Leasehold Property: What You Need to Know

Before proceeding with the purchase of a leasehold property, it is essential for any buyer to understand the key elements that differentiate it from a traditional freehold purchase.

Leasehold ownership carries with it additional obligations and burdens.  Purchasing a leasehold property essentially involves buying the right to occupy a property for a set period of time, and the land upon which the apartment sits remains owned by a separate freeholder / landlord. The rights / reservations / covenants / obligations determining the basis of that occupation by the Tenant are set out in the lease.

Below are some important considerations when buying any leasehold property: -

1. Nature of the Property

You should consider the wider building / estate of which the property comprises part, and in particular, what the repairing / service charge obligations are / could be (and who makes any important decisions on such matters). 

2. Remaining Term of the Lease

The length of the lease.  This is really important! The length of any lease depreciates day by day.  However, if the term has fewer than 90 years remaining, the value / marketability is adversely affected with many high street banks hesitant to offer mortgages on such property.  A lease extension may be possible, but this can be both time consuming and expensive so the term should be considered from the outset (and whether the Seller is prepared to deal with this prior to exchange of contract).

3. The Landlord and Managing Agents

You will need to understand who owns the freehold and who manages the building on their behalf (if anyone).  Is this an individual who lives in the building or an offshore company registered on the isle of man with no contact details?  The landlord's identity is key because they have the power to make decisions that could affect your use of the property / estate, such as granting lease extensions or agreeing to alterations.  Additionally, managing agents handle day-to-day property management. Knowing who those persons are and whether they are reasonable to deal with is important for your own peace of mind.

4. Additional Costs

Leasehold properties typically come with ongoing annual costs. These may include:

• Service charges: typically, these include contributions towards the maintenance and management of any estate / communal areas and the insurance of the same.

• Ground rent: An annual fee paid to the freeholder.

It is important to understand what these costs are, and what they cover.  You should also remember service charges are not capped (they are likely to grow year on year).  Does the Service Charge include a sinking fund for significant repairs to the building and if so, what is the value of that fund?  You do not want to find yourself purchasing a property that carries with it significant service charge liability (i.e a wider building that requires repairs with no sinking fund in place).  

5. Implications of Poor Drafting

Perhaps the greatest consideration is the wording of the lease itself.  Unfortunately, some leases include poor or outdated terms that can negatively affect your rights and obligations. This may include, for example, escalating ground rents, a demise with parts of the property missing (attic room / cellar) etc.  A poorly drafted lease may lack essential maintenance / repair / insurance responsibilities, potentially leaving you in a pickle in the future should a dispute arise.  It is important that you read through the lease carefully and understand the implications of the wording within it.

6. Restrictions on Use

Leases often contain ‘restrictive covenants’ (I.e contractual promises on what you can and cannot do with the property). For example, some leases may prohibit subletting, making alterations to the property, or run a business from home (which may extend to BnB style arrangements). It is important to review the lease to ensure there are no restrictions that could affect your intended use of the property.

Conclusion

Buying a leasehold property requires a thorough understanding.  You must read the terms of the lease with care and speak to your solicitor should you have any concerns / queries.  You must work with your solicitor throughout the process to ensure your understanding and peace of mind that your purchase is a sound investment.