1. Understand the role of your solicitor – You get what you pay for
The conveyancing process has become somewhat commoditised with many law firms operating a “bucket shop” model. This entails one solicitor overseeing a large number of “conveyancing assistants” who will generally not have had anything like the level of training of that of a solicitor. This model is fine for simple transactions, however, leasehold property transfers are rarely simple…..AVOID AVOID AVOID.
Even if you appoint a “proper” solicitor, often the role can be restricted to the following;
- Ensuring you are buying a good and marketable title
- Ensuring that the lease is acceptable to the lender
- Should point out any major concerns with the lease but will not necessarily read it line by line or determine if all parts of it are fair and equitable
2. You will not legally own the property. Why and what to look for?
Even though you get the exclusive possession of a property for a fixed time, you don’t become the owner. In the eyes of the law, you’ll essentially be a tenant of the freeholder during the lease period.
It’s like buying a long term rental rather than owning a property.
What to look for
Ideally, your flat should include “share of freehold”. This gives you and your fellow leaseholders the ability to determine how the building/estate is managed, however, it’s not like owning a freehold property and you still have to adhere to the terms of the lease.
Unfortunately, feudalism lives on in the 21st century UK property market and there is a high chance any leasehold property you try to buy will be owned by an Independent freeholder. Other sections of this article cover things to look out for with this arrangement.
How long is left on the lease?
The lease will eventually have to be extended and this is always a costly process. The costs of extending a lease typically run into the thousands and the costs escalate considerably when the lease hits an unexpired term of 80 years as “marriage value” begins to take effect.
A period of less than 80 years is generally the point at which estate agents and mortgage lenders consider the length of a lease will adversely affect the value of a property and its ‘mortgageability’. While some lenders may lend, not all will.
Any lease of less than 70 years can start to significantly affect the value of the property when compared to other properties with a longer lease.
If a lease needs extending on a property you want to buy, the seller has an important role to play. As the current owner, they have to claim the right to extend the lease, before passing this on to you to complete when your purchase has gone through. Otherwise, you will have to wait two years.
3. Read the Lease
Leases are truly the most tedious documents in the world (except to me but I’m a Leasehold nerd) but it is worth investing the time to read them and understand the main provisions. Common Ground has written several articles to help clients understand leases in its lease FAQ section.
As with any property there is a cost of ownership. Leasehold properties have the advantage that much of the cost is shared amongst your fellow leaseholders, however, be sure that you understand what costs are associated with ownership of the lease.
Key things to look out for are:
- Ground rent. How much is it and when do increases kick in
- Service charges. Ask your solicitor how they compare to other similar developments
- Reserve fund. The lack of one or a low reserve fund should be a read flag. It can often be indicative of a building that is subject to overspends
A building with a poor insurance record is often one to avoid. It can be indicative of poor build quality or poor management.
Additionally, find out who arranges the insurance (it will be in the lease). If it’s the freeholder, expect there to be a big mark up. If it’s the managing agent, find out what commissions they are getting and what they do for those commissions?
6. Think about the future
Before buying a leasehold property, think about what the situation would be a few years later when you would like to sell the property. Factors such as increasing ground rents, excessive maintenance charges, and a lease period below 70 years could make a future resale extensively difficult for you.
Therefore, caution is necessary when buying a leasehold property. Provided that there’s a well-drafted lease that protects your interests and the property is appropriately managed, a leasehold property could be a secure long-term investment.
7. Speak to the incumbent Management Company
A lot of the questions raised in the previous points can often be quickly answered by the incumbent managing agent. They will have the benefit of knowing the site, the potential risks, plans for the future and how it compares to other sites. If the managing agent isn’t prepared to help or is difficult to contact this can be indicative of poor management or a managing agent not driven by the concerns of leaseholders (often the case when the agent is appointed by an independent freeholder.
8. Are there any disputes amongst parties to the lease?
Legal fees and visits to the First Tier Property Tribunal run into the thousands if not tens of thousands. It is always advantageous to buy a property on a harmonious site. It is often worth putting the name of your freeholder into a search engine. This will often reveal legal cases in which they have been involved and may offer insight as to how reasonable the freeholder is.