The Dirty Dozen – 12 things to ask when buying Leasehold
Buying leasehold? The Conveyancing Association have covered the 12 questions you need to ask your property lawyer.
1/ How long is left on the lease?
When you buy leasehold, you buy the right to possess the property for the remainder of the term of the lease. When drawn up in the past, leases have been anything between 99 years and 999 years. Obviously, as the years go by the term reduces.
The law allows you to require that the landlord extends the lease once you have owned the property for two years, but the cost of that lease extension goes up dramatically once the term of the lease is less than 80 years. For this reason, some mortgage lenders want there to be as much as 90 years left to run so that you have time to extend the lease before the costs go up.
2/ How much is the ground rent?
Ground rent is the amount which the lease says you have to pay to the landlord every year – for nothing. Yes, you do not get anything in return for ground rent other than to be able to say that you have complied with the requirement of the lease. If you fail to pay the ground rent then the law does allow the landlord to take you to court so you need to know that you can afford it and should always pay it even if there is a dispute over the rent. You can claim it back later if you win the dispute.
Ground rent can be anything from a peppercorn (basically a nominal value so you do not actually pay anything for ground rent) to many thousands of pounds and it can go up.
3/ Is there a ground rent review clause?
You need to ask your property lawyer whether there is a rent review clause and how that operates. If there is a calculation you should run the calculation for at least 50 years to see what the payment would look like. There have been some badly-worded rent review clauses that have resulted in ground rents of millions of pounds.
4/ How often is the rent reviewed?
Most lenders require that the rent is not reviewed more often than every 20 years so you need to check that your lease will comply with that.
5/ When is the next review?
It may say that rent is reviewed every 20 years, but you need to know from when. Some lease start dates are well before the actual date of the lease because the builder might start all their leases on the same date within an estate. If you are buying one of the last plots to be sold on the estate then the lease may already have been running for several years so you may find that your rent is reviewed or your lease terms will become ‘short’ much sooner than you would think.
6/ How much is the service charge?
Service charges are the contribution by the property owners towards the maintenance of the shared areas and amenities. These vary hugely depending on how big the communal areas are and the type of shared amenities. You can imagine that if you have access to a marina or leisure facilities then these can be very high whereas if you have a leasehold house which only has to contribute towards a small amount of communal garden then hopefully the service charge would be pretty low.
7/ Are there any major expenditures coming up?
Where there are major expenditures the landlord has to consult with leaseholders before committing to have the work done. Your property lawyer will ask if there are any Section 20 notices revealed which would indicate if works were planned. However, you need to ask your surveyor to see if they can see any work that might come up which has not yet been consulted on.
8/ Is there a sinking or a reserve fund?
Every leasehold estate should have an asset management plan detailing what the likely costs will be to maintain the properties in the estate so that they can be correctly budgeted for. This should result in an additional payment to the service charge which goes into the reserve fund to build up funds so that when a large expenditure does come up you don’t have to find thousands of pounds. Once paid into the reserve fund you won’t get the money back but similarly when you buy the property you will get the benefit of the monies already accrued in the reserve fund.
9/ What consents do I need?
The lease may well contain additional requirements for you to obtain the consent of the landlord, for example, if you want to alter, extend or let the property but also if you want to keep a pet or run a business from the property. You need therefore to know whether you have to get consent and, if it is going to be important to you, make obtaining consent a condition of your purchase of the property.
10/ What are the administration fees?
When you buy leasehold the lease administrator will charge fees for administering the lease. The lease administrator might be a landlord, a management company, a managing agent, a right to manage company, a housing association, a resident’s association or a legal representative of any of the above. There could also be more than one lease administrator all of whom may want to make a charge for the administration of the lease.
Ask your property lawyer to ask the lease administrator for a menu of their charges so that you know how much it will cost you if you want to sell, let, remortgage, extend or do anything that requires their consent within the lease. The administration fees can be very high, and you generally have no right to challenge how reasonable they are through the courts.
11/ Are event fees payable?
