The post that goes through some of the problems you might face if you are buying a leasehold property.
I recently completed on the purchase of a flat. Like pretty much all flats it is a leasehold and with leasehold comes a whole host of complex legal issues that you just don’t get with freehold. I thought I would go through some of these in a post.
Some of the points below apply to both flats and leasehold houses, others only apply to flats.
As a general rule, I’d steer clear of leasehold houses. There is absolutely no justification for a house to be leasehold. At least there is a logic with the flats in a block being leasehold in order to deal with maintenance of communal areas. The only reason for a leasehold house is for a developer to bleed more money from the leaseholder. There is increasing press coverage about the problems people are facing when they have purchased leasehold houses.
Whilst I suspect leasehold flats are here to stay (the property market has hardly leapt at the new-ish commonhold tenure that is now available) I think there will be increasing regulation of leasehold housing.
Don’t rely on your conveyancer/solicitor
You should be able to just leave your conveyancer to deal with all the legal issues and flag any potential problems to you. But I found that I was picking up on most of the problems myself. I think a lot of the high-churn conveyancing firms seem ill-prepared to deal with leases. So make sure you know your way around a lease. Remember that you are sinking an awful lot of money into this purchase (in most cases it will be your life savings) so it is perfectly reasonable to comb obsessively through the lease.
I would also say, don’t skimp on your conveyancer. Some colleagues of mine advised I should go with the cheapest out there as they are all crap so there’s no point paying more than necessary. However, in hindsight I wish I’d gone with a solicitor that a friend of mine recommended, even if it would have cost more.
This is the part of the lease that defines exactly what is leased to you. Make sure it covers what you think it covers.
The two areas of concern I had were:
I’m in the upper floor flat and the property had been advertised as including the loft space. The lease referred to the demise as including “the roof and roof timbers”. You’d be forgiven for thinking this means the loft space was included. But after a bit of Googling, I wasn’t convinced. Because just because you own the roof it doesn’t mean you own the air space within the roof (I’m going to use the term “own” even though no doubt some smug bastard will take delight in pointing out that with a leasehold you don’t really “own” anything).
I know that sound ridiculous, but when we got the freeholder to confirm their view on the demise, they said that they didn’t consider the loft space was included. An unsurprising view given freehold companies are usually parasites. But, unfortunately, their view is all that matters in the end. If you want to convert the loft you’ll need the freeholder’s permission and if they think you don’t own the loft space they won’t give that permission unless you agree to “buy” the loft space from them. So if in doubt, always get the freeholder to confirm.
Another thing to be aware of if you want a dormer extension, is that just because you own the air space within the loft, it doesn’t mean you own the air space outside of the loft.
Any changes to the demise of the lease will require a deed of variation. I tried to get this done before we completed, which is clearly preferable so you’re clear on what the costs will be. But in the end everyone involved faffed around for so long that my mortgage offer was going to expire, so we agreed on a price chip instead.
In a lot of blocks of flats the staircase(s) will be very clearly in the communal areas. In mine, the stairs are behind my own front door, yet it is not clear that they are covered by the demise of the lease. A well-defined demise will be very specific, often down to making it clear how deeply into the walls the demise covers.
Mine was horribly drafted, and if we’d pursued the deed of variation I’d have also insisted it was amended to specifically cover the stairs. Why does this matter? It’s to do with the insurance…
Look carefully at how the property is insured. In most blocks of flats, the freeholder will cover the entire building and recover the insurance through the service charge. The pro of this is that it’s clear and simple and ensures everything is definitely covered by insurance. The con is that you are tied to whatever insurer the freeholder or it’s agent chooses to sure with, and believe me, they won’t be picking the cheapest insurer. It will be an insurer they have some sort of commission arrangement with. Often the premium will be ludicrously overpriced – I’m talking five times what you get if you insured yourself.
Alternatively, perhaps in a house conversion, each leaseholder might be responsible for insuring their own flat. That is the case under my lease. The benefit of this is that you can source a better deal. The downside is that there is an element of risk if the communal areas aren’t adequately covered. My lease imposes no obligation on the freeholder to cover the communal areas (very small though they are), so if the entire house were to burn down it could cause both mine and the ground floor flat’s insurance to be rendered invalid if there are uninsured sections of the house. Or what if the ground floor’s insurance had lapsed? My insurer can hardly rebuild my first floor flat in isolation.
On the staircase issue I mentioned above, I was concerned that my insurer might refuse to repair any damage to the stairs if it technically wasn’t covered by the demise (although I got the insurer to confirm that both the staircase and roof would be covered by their policy).
The solution to potentially inadequate insurance is to make sure there is a contingent building insurance indemnity policy in place. It’s a one-off policy that pays out if something has failed with your normal insurance.
The lease term
This one is a fairly easy one that your conveyancer should pick up on. If there is a lease term of less than 80 years remaining you’ll find it very difficult (maybe impossible) to get a mortgage. The closer the remaining term gets to this point, the more expensive it becomes to extend the lease, so bear this in mind. If you think you’ll need to extend the lease term quite soon after purchase then make sure your offer reflects this.
Look at when the lease was last extended. Does it look like the freeholder only extends up to 99 years each time? For me this is a bit of a concern as it speaks of a freeholder that expects to be able to extract a premium for extending the term every decade or two.
Who is the freeholder?
Make sure you do your due diligence on the freeholder
I take the general view that freeholders (especially companies) and their managing agents cannot be trusted as far as you can throw them. As a leaseholder you can be stuck between a rock and a hard place. If you have a very hands-off freeholder it can be great, as you can just deal with any maintenance issues with your neighbour(s) and you don’t need to get permission every time you want to paint the walls. The problem with this is if your neighbours aren’t inclined to do their part. You need a freeholder that will be willing to enforce maintenance obligations.
