What do you need to consider when purchasing a leasehold property?
THEODORA MICHAELOUDIS >
Consultant SolicitorWed 23 January 2019
Our Residential Property Expert Theodora advises that at least 85% of the residential property transactions she is instructed on in London relate to leasehold property transactions. Here she explains the factors that clients need to consider when purchasing a leasehold property:
Term- Leases can vary in lease term. A longer lease may have a term of 999 years, however, a shorter lease may have a term of 99 years and some leases have varying unexpired terms which could be 80 years or much less. Generally when a lease falls below 70 years it is advisable to approach the Landlord for a lease extension. A shorter lease term affects the future marketability of a property and potentially makes it very difficult to obtain a mortgage as lenders will have specific guidelines as to the length of the lease term which they require.
There is also statutory provisions relating to lease extensions and leases can be extended pursuant to statutory provisions and subject to certain conditions.
Rent- The rent provisions in different Leases can also vary. Some leases charge a peppercorn rent which is nothing, however, other leases have a rent provision which states that the rent doubles over a certain number of years. If there is such a doubling lease rent clause then you need to consider what the rent will be when it does double as when considered over several years it could be very high and unaffordable which will affect marketability and also the prospect of obtaining a mortgage is limited.
Share of Freehold-- Some clients will not consider a leasehold property unless a share of the freehold is also offered as it allows the leaseholder who also owns a share of the freehold to have a say in the decision making process. However, the Lease is still important and the leaseholder is still bound by the provisions of the Lease. Owning the share of the freehold does not mean that the Lease should be disregarded.
It is also important to consider whether the share of the freehold will be held in the individual leaseholder names (up to 4 names) or whether a company will be set up. It is generally advisable that a company is set up so that details of how the company is run are clearly set out in formal documentation.
Service Charges– A leaseholder will generally be expected to pay towards the maintenance of the building by way of service charge contributions. The Lease will generally set out what is included in the service charges and also the percentage proportion which the leaseholder is expected to pay towards the service charges.
Major works- Often leasehold properties form part of a larger building or block of flats and regular maintenance, repair and upgrading is required. Some maintenance works are known as major works as the cost of such works is higher than the routine service charges and clients should consider and budget for the additional cost. Under section 20 of the Landlord and Tenant Act 1985 a landlord will be required to consult with leaseholders if the cost of the works will cost more than £250.00 to one individual leaseholder.
Retention- Generally service charge accounts take a while to be audited and therefore it is impossible to say whether or not, at completion, the account is completely clear or whether an excess will arise relating to the seller’s period of ownership. It is therefore preferable to ask the seller to agree to a retention, to be held back by the seller’s solicitor, which can be released back to a buyer to clear any unpaid service charge which would have been due during the seller’s period of ownership. Of course if there is no excess the retention can simply be returned back to the seller.
Lease Plans- When purchasing a leasehold property it is important to consider the layout of the plan which is attached to the Lease. If the lease plan does not match the current layout of the flat then legal representative will need to consider what alterations have been carried out and if such alterations have had the consent of the Landlord, if there is a requirement under the terms of the lease for the landlord’s consent to be obtained. A new plan may also need to be prepared to substitute the existing lease plan and to reflect the current layout of the flat.
Fire and Asbestos Assessments- It is a legal requirement for block of flats and converted houses (converted into flats) to have a fire risk assessment of the communal areas. An asbestos assessment may also be required for parts of the managed area built or converted.
Leasehold transactions vary from case to case and when dealing with leasehold properties a solicitor or legal representative will have to consider many factors including whether a lease needs to be varied to ensure that the Lease terms will be adequate to a lender ensuring that the lender’s security is not compromised and also consistent with the clients requirements and interests. For example a lease which does not allow pets will not be right for a client who wants to live with pets and a client wanting to sublet a flat will need to be notified if a lease does not allow for this.
Leases often need to be varied to ensure that provisions such as insurance clauses, alteration clauses, assignment clauses, rights granted and enforceability are adequate. Leases may also need the landlord’s consent for assignment of the Lease and this is something that will need to be covered in another article.
If you need further guidance on residential leasehold transactions, please contact our London Residential Property Expert Theodora Michaeloudis.
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