13 Feb 2018
Author: Stephen Breen
First time buyers looking for affordable properties will often look at flats or maisonettes as a cheap way to get a foot on the housing ladder. But an understanding of the legal jargon is necessary in order to pick the genuinely good value properties from those that could be expensive in the long run.
Leasehold v freehold
If a property for sale is a ‘freehold’, you’ll be purchasing both the land and buildings on it.
If however the property is a ‘leasehold’ you’ll be purchasing the right to occupy the building for a certain number of years.
Most houses are freehold, while flats and maisonettes tend to be leasehold.
For leasehold properties, the freehold owner – who might be an individual landlord, or a property company – will arrange buildings insurance and carry out maintenance on the exterior and common parts of the building. In addition to the cost of the lease itself, you’ll be asked to pay a contribution towards these shared costs of running the building, together with management fees.
Some leases also allow the freeholder to raise the fees to cover major refurbishment, repairs or one-off expenses. Such extra charges are called a sinking fund.
Your conveyancer (the solicitor completing the legal work for you) will typically ask for a copy of the lease to see how service charges are calculated, together with details of past service charges and any anticipated increases. If you leave it to your conveyancer to obtain this information, you will have already made an offer and paid a contribution towards your legal costs. It is sensible to ask for a copy of the lease and details of service charges at an early stage to see if they are affordable and realistic.
Sometimes, a leasehold property comes with a share of the freehold, giving you more control over costs in the future. This means you will have to negotiate with the other owners of flats in the building over insurance and maintenance costs. Prospective buyers should still ask for details of costs to date and any known future expenditure.
Length of term
Those purchasing a leasehold property also need to consider how long is left on the lease. Again, the best way to obtain this information is to ask for a copy of the lease itself from the estate agent. The majority of flats on the market have between 99 and 999 years left to run – the longer, the better.
It will be difficult to get a mortgage on a lease with 70 years or less left to run, and virtually impossible on a lease of 60 years or less. Consequently, you’ll have problems selling the lease and your only hope would be a cash buyer who didn’t need a mortgage.
For leases with 85 or less years left to run, you’ll need to get an extension – which will cost a premium. Most flat owners who have owned their property for at least two years can get 90 years added to their lease at a fair market price. According to Leasehold Advisory Service data, the typical cost to add 90 years on to a flat (based on a £200,000 flat where £200,000 is its value with a 999 year lease):
- 95 years left on lease : £5,000 plus £2,500 professional fees
- 85 years left on lease : £6,000 plus £2,500 professional fees
- 79 years left on lease : £8,500 plus £2,500 professional fees
- 70 years left on lease : £14,000 plus £2,500 professional fees
- 60 years left on lease : £24,000 plus £2,500 professional fees
If a lease has less than 60 years left to run, expect to pay a much higher premium.
Would-be buyers need to check the lease for clauses on ground rent – often this will be fixed, but some provide for increases over time. Rises in ground rent should not exceed the retail price index. Recently the Government has announced plans to stamp out the practice of developers selling new build homes where ground rent doubles every ten years. Lenders are unlikely to offer finance on such propositions but where they do, unfortunate buyers can find themselves with a property that cannot be sold.
When considering the purchase of a leasehold:
- Check how many years are left on the lease.
- Check the ground rent charges (and any provision for increase).
- Check the most recent and historical service charges.
- Check the sinking fund, if there is one – and if major works are anticipated, whether these can be covered by the existing pot of money.
- Check how many other flats are in the building – major expenditure will be split by this number.
- Don’t rely on the information provided by the estate agent – make sure you see the paperwork early in the transaction, before wasting time and money.