Buying Leasehold Property Guide
When looking for a new property using the internet or an estate agent, the word leasehold is likely to appear often in property searches. Many home buyers don’t understand what a leasehold is, how it works, the rights it gives and the responsibilities that it entails.
For those people who are buying, or are considering buying, a leasehold flat or house (flats are more often leasehold than houses), it is essential to know exactly what a leasehold means.
What is a leasehold property?
Leasehold flats and houses may be in situated in purpose-built blocks, converted houses or as part of commercial or retail premises.
Leasehold ownership of a flat fundamentally means a long tenancy – the right to own, occupy and use a flat for a long period known as the ‘term’ of the lease.
This can be for between 99 – 999 years; and the flat can be bought and sold within that period. There are ‘long’ leases and ‘short’ leases, referring to the number of years left on the lease.
From the outset of the lease, the term is fixed, and decreases every year. At the end of the lease, the flat is returned to the owner of the building.
Technically, even whilst a leaseholder owns the lease on a property, the owner of the freehold retains ownership of the external and structural walls, as well as any common parts of the structure. The owner of the building is also responsible for the maintenance and repair of the building.
Leasehold properties may be owned by either individuals or companies, and sometimes by housing associations or local authorities. Often, leaseholders purchase the freehold of the building in which they live by creating a residents’ management company.
What is a lease?
In the eyes of the law, a lease refers to a specific contract that exists between the owner of a property and a leaseholder that provides the latter with conditional ownership for a fixed period of time.
Leases are extremely important documents, and both parties should keep a copy of the agreement and make sure that it is understood. Leases are usually worded in legal jargon which can be hard to understand without taking advice.
Leases lay out in certain terms the contractual obligations of both parties. This will include what the leaseholder has to do, and what the landlord has to do. The lease will set out what the leaseholder’s obligations are, as well as any restrictions and conditions regarding the property. Usually, the landlord is required to maintain and manage the structure of the property, as well the outside and any common areas.
Leaseholders may not be totally free to do what they wish to in or with the leasehold property. The lease itself has its own conditions, to protect the rights of all those with an interest in the building.
When a flat is sold, the seller passes all the rights and responsibilities of the lease to the purchaser, including all future service charges that have not been identified.
Leasehold and Ground Rent
Due to the fact that leasehold is a tenancy, there is a payment of a rent (which can be nominal) to the landlord. Ground rent is a specific requisite of the lease and needs to be paid on an arranged date.
Leasehold Service Charges
Service charges are payments made by the leaseholder to the landlord for the entire range of services the landlord provides, including maintenance and repairs, building insurance, and in certain cases, central heating provision, porterage, lifts, lighting as well as cleaning of common areas, gardening of grounds and so on.
Charges include management costs, charged by the landlord or a professional managing agent.
Service charges may vary year to year. They could increase or decrease, yet they need to remain reasonable.
However, the lease will set out the fraction of the cost or percentage that the leaseholder needs to pay and the accounting period to which the landlord must produce annual accounts highlighting expenditure and service charge payments.
Specific details of what the landlord can and cannot charged and the proportion of the charge to be paid by the individual leaseholder will be set out in the lease.
The landlord provides all the services, with the leaseholder paying for them.
All costs are sorted out by the leaseholders, with the landlord generally not making any financial contribution. The majority of modern leases permit landlords to collect service charges in advance, reimbursing any surplus or collecting any shortfall at the end of the year.
The landlord is able to recover reasonable costs. Leaseholders have quite formidable rights to challenge service charges they consider to be unreasonable at the Leasehold Valuation Tribunal (LVT).
When considering buying a leasehold flat, it is crucial to know, for the sake of personal finances, what the present and future service charges are likely to be. You also need to check to see if there is a reserve fund. You also need to check what plans there may be for major works that could affect the service charge in the few years following the purchase.
What are Reserve Funds?
A majority of leases enable the landlord to collect sums in advance to create a reserve or ‘sinking’ fund, to make sure that enough money is available for future scheduled major works, like external decorations or lift replacement. The lease will clarify sums involved and when cyclical, regular, maintenance works are due.
Contributions to the reserve fund are not reimbursed when the flat is sold.
What happens if the leaseholder does not pay?
It is the leaseholder’s obligation to pay the service charges and ground rent promptly under the terms of the lease. Should they not be paid and the landlord is able to show that the charges are reasonable, then he is able to commence with forfeiture proceedings.
Should a court approve this, then this can lead to the landlord repossessing the flat. Furthermore, under the Commonhold and Leasehold Reform Act 2002, the landlord’s right will be restricted.
