There’s a lot to think about when buying any property regardless of its tenure, but with leasehold there are four additional factors that you need to consider:
o The duration (remaining term) of the lease
o The Lease itself; Are there any unacceptable clauses?
o The Ground rent
o Service Charges
The duration (remaining term) of the lease
When considering a leasehold purchase, it’s important to understand that what you are buying is a lease, which is the right to occupy the property for a specified length of time (albeit a period of time that you can extend), you are not actually buying the property itself.
The one certain thing about a lease, is that one day it will expire; that day may look a long way off at this point - maybe even in the next century - however the end-date is slightly misleading, because even if your lease has a healthy looking ~90 years to run, there are still implications for your ownership today and significantly, for the resale value of your property.
A lease is normally granted for a period 99 or 125 years, but that would have been to the original owner of the flat, perhaps ~30 years ago. The crucial question for you is how much of the lease remains when you take ownership? Personally I’d want to know the length of the lease before I even view a property, and if the Estate Agent (or Vendor) is vague about the remaining term of the Lease, then that's a warning flag. Be aware that it's not in the Agent's interests to voluntarily make you aware of any problems or issues with the lease. It's your responsibility to ask the right questions, e.g. you should insist that the Agent provides you with the remaining term, in writing if possible, when you first view the property and a copy of the Lease (document) before you make a firm offer. Don't allow yourself to be fobbed-off by a smooth talking Estate Agent.
If you're not getting anywhere with the Agent/Vendor or suspect that you are being misled, you can get a copy of the lease of any property (in England and Wales) from the Land Registry website, see the Getting Started FAQ for more on this.
Here is how the remaining term on the lease should impact on your purchase decision:
- 100+ Years remaining: If there is more than 100 years remaining on your lease, go ahead with the purchase; you don’t need to do anything at this stage.
- 95-99 years remaining: You’re OK to buy. But consider extending your lease at some point to get the full value of your property when you do eventually sell-up.
- 83-94 years remaining: Caution: a relatively low remaining term on the lease; And you should expect to see the asking price of the property slightly reduced for that reason. Depending on how long you stay in the flat, you’ll likely have to extend the lease yourself at some point, that will take time and cost money. You should find out the ballpark cost of extending the lease and factor this into the amount you pay for the property.
- 70-82 years remaining: Once the lease is down to 80 years (82 yrs in practice for new owners, see below) there is an additional cost to extend, called a Marriage Fee. The previous owner has been remiss in not extending the lease earlier, a lease extension at this stage will incur Marriage Fees which could be significant. The property should be available at a discounted price for this reason.
- 50-69 years remaining: You will have difficulty getting a mortgage to purchase the property and difficulty selling-up for the same reason. Again, the burden of extending the lease will fall on you and with high Marriage fees, it’s likely to be expensive; buyer beware.
One restriction in the 1993 Leasehold Reform Act (the legislation that gives you the right to extend your lease) is that you must have owned the property for 2 years before you can start the process of extending the lease. However there is a quirk in the legislation, where, if you are buying a leasehold property and the current owner has already started the leasehold extension process, you may effectively inherit and continue that process. You can exploit this quirk by requesting that the current owner initiates the lease extension procedure as a condition of you purchasing the property, allowing you to complete the process when you take ownership and thereby avoid the 2 year delay. This technique can be used when you want to avoid Marriage Fees on leases with 80-82 years remaining; or if you plan a quick-sale of the property and want to extend the lease without having to wait 2 years.
The key point to note when viewing/buying a leasehold flat is that the remaining term on the lease is as important as the location of the property; even if there’s a lengthy looking term (80-90 years) remaining, there is still an impact on the value of the property today and you'd be foolish not to factor that in when negotiating a purchase price.
The Lease; Are there any unacceptable clauses?
