A guide to purchasing leasehold property
In the UK there are two main types of legal ownership of a property: freehold and leasehold. As a first-time buyer, it is possible that you might be looking to purchase leasehold property. If you are looking to buy a flat, for example, then it is likely to be leasehold, because it makes it simpler to manage the shared spaces and common facilities within a block of flats.
Recent research highlights that some property buyers are unaware of the implications of purchasing leasehold property. Many leaseholders can also be unaware of the terms of their lease. This article will help explain what it means to purchase leasehold property and what to expect during the term of your lease.
What is leasehold?
Leasehold ownership of a property can be described as a long tenancy. The leaseholder owns the right to occupy the property for a fixed period of time. The leaseholder does not own the building itself or the land on which it sits, as this remains the property of the landlord. The length of time that the leaseholder owns the right to occupy the property will be set out in the lease. A lease is usually granted for in between 99 and 999 years.
A lease is the legal contract between the leaseholder and the landlord which sets out all of the terms of the agreement, including the rights, responsibilities and burdens. The lease is likely to impose certain conditions on the leaseholder’s use and occupation of the property. The lease will often restrict the leaseholder from doing certain things, such as making alterations or subletting, without the landlord’s permission.
The lease will also set out the extra expenses that the leaseholder will incur during the term of the lease. These will include the payment of yearly ground rent, if applicable, and the payment of a service charge to contribute towards the costs of maintaining, repairing, insuring and managing the building.
When leasehold property is sold, the seller will ‘assign’ the existing lease to the buyer so that the buyer inherits all of the rights and responsibilities of the lease.
When purchasing leasehold property, it is important to consider how long there is left to run of the current lease. The value of the leasehold decreases as the lease nears the end of its term. This will impact directly on the selling price of the property should the leaseholder try to sell it in the future. It can also be much harder to obtain a mortgage offer from a lender if the lease is close to expiring. There are mechanisms for the lease to be extended, albeit at an extra cost.
What advice you should receive before purchasing leasehold property
It is very important to understand the specific terms of your lease and their impact on the time that you live in the property.
Before a buyer decides to exchange contracts, solicitors should report in layman’s terms on:
- the particular rights and burdens of the lease,
- the management of the block or estate of which the property forms part of, and
- the costs involved for the owner.
Every lease is different, so it is important to fully understand the specific obligations of your lease.
Particular attention should be paid to the ground rent terms and whether they could affect resale values.
The issue of increasingly onerous ground rents within leases has been brought to light in recent years. It is acceptable for ground rents to periodically increase by a reasonable amount to account for inflation, but some leaseholders have been left with ground rents that double every 10 years. In practice, such rapidly increasing ground rents can lead to property becoming unsaleable.
The Government has proposed to introduce new legislation so that ground rents on new long leases, for both houses and flats, will be restricted to a peppercorn (zero financial value). Although it has been said that the legislation will be introduced as soon as possible, no specific timetable has been set.
If you have any questions about this article or you would like to instruct us to act for you on your purchase or sale of a property, please contact us:
Partner, Head of Property
T. 020 7227 7273
Ben Dos Santos
T. 020 7227 6743
This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.