Many flats in the UK are sold on a leasehold basis, as are a number of other properties. If you are thinking about buying a leasehold property, it is important to understand how this differs from buying a freehold property and the key things you need to consider before going ahead with the purchase.
The difference between leasehold and freehold property
When you buy the leasehold on a property, you are effectively buying conditional ownership of the property for a fixed time. This is different to buying the freehold on a property, where there will usually be no conditions on your ownership and the property will be yours until you choose to sell it.
You hold the lease on a property from the owner of the freehold, and this lease will specify the terms and conditions of your occupation, including when the lease will run out. When you buy a lease, you are usually buying the time remaining on the existing lease, rather than creating a new lease agreement with the freeholder.
What are your rights and responsibilities?
The lease agreement will set out your rights and responsibilities. Typically, the leaseholder is required to maintain everything within the property, including the floorboards and plasterwork. However, the freeholder will normally be responsible for the building’s exterior, any structural walls and communal areas (if you are in a block of flats, for example).
The lease will also normally contain certain conditions, such as requiring you to keep the property in good order and asking the freeholder before getting a pet or redecorating.
It’s essential to be aware of these details before agreeing to a lease. They can impact your ability to live as you wish in the property and can also affect your potential financial liability if any maintenance work is required.
How much is the ground rent?
When you buy the leasehold on a property, you become a tenant of the freeholder. You therefore have to pay ground rent, which is normally charged annually. This is likely to be a nominal amount, but failing to pay it by the agreed due date is still technically a violation of your lease and could have serious consequences.
What other charges are there?
The freeholder is entitled to specify ‘service charges’ as part of the lease agreement, to cover their expenses in maintaining the property, as well as costs such as insurance and cleaning of communal areas. These charges can range from hundreds to thousands of pounds, so can make a big difference to the on-going cost of a leasehold property.
How many years are left on the lease?
When buying a lease, it is absolutely critical to pay attention to how many years are left on the lease. The value of a leasehold property tends to fall significantly once there are 80 years or less left on the lease. This is because, once you pass this threshold, you will have to pay 50% of the property’s ‘marriage value’ to the freeholder if you then extend the lease. Marriage value is the amount the property’s value increases by due to extending the lease, which can be considerable.
Most leaseholders have the automatic right to extend their lease by at least 90 years, as long as they meet certain conditions. However, you have to have been living in the property for at least 2 years to qualify and the lease renewal process can take around 6 months. It is therefore usually a risk to buy a leasehold property with fewer than 83 years left on the lease.
It is also worth bearing in mind that, if there are fewer that 70 years left on the lease, you will likely struggle to get a mortgage on the property as its value will have fallen so much.
Is buying a leasehold property a good investment?
Leasehold property is usually cheaper than freehold property, and for many flats it is the only option. Whether the leasehold represents a good investment or not will depend on the circumstances. If the property has at least 83 years left on the lease and the ground rent and service charges are not too high, a leasehold property normally has as fair a chance as a freehold property of being a good investment.
Get expert help with buying a leasehold property
Bird & Co Solicitors is a long-established law firm offering conveyancing services on properties across England and Wales from our 3 offices in the East Midlands. We hold the Conveyancing Quality Mark and regularly deal with all types of conveyancing transactions, including those involving both leasehold and freehold property.
To find out more about our conveyancing services, call us today on 01476 591711 or use our contact page to find details of your nearest office.