Once you have found a property you’re interested in, the first thing to do is get a copy of the lease, the Vendor/Agent should supply you with a copy or at least give you all the relevant details in writing, if they are reluctant or cagey about giving you this info, you are entitled to be suspicious… perhaps the Agent was hoping for a more naïve buyer who puts his money down without any due diligence on the lease?
The lease (document) itself is usually 5+ pages long, which includes various sections and a large scale map of the property, parking space etc. The lease will contain the start date and duration/term of the lease, the name of the landlord, details of the ground rent payable, plus various clauses usually written in unintelligible legal-speak, which is why you’ll need a solicitor to de-code it before you make a firm offer. There's likely to be some interesting clauses in the lease, e.g. you may not be allowed to sub-let or rent the property to someone else or be prevented from installing wooden floors (because of noise in the flats below). Most people don't have any problems, but it is important that the Lease is understood; you may find a clause that's a show-stopper for you.
Consumer contract legislation applies to recently granted leases; this is relevant because sometimes leases contain unfairly restrictive clauses, e.g. A lease may prevent you from running any sort of business or keeping pets in the property, however, what if the leaseholder is an author that works from home? or the pet is something harmless like a goldfish? The Unfair terms in Consumer Contracts legislation 1995 (amended 1999) makes such restrictive clauses unenforceable in leases granted after July 1995.
Older leases may have even more obscure duration/expiry clauses that relate to Royal Weddings or some unknown future date, these are known as Prince of Wales clauses and are an attempt by the Landlord to avoid setting a term (99/125 years) for the lease, thereby trying to avoid legislation that protects leaseholders with long-term leases. However the law has now been changed to disallow such clauses and deem the lease to be a 'long Lease' (i.e. normal and extendable). This change is fully backdated and applies to all leases regardless of when they were first granted.
The amount of ground rent (or yearly rent) payable will be specified in the lease. Ground rent is usually a token payment to the landlord which does little more than serve as a reminder that you don’t own the land/property – the landlord does. Ground rent is payable to the landlord annually or every 6 months. A typical ground rent would be £200 per year (but for some top-end London properties it can be a lot more). Beware of ground rent ‘time bombs’ in the lease, e.g. clauses stating that the ground rent should double every 10 years or somesuch, this appears to be a growing trend in new-build flats. Your solicitor should be able to spot any such clauses, but feel free to skim the lease yourself - just in case.
Service charges (a.k.a. variable service charges) are charges levied by the landlord, to cover the costs of maintaining the fabric of the building and the shared areas (e.g. the roof, external walls, lighting & cleaning of stairwells, maintaining gardens and things like buildings insurance). The charges may also include the costs of management (administration) by the landlord or by a professional managing agent and possibly for contributions to a reserve or 'Sinking' fund, which is a nice way of smoothing out payment of large one-off bills.
The variability of service charges needs to be stressed here, the lease will outline the payment schedule, but the charge itself isn't specified in the lease. A typical service charge in 2012 might be ~£1000 per year (payable £250 per quarter), but be warned, that any such figure could vary dramatically if the building requires a new roof, or if the windows need replacement. This kind of big-ticket, infrequent maintenance could incur a large one-off service charge fee (of £thousands) per tenant and be a big area of dispute between a landlord and his tenants.
When buying a leasehold property, the Agent/Vendor should be able to supply details of the service charge(s) levied over the previous 2-3 year period - and that's something you should insist on seeing. However current bills are not always a good indication of your future payments; this can cut both ways - the building may not have been maintained properly for years, resulting in low current service charges (but potentially high charges in the future) or there may have been some significant improvements to the building in recent years, which you will benefit from, but which have been paid for by previous tenants.
Service charges can be a problem area for leaseholders and not always because of the costs of the service or maintenance works. Flat owners often have to pay to maintain facilities they never use, like ground floor residents paying thousands to replace the lifts. So when viewing a potential leasehold purchase, take time to view the building, roof, windows and common areas, are they in a good state of repair? Or are there likely to be some big service charge bills coming your way?