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Refresher course: selling leasehold properties

Fahmida Chowdhury, Associate Solicitor at ELS Legal, sets ten key questions homemovers should ask before buying a leasehold property.

Fahmida Chowdhury

Leasehold flats image

Leasehold properties have become a contentious issue in recent months. Whether it’s inflating ground rents, rogue property managers, or questionable lease terms, thousands of homeowners are getting caught in the leasehold property trap. The surrounding publicity means that more estate agents will be questioned on the complications of leasehold homes – so you need to guide potential buyers.

Fahmida Chowdhury,image

Fahmida Chowdhury

1 What is the duration (remaining term) of the lease?

Leasehold, in its most basic form, means that the buyer obtains the lease from the freeholder (also known as the landlord) to use the home for a number of years. Leases are usually long-term – often 90 to 120 years, but can be as high as 999 years or as short as 40 years.

The buyer would want to ensure that they will be allowed to stay at the property for the number of years required, and that the premium paid for the lease reflects the number of the years remaining on the lease. Importantly, if the remaining term is rather short, then the tenant may want to consider his or her ability to apply for a lease extension to extend the term of the lease.

2 How much annual ground rent is payable, and are there any rent review clauses?

Because leasehold is a form of tenancy, it is subject to the payment of a rent to the landlord – which is additional to the premium paid for the purchase of the property.

Ground rent is a specific requirement of the lease and must be paid on the due date, subject to the issue of a formal and specific demand by the landlord. If the tenant is buying a new property, the solicitor should be able to renegotiate the ground rent if it is excessive. Sometimes the rent is known as “peppercorn rent” – an historic term meaning that no ground rent is payable.

Buyers need to establish exactly how much the rent will increase to avoid nasty surprises in the future.

If there is a rent review clause in the lease then the fixed amount of ground rent may increase during the course of the lease term. There are many different types of rent review clauses – and calculations can be complex.

However, it is vital to establish exactly how much the rent will increase, and when, so the tenant’s solicitors can negotiate the clause to ensure that there are no nasty surprises in the years to come.

If the calculation or amount is not settled in advance then the tenant may be lumbered with an unexpected and unreasonable amount of rent to pay.

This will also make it very difficult for the tenant to assign the property in the future, so it is vitally important to be clear.

3 How much is the owner required to pay towards maintenance fees, annual service charge and my share of the building insurance?

Generally, the lease will oblige the tenant to pay a fixed percentage or a “reasonable proportion” of the total amount. It is important to establish the items that are included within the service charge payment, whether the landlord has any plans for expensive works and when these will be carried out, as the tenant will be responsible to contribute toward the major work expenses.

4 Does the buyer have the ability to alter the property or carry out major works?

The lease will stipulate whether the tenant needs to obtain the landlord’s permission before carrying out any alterations to the property or if there is absolute prohibition on alterations.

5 Does the buyer have the ability to sell or use the property as an investment property?

With the growing demand for rental homes, it is quite possible that a buyer may, later on, want to let the property. The generic term for any dealings with the leasehold interest is called alienation. This includes assignment, subletting or underletting, parting with possession, sharing occupation and charging the premises.

The landlord will have chosen the original tenant carefully based on his strength of covenant – i.e. the tenant’s ability to pay the rent and perform the covenants in the lease; so, the landlord will therefore want some control over whoever else might occupy the investment property.

Therefore, they will usually insist upon there being some restrictions in the lease against tenants dealing with the leasehold interest.

It is important that the landlord specifies in the lease whether the tenant can deal with the whole of the premises and/or part of the premises – i.e. can they assign the whole or part of the lease, or sublet whole/part.

6 Are there any other restrictions?

It is common to have restrictions such as not owning pets, not to use the premises for business purposes, not to install a satellite dish, among others.

7 Are there any parking spaces available?

This question seems obvious, but always remember to ask about the property’s amenities. You don’t want your seemingly designated parking space reassigned overnight.

8 What is the precise area that my leasehold covers?

As this may not include the balcony, loft or the roof. This also determines who is responsible to maintain each part of the property.

9 What are the tenant’s covenants?

Ask this question so that you can observe your obligations as a tenant. If the tenant does not fulfil the terms of the lease, in particular the tenant’s covenants – for example, by not paying the fees – then the lease can become forfeit.

10 What should I look out for after the purchase?

Following completion of the purchase, the buyer’s solicitors should serve Notice of Assignment and Charges on the landlord and the management company.

The buyer’s solicitors should always check whether a Deed of Covenant is required. The landlord may require the buyer to enter into a Deed of Covenant to transfer the obligations in the Lease directly to the buyer. There is normally a fee which the management company will charge and the buyer’s solicitors will need to make sure that it is drafted correctly to ensure there are no problems encountered between the buyer and the landlord post completion.

Likewise, obtain a Certificate of Compliance to submit to the Land Registry which states that the requirements in the lease for the change in ownership have been complied with.

The buyer’s solicitors should also ensure that the seller’s account is fully paid up before the buyer takes on this responsibility.

ELS Legal: www.els-law.co.uk

September 29, 2017

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