Selling leasehold properties has its pitfalls. These are the critical questions that a buyer will need answered, estate agents may like to add to their buyer information and advice:
HOW LONG IS LEFT ON THE LEASE?
This is the most important question that should be asked and it’s too frequently omitted from agent’s sales brochures. Whilst the majority of leasehold properties are sold with decades left to run, once the lease drops below 80 years the cost of extending it rises rapidly. It also becomes harder for buyers to be granted a mortgage.
With a short lease the buyer’s greatest asset can quickly become their greatest liability.
This greatest asset could quickly become their greatest liability, so most might look for a property with a lease that won’t drop below 80 years whilst they live there, but future buyers will have the same concerns.
So, either look for properties with even longer leases or consider extending the lease before it drops below 80 years. If you opt for the latter, note that you will need to own the property for two years before you can qualify for a statutory lease extension.
There are alternatives:
- Have the seller (if they have owned the property for two years) start the lease extension process for you and assign the benefit of the notice to you
- Have the landlord extend the lease informally before or after the sale. With this option, the landlord is under no obligation to grant an extension or transfer the benefit of agreement to you
- Insist that the seller completes the lease extension at their cost before completion.
HOW MUCH IS THE GROUND RENT?
Buying a leasehold property, you are buying the remaining term of a long rental contract, and should expect to pay a small, usually token amount of rent per annum to the Freeholder. Whilst this is often no more than £100-£200 per annum, watch out if your lease refers to an escalating ground rent (e.g. it may be £150 now, but will double every 25 years for the remainder of the term). Designed to protect the freeholder against the effects of inflation, an escalating ground rent is arguably not particularly unreasonable. However, it will make any future lease extension more expensive. There has been a fair amount of commentary of escalating ground rents that have seen huge annual figures payable at the end of the term of the lease making some leasehold properties unsellable.
HOW MUCH IS THE SERVICE CHARGE?
Usually around £1000-£3000 per annum, this fee enables landlords to recover the costs they incur in providing services to the building. This will usually cover general maintenance and insurance for the building. If services are provided, it should also cover things such as central heating, lifts, lighting and cleaning of the building’s shared areas.
It may also cover contributions towards a ‘sinking’ fund to help to cover unexpected expenses. It may not, so check if this is charged separately.
Leaseholds can be flats or houses, note that leasehold houses have less protection than flats in areas such as service charges.
Once you own the property any future service charges are yours to pay so it is important to have information before exchange of contracts of any future planned works and their costs along with specific confirmation that any works that have already been carried out have been paid for. This avoids facing an unexpected bill after you buy the property. Be sure to check if there are any arrears of service charges.
DOES THE SELLER OWE MONEY?
Any arrears owed by a seller become your responsibility following completion. Whilst you may be able to sue the sellers for breach of contract if arrears are not paid, success is never guaranteed. The level of arrears are often not worth the risk of incurring litigation costs if you are unsuccessful.
Your solicitor should ensure that full details of any arrears are known before completion. If there are arrears, they should request evidence that these have been settled before exchange of contracts or demand an undertaking from the seller’s solicitors that they will be settled prior to completion. Ask the question early on so that you can gauge whether or not this is going to be a barrier to you.
MANAGEMENT INFORMATION PACKS
The management information pack is provided by the freeholder (or the managing agents on their behalf) and contains important information about the property and the freeholder. As it is the seller who pays the fee for supplying this information, this may not be your immediate concern. However, as these packs often cost up to £500+VAT, it is a good idea to take a note of it so that you are not taken by surprise when you come to sell the property. The fee for supplying this information is currently unregulated, so it is safe to expect this fee to have risen by the time you come to sell.
Hart Brown is a leading law firm with offices throughout Surrey and in London: www.hartbrown.co.uk