Leasehold Property Insurance – who insures what?
The lease usually requires the landlord to take out enough insurance for the building and its communal parts.
This will give the landlord the right to recover the cost of the premium through the service charges or as a separate charge forming part of the ground rent.
This policy does not normally cover contents or possessions of individual leaseholder’s flats.
Leaseholders who own flats within a building will still need to purchase contents insurance.
What is a Leasehold Property Managing Agent?
At times the landlord undertakes the management of the property himself.
Alternatively, a managing agent can be appointed who manages and maintains the building on behalf of the landlord, in accordance with the terms of the lease, current relevant legislation and codes of practice.
The managing agent takes instruction from the landlord, not the leaseholders, and is constantly be aware of the leaseholders’ wishes and needs.
The agent receives a fee, usually be paid by leaseholders as a portion of service charges. This can be based on a certain percentage of daily service charges, yet usual and good practice is for it to be a fixed annual fee.
When major works are involved, the agent can charge an additional fee, normally a percentage of the total cost of such works.
Rights of the Leaseholder
Leaseholder have contractual rights, as should be stipulated in the lease document. The leaseholder should expect the landlord to maintain and repair the bulding, including any buildings or grounds not granted to the leaseholder but to which they have rights of access.
Responsibilities of the Leaseholder
Usually, the leaseholder is required to keep the flat in good order, and make sure all occupation costs are met.
These include Council Tax, electricity, gas and other bills.
Leaseholders are also expected to pay part of the maintenance cost of the building, to act in a neighbourly fashion and to seek the consent of the landlord for all alterations.
The landlord should have an obligation to ensure that the leaseholder complies with such responsibilities for the good of all the other leaseholders.
These rights and responsibilities will be set out in the lease. Some times in older style leases certain obligations may not have been included and this can be rectified by the lease being altered through the completion of a Deed of Variation.
What other rights do leaseholders have?
Leaseholders have more rights than you think. There are many rights set out in the legislation and advice is available readily. When a dispute is ongoing, you ought to ask the managing agent for full details and/or an explanation.
Information: the landlord should provide his name and a contact address within the UK which must be stated on every demand for service charges. Leaseholders can demand service charge summaries, insurance cover details and have the right to inspect accounts and any other documents.
Consultation on major works: the landlord is unable to carry out major works to the building without initially consulting the leaseholders in an appropriate fashion. Should he fail to do this, he may not recover all the costs.
Consultation on long-term agreements: the landlord cannot enter into certain agreements or contracts for any service over 12 months without first consulting the leaseholders.
Challenging service charges; leaseholders may apply to the Leasehold Valuation Tribunal (LVT) to seek a determination of how reasonable the charges are and whether they have already been paid or not.
Challenging administration charges: leaseholders may apply to the LVT to seek a determination of how reasonable other charges arising from the lease are as well as how reasonable the service charge, such as, consents for alterations and sub-letting, or fees for providing information on resale.
Right to manage: if leaseholders want to change the management of property whether it is effective or not. They can do so by using the right to manage. This is a ‘no fault, no compensation’ process that will allow leaseholders as a collective to decide the management arrangements for the property. This right does not apply to local authority landlords.
Appointing a manager: if the landlord’s management is deficient, then leaseholders can apply to the LVT for the appointment of a new manager (except for housing associations and local authorities.)
Extending a lease: an individual leaseholder who meets certain conditions can demand a new lease from the landlord, with the price to be agreed between the parties. If that is not possible the price can be set by the LVT.
Buying the freehold: groups of leaseholders who meet certain conditions can get together and enforce the purchase of the freehold, again with the price being agreed between the parties. If that is not possible, the price can be set by the LVT.
More information on buying the freehold.
Right of first refusal: where the landlord proposes to sell his interest in the building, first he must offer it to the leaseholders or he can be prosecuted (except for housing associations and local authority landlords).
All these rights are covered in various publications available from LEASE.
Should I buy Leasehold Property?
Present property law in England and Wales effectively demands that most flats be leasehold.
Currently, leasehold flats are usually preferable to other forms of freehold flats where similar rights and obligations as found in a leasehold may not exist and enforceability between flat owners can become difficult as there is no separate landlord.
Should you be considering buying a flat, then a leasehold ought not to be a concern as long as you know and appreciate your rights and obligations.
Given that you have a well-written lease as well as a properly managed building, a leasehold flat ought to provide a perfectly good home for occupants, as well as being a secure investment.
