Most people have aspirations to buy a freehold property – you'll own it outright (even if you have to pay off a mortgage for a number of years) and you won't have to think about things like lease extensions, ground rent and service charges.
But the simple fact of the matter is that buying a leasehold property is considerably cheaper and therefore easier to achieve as a way of escaping renting and the majority of first time buyers in the presently overpriced UK housing market certainly have to consider it.
This article is aimed at demystifying some of the topics which accompany buying a leasehold.
So what is a lease?
The lease is a long-term rental agreement created by the freeholder of a property – think of a whole flat block as the freehold and the individual flats as leases, and the cost of the lease is fixed at the time that it was created. The purchaser of the lease has to right to sell it on at any point during the agreed term.
In real life, you'll normally be buying what's formally termed a long lease (i.e. one which has more than 21 years to run) and if you're buying with a mortgage, that long lease term will be for at least 80 years. This is because lenders view lease terms shorter than this as not having enough value to lend against.
Predominantly leaseholds are flats, although there are a growing number of leasehold houses on the market.
How does the buying process differ when comparing leasehold and freehold?
You should always remember that when you buy leasehold, you won't ever own your property outright, it's more like a very long rental. You will, however, have the right to extend your lease, subject to a statutory process, but you'll have to pay a premium to the freeholder to do so and there are other costs involved.
You do actually have the right to club together with others and negotiate with the freeholder to buy the whole block, but that's beyond the scope of this discussion.
When you purchase a freehold property, you are also purchasing the land that the property is on and also the property itself.
A lease contract also specifies who bears the responsibility for managing the cost of maintenance work within the communal areas and the manner in which they will get paid by you for doing so.
Additionally, because the leasehold conveyancing process involves additional work (there's a freeholder involved as well as you buying a lease), it takes longer than freehold conveyancing and will normally be more expensive.
It's very difficult to pin down exactly how long an individual conveyancing might take, but for a freehold it'll often take 6-8 weeks whereas with leasehold it'll normally take between 8 and 12 weeks.
Having a leasehold property is similar to renting a property long term
Buying and renting leasehold flats are very similar concepts, both of the leases include:
- Length of the lease (rentals are shorter but a leasehold can go up to 999 years)
- Restrictions of what you are able to do to the property
- You have obligations to the freeholder (landlord)
- Leasehold property owners have to pay ground rent, similarly in rented accommodation you have to pay fees
Ground Rent and Service Charges
Ground rent means the regular payments you have to make to the freeholder which are specified within your lease. Formally, the ground rent charges are created when a freehold piece of land is sold on a long lease or leases. Ground rent payments are generally quite small in comparison to what you paid for your lease, they might be a few hundred pounds per year or less or more, but your lease might also specify that they can increase over time.
Service charges are the charges you pay your freeholder for the costs of maintaining the communal areas, cleaning and electrical charges. They are either paid to the freeholder's managing agent, the council or the freeholder. Sometimes the other leaseholders in a flat block take over this function, which they are legally allowed to do. In this case, you'll automatically become a member of the leaseholder management company when you take up your lease.
Service charges are sometimes paid in advance and they can also include the costs of major works to be carried out, for example refurbishing a building's lifts, administration costs, accountancy fees and also the costs of any full-time maintenance staff.
Whoever manages the block also decides on the tradesmen that they use for work carried out on the property.
Managing Information / Leasehold Information Pack
When you come to sell a leasehold property you must provide the buyer with the following information:
- Service charges
- Ground Rent
- Accounts for the management company for the last 3 years
- Any planned major works
- Overdue service charges or ground rent
- Other information they would need to know about the leasehold
You should always these items – formally known as the 'management pack' – as early on in the transaction as possible as it can take a number of weeks for the information to be collected and passed on to you/your solicitor and your buyer/buyer's solicitor. Private freeholders and councils are well known for being extremely slow to respond; this can frustrate many buyers and slow down the conveyancing process.
The cost of buying the leasehold information pack varies from around £100 - £300 or more based on who will be providing it. Unfortunately, you don't have the choice but to pay the fees for the pack your buyer's solicitor will always need to scrutinise it.
Leasehold Buyers Checklist
- Check to see how many years are lease. If there are 85 years or less, ensure a lease extension has been agreed before you buy the property; this is something your seller Is best placed to achieve.
- How much is the service charge and when does it need to be paid?
- Are there plans for any major works?
- Ensure your solicitor requests the leasehold information pack as soon as possible (see above).
- Agree a retention for any future liability to major works, service charges or ground rent (this is so the seller pays towards any of these that they're liable for, but haven’t yet been charged for, up to the point when you take ownership).
- Make sure you know exactly what's being included e.g. if parking spaces are included and if you are the only one able to occupy a particular slot.
Leasehold Conveyancing Costs
Always ensure that you have checked that the work relating to your leasehold transfer has been included within your conveyancing solicitor's price. Whenever possible obtain a fixed quote – this is a good rule of thumb for conveyancing in general.
By Marcus Simpson
Digital Marketing Manager