Some leases contain a requirement that if you sell, let or remortgage the property you have to pay a percentage of the value of the property at that time to the landlord. Sometimes event fees are created as a way to offset service charges during the ownership, particularly in retirement homes, but in other cases it is just an additional payment to the landlord.
12/ Is the lease acceptable to mortgage lenders?
Whether or not you are buying with a mortgage, you need to know that you will be able to sell on the open market or take a mortgage out in the future if you need to. It is therefore incredibly important that you know whether the lease is acceptable. Of course, lending policy does change so do beware that just because it is okay now does not mean it will be acceptable in the future.
For example, some lenders have changed their policy so that they will not lend on leases which have ground rents of more than £250 (£1,000 in Greater London) because they can be caught by the provisions of the Housing Act 1988 which would turn the lease into an assured shorthold tenancy that would give additional rights to the landlord if you fall behind on payment of the ground rent. The Government have committed to change this law but until it does you need to make sure that your lease meets the lender’s policy.
There are lots of other complications to leasehold so make sure that you read your property lawyer’s advice thoroughly and question anything which you do not understand or which conflicts with what you have been told already.
There are lots of leases out there which are absolutely fine – you just need to make sure that you are buying one of them. It is worth noting that the majority of these 12 questions require information which the person marketing the property should have available under the Consumer Protection from Unfair Trading Regulations 2008 so ask them for their material facts disclosure for the property.
Beth Rudolf is Director of Delivery at the Conveyancing Association (CA)
Related posts:
Leasehold first-time buyers trapped in leasehold homes with £800 ground rents, says BBC
Leasehold sales are bedevilled with ‘extortionate’ charges and game-playing, says the Conveyancing Association
Conveyancing Association’s Beth Rudolf attacks the HomeOwners Alliance for ‘scaremongering’ over leasehold
£80 million a year in charges for conveyancing leasehold property, say lawyers
Leasehold needs to stop being a means to produce ‘ever-increasing profits’, says Conveyancing Association
Moneywise does a thorough job reporting leasehold
You state:-
“Ground rent is the amount which the lease says you have to pay to the landlord every year – for nothing.”
Ground rent is indeed for nothing (The lease confirms this as the rent is not used in the calculation of the service charge) and therefore it is a burden on the property that needs to be valued and reflected in the offer price. If the NPV of the rent was shown then this would help purchasers make an informed choice
The Law Commission recognises that ground rents can have lower premiums in return for a higher rent and that these deals need to be preserved (see 6.151 onwards of the main report)
Ground rent has no place in a modern democracy. Until recently leasehold properties were no cheaper than freehold ones to reflect the ground rent. Remote investors are an unnecessary expense and an obstruction for home owners so are irrelevant. Invest elsewhere in something ethical.
7/ Are there any major expenditures coming up?
As a matter of due diligence, it is also worth checking what previous Section 20 notices were issued, what special project (major cost) the notice was issued for, and the cost to the leaseholder.
It has been my experience that special projects are grossly over-charged, running into the 10’s of thousands for many leaseholders. As a leaseholder you must pay the costs, there is no arbitration.
Checking the details of previous Section 20 Notices may not flag future unscrupulous behaviour, but at least potential leaseholders can avoid properties where bad/greedy management practices are already apparent.
If the block of flats has a management agent directly under control of the Leaseholders who also have shares of the Freehold, the control of the administration of and hence maintenance of their homes is much more clearly discussed and decided upon by way of shareholder meetings and votes. Where I live there are available records covering works for about 35 years. I don’t say all older and established blocks are always well run but my experience over the years of living in such blocks has been quite good overall. From what I’ve read regarding new builds, the situation looks extremely worrying. It is quite difficult steering first time buyers to really look carefully at the very matters you point out. It is an anxious time and I think they feel very stressed out by the financial challenge etc and maybe don’t want to cope with more bad news…. Once someone has bought their property, then is the time to commit yourself to attending block meetings,shareholder meetings and building a relationship with managing agents. At least then you can involve yourself in planning and decisions. If you don’t bother with that you give away your rights. This is your home and not thee more free-wheeling rental situation. Be involved if you want to create and maintain a good living environment.