You may find yourself in a situation where the freeholder hasn’t been seen or heard from in years. This may seem like a good thing, but for similar reasons mentioned above, it could be problematic if you need someone to enforce covenants against your neighbours.
And if there’s stuff you want to do to the property that technically requires freeholder consent and you can’t get hold of them, you will either need to make the changes and risk this being a problem down the line or go to the trouble and expense of applying to court to have the freehold vested in you and the other leaseholders.
Share of the freehold
You might find the flat comes with a “share of the freehold”. This means all the leaseholders in a block/house own a share of the freehold, usually through shares in a company that is the technical owner of the freehold.
As with an absentee freeholder, this can sound great, and in general it is considered to be a desirable thing. However, it becomes even more important to know your neighbours. Let’s say you want consent to do a loft extension. An independent freeholder will only want to know it doesn’t negatively affect the value of the property and will likely want you to pay them something for their consent. A neighbour might block your plans for various reasons: some valid such as an extension blocking their light and some petty, like not wanting the noise disturbance for a few weeks.
Service Charge and Repairs
Your service charge may be zero if you are in a converted house where the leaseholders are responsible for all repairs. If the freeholder is responsible for repairs then it will be recovered by a (usually) monthly or quarterly service charge. If this is the case, check what the service charge covers (e.g. does it cover the insurance).
Get your conveyancer to check the previous service charge records (this should be standard) to make sure that the freeholder has been doing the works that the leaseholders have been paying for. The service charge should only cover works that are actually being done.
Also check whether the service charge includes contribution to a sinking fund, which is a pot of money that is intended to cover larger expenses. The idea is you pay a bit towards it regularly so you don’t then get hit with a huge bill when something major needs doing.
Whoever is responsible for repairs, check the condition of the property to make sure it appears to have been done in accordance with the lease. E.g. if the lease requires the leaseholders to paint the outside of the house every three years but it looks like it hasn’t been done in about 20 years, this might say something about your fellow leaseholders’ motivation to do the works. Is the burden going to keep falling on you?
A sub question here is “who are the neighbours?”. This is obviously a question for whenever you move, but it has an extra significance in a flat as you may need to rely on them to keep the property in decent repair. Where the repair obligations lie with the leaseholders, I always found it created alarm bells if the other flats in the property are occupied by (shorthold) tenants. Tenants obviously won’t (and have no obligation to) contribute to maintenance, but their landlords (your fellow leaseholder) won’t care like you do about the maintenance of the property.
Ground rent should just be a token amount really. My own ground rent is £100 per year, increasing by £100 every 25 years. This is acceptable. What is not acceptable is doubling ground rents – in particular those than double every ten years. These tend to be uninsurable and unsellable as they soon become astronomical.
Know your rights
There is a vast array of leasehold legislation. I’ve just mentioned three bits briefly here, as to go through even these three in detail would take thousands of words. The Leasehold Advisory Service is incredibly useful for more detail.
The following are rights available to flats rather than houses. And as will become apparent, they will become less and less feasible the bigger the block of flats.
The Commonhold and Leasehold Reform Act 2002 allows leaseholders to acquire the freeholder’s management functions by transferring them to a Right To Manage (RTM) company.
There are various rules for qualifying for this right, but broadly, at least half of the leaseholders in the building will need to participate in the RTM company
The process does not require the freeholder’s consent nor an order of the court. There is no need for the leaseholders to prove mismanagement by the freeholder.
Once the right to manage has been acquired, the landlord is also entitled to membership of the company.
Before going down this route, you would need to be clear on the burdens of managing the property yourself (albeit you can outsource this to a specialist management company rather than doing it yourself).
You won’t have this right if the landlord is a Local Authority.
Collective enfranchisement is essentially the ability to force the sale of the freehold to the leaseholders. It can be done providing at least 50% of the flats in the building, who are “qualifying tenants” (essentially people with leases that were originally granted for more than 21 years) agree. If there are just two flats in the house/block, then both leaseholders need to agree.
There is a formula, laid out in legislation, which is used to calculate the amount the leaseholders will have to pay to buy the freehold.
The leaseholders will usually then hold the freehold via a company of which they will all be shareholders.
Again, this right isn’t available where the landlord is a Local Authority.
Where a landlord is proposing to sell his interest in a building containing flats in relation to which the RFR exists, he must, by law, first offer it to the tenants before offering it on the open market.
There are various rules for when the RFR applies, for example, at least 50% of the flats in the block must be owned by “qualifying tenants” (those with long leases) and the freeholder must not be a housing association or Local Authority.
Breach of these legal obligations by the landlord is a criminal offence. If the landlord sells without providing the RFR, the tenants/leaseholders can take action to force the new owner to sell to them at the price the new owner paid.
You can certainly get more for your money if you purchase an ex-Local Authority/ex-Council property. But you need to be aware of a few things. You don’t have the rights mentioned above, for one thing.
You also need to be wary of Section 20 notices. These are notices the Council can serve on owners of ex-Local Authority flats when major works need doing. They outline what your share of the bill we be, which should be reasonable and proportionate to the floor space of your flat. However, there are horror stories of leaseholders being issued with huge bills that seem completely disproportionate. Or Councils doing expensive, cosmetic works that you probably wouldn’t choose to do if you had the choice yourselves.
Unlike with a private landlord where you have the right to force them to get a quote from a service provider of your choice, with a Local Authority landlord you only have the right to make “observations” about the proposed works. So if they get an uncompetitive quote for the work, there’s not much you can do about it.
I’m thinking I might create some kind of checklist of the above that people can print off/download. Let me know in the comments if you think this would be useful.