Holding Firm Mary-Anne Bowring unravels the jargon behind buying a leasehold property
Around two million people in UK don't actually own their property. Instead, they have bought the right occupy their homes as lessees. If you're looking to move into a flat or property in the heart of a city, it's a near certainty that you'll be a tenant, so it's a wise move to get acquainted with the ins and outs of buying leasehold. Since the mid 1980s, Government legislation has granted lessees more power to protect their interests, and buying leasehold has become an even-more attractive prospect.
RIGHT ON TIME
At the simplest level, a lease gives the tenant the right to occupy a space in a building for a term of years. At the top of the tree stands the freeholder, who owns the property and grants the lease to an individual. Often, there will be a middle-man of some kind, perhaps a developer that has been granted a head lease by the freeholder and then goes on to sell long leases to individual tenants.
Most residential leases are originally sold for a term of 99 or 125 years, during which time the leasehold can be bought and sold. Upon expiry of the lease, the flat reverts to the landlord. The term is fixed at the beginning, so it decreases in length year on year. Always check the remaining time on a contract when buying a leasehold property. The Royal Institution of Chartered Surveyors considers a short lease to be one that has less than 70 years remaining. However, most mortgage companies are reluctant to lend at the normal loan criteria if a lease has less than 60 years (or 30 years plus the mortgage term) unexpired.
Keep an eye out for the term leasehold plus share of freehold when buying. This is arguably the ultimate scenario for a leasehold, as he or she will then share democratic rights in the way the building is run. When it comes to the sale of leaseholds in period conversions, such as stately homes or Victorian terraces, the market is driven by downsizers perceived to come from high-income brackets. Freeholders and landlords will, therefore, often offer favourable terms to these buyers, such as a 125 or 999 year lease, with a £1.00 or peppercorn ground rent or a share of the freehold from day one.
A HEALTHY SHARE
It's a common myth that leasehold is more expensive in terms of the running costs than owning a home of the same size. In fact, the contributions a lessee pays to the freeholder tend to balance out with the usual costs of insurance, maintenance and repair you could expect as the owner of a freeholder building.
These payments will usually consist of ground rent (which may be nominal), a service charge and contributions towards a reserve fund. The service charge will cover everyday expenditure, including electricity, repairs, insurance and management costs. A reserve fund is a pool of money used to pay for large items or infrequent expenditure, such as mending a roof, and major items, like decoration, that arise more regularly. It's best to buy a leasehold property that has a reasonable service charge and a healthy reserve fund. Previous lessees will have paid into the reserves towards future maintenance costs, and since the fund runs with the lease, you'll be buying into quite a benefit. As a buyer, it's always prudent to check the balance sheets of past years service accounts to find out what accrued reserve funds are held.
As well as such charges, the lease will include details of any covenants between he lessee and freeholder. Each lease will vary to a certain extent, but a lessee will be expected to comply with statute and any by-laws set by the local authority, and advice will be offered on reasonable behaviour and maintenance of the property. Similarly, a freeholder will have to comply with his covenants, which will often include keeping the building insured and maintained and granting the lessee the right to peaceful enjoyment of the property.
Not all of us are lucky enough to fall in love with a flat that already has a share in the freehold title. In such cases, it's important to e aware of the right to buy the freehold and the right of first refusal. Right to buy was first given to lessees in 1993, and since then it's become even easier to invoke. As long as two thirds of the flats in your building have long leases, and 51% of the qualifying lessees participate, you can actually force the Freeholder to sell you the title. Similarly, should the freeholder want to dispose his title, lessees are also protected thanks to the right of first refusal. This means that the freeholder must either offer the title to the lessees before selling it to anyone else, or give them the option to take the contract from a prospective buyer at the same price and terms. If the freeholder has nominated an investment company as the buyer, you may be lucky enough to purchase at an investment price. If the block you're buying into has a management company which will often suit both the lessees and the freeholder or owns the freehold title already, then there will usually be a managing agent appointed. Self-management is also possible, and can be especially appropriate in smaller conversions, for example in period properties consisting of four to eight flats. Provided that, between them, the lessees feel they have enough legal, financial and practical experience, this can be a great option. Self-managing can save on costs, particularly if there are no real disputes or different living agendas within a building. You are still entitled to claim the right to manage, even if you don't own the freehold or there is no management company, if 51% of lessees wish to set up a Right to Manage company. Once notice has been served on the freeholder, this could be set up within four months.
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