What is a leasehold property?
A leasehold interest in a property is created when a freehold owner (also known as a landlord) grants a lease over their land, allowing the leaseholder (also known as a tenant) to occupy and use the land for a specific period of time for a specific purpose. In the case of residential properties, the “land” is often part of a larger property such as a flat in an apartment block. When you purchase a leasehold property, you accept the provisions of the lease.
What is the “term” of a lease?
All leases are granted by the landlord for a specific number of years – the term. This can be any number of year but commonly residential leases are for 99, 125, 250 or 999 years.
Before submitting an offer for a leasehold property, you should determine from the seller the remaining length of term. Each mortgage lender has a minimum amount of years they will accept for leasehold properties being offered as mortgage security. If the remaining term of a leasehold property falls below the lender’s minimum, they will not accept the property as security.
If you are selling a property you can calculate the remaining term of your lease by locating the lease term on the lease (or Land Registry Register of Title for the property), adding this to the date on which the lease term began (not always the same as the date of the lease) and deducting the current year. If in doubt, you should contact your solicitor, who will be able to help with this
If the remaining lease term is short, it may improve the marketability of the property to apply to the landlord to extend the term. However, to do so you must meet certain criteria, and there will be legal fees involved.
Ground rent is an annual fee the leasehold owner pays to the freehold owner to rent the land on which the leasehold property stands. This can sometimes be charged at the rate of ‘a peppercorn’ which equates to no charge, but can be as much as thousands of pounds depending on the lease. It is also important to bear in mind the nature of any rent review as mortgage lenders do not like ground rents that double on each review throughout the term of the lease. Your solicitor will be able to advise you on this issue and, if necessary, liaise with your lender on this issue.
The service charge is a fee payable by the leaseholder to either the landlord, management company or their agents to cover their share of the cost of maintaining the estate and/or building in which the property is located. This can include items such as decorating the common areas, cleaning the windows, structural repairs, communal gardening and building insurance.
Service charges vary between properties and developments. Service charges are sometimes also payable for freehold properties in estates that share facilities.
Restrictive covenants were dealt with in more detail in an earlier blog but very simply, the vast majority of leases will include restrictions which the leaseholder must comply with. If the leaseholder does not comply with them, the landlord can take enforcement action and it may be difficult to sell a leasehold property with outstanding breaches of covenants. Common examples of restrictive covenants are not being able to keep animals at the property, not to carry out any structural alterations, and not to cause a nuisance or annoyance to neighbouring properties. When purchasing a leasehold property, your solicitor should report to you on the restrictive covenants as a matter of course.
Most leases contain requirements for buyers to pay various fees following the completion of a purchase of a leasehold property. These usually include having to pay a fee for the landlord and/or management company to receipt and return Notices of Transfer and Charge, but can also include fees for the provision of a Deed of Covenant, issuing of a share certificate and certificate confirming compliance with the lease. The fees charged by landlords and management companies vary substantially from one leasehold property to the next and it is often not until part way through the transaction that your solicitor will receive details of these fees.
When selling a leasehold property, it is not uncommon for landlords and/or management companies to charge a fee for providing a sales pack containing information in relation to service charges, maintenance schedule, buildings insurance, fire risk assessments, and more for your buyer. As with the notice fees, these can vary widely and can be several hundred pounds. It is advisable to ascertain this from your landlord and/or management company before marketing your property so that it does not come as a shock when your solicitor requests payment from you to obtain this information.
To speak to a solicitor with experience of leasehold properties, please get in touch with Farleys’ residential property team on 0845 287 0939 or complete our online enquiry form.