There are a multitude of articles in relation to advice on property investment. The scope of this article is to focus on leasehold property as an investment and attempts to cover areas specific to investment in leasehold property.
- Look at the underlying finances of the development
With a freehold property you will usually have to bear the costs of maintaining the property. With leasehold property, a great deal of these costs are shared with fellow leaseholders. If you pick the right property, it can be a solid investment. Areas to focus on are covered in other parts of the the knowledgebase but can be summarised as follows;
- Service charges
- Ground Rent
- Size of the reserve fund
- Charges levied by the freeholder
Sites that attract a low service charge are typically very simple but functional buildings. Whilst some facilities add to the costs but are attractive to renters (electric gates, modern access control systems, satellite TV systems, lifts etc) many services are required that are not visible and hence not a selling point (e.g. sewage pumps, water pumps, communal water tanks, dry risers) but add to costs.
Estates that attract the lowest service charges typically have the following 3 characteristics
- Simple buildings with few “invisible” services such as pumps etc
- No internal communal areas. The costs of maintaining these are high
- Have a share of freehold
- Talk to local letting agents
It goes without saying that when looking to let out property you should look at the fundamentals such as transport links, schools, shops, employment but much of this can be qualified through a local letting agent. Just be honest and upfront, tell them you are an investor and what rents in their area? Any letting agent sniffing a potential let will be sure to help
Where buildings insurance is usually obtained by the freeholder it can often be marked up quite substantially. Properties where the insurance is arranged by the residents management company or managing agent typically are subject to lower insurance premiums.
Check the claims record. The party booking the insurance policy should know this as most insurers ask about the 3 year claims record. Be wary of any development with a poor claims record, especially in relation to escape of water which make up around 80% of claims on block management buildings policies. Poor standards of plumbing can have a severely negative impact on insurance premiums.
Short term letting (AirBnB)
This is a hot topic as most leases don’t take into account this relatively new phenomenon. The returns can be exceptional compared to assured shorthold tenancies but there is a big question mark as to whether this practice is legal in leasehold properties.
In the first instance, it may be that the block insurance doesn’t cover this type of use and invalidates the insurance. Additionally, other covenants may be being breached.
Case law is developing but notable is Bermondsey Exchange Freeholders Limited v Kevin Geoghegan Conway. County Court at Lambeth (10 November 2016) .
In 2015, after lawfully letting out his flat on a series of assured shorthold tenancies, Mr Conway started using Airbnb and other online temporary letting agencies. The freehold owners (Mr Conway’s fellow leaseholders) got fed up of the stream of temporary residents to the flat and took their case to Lambeth County Court to request an injunction. They argued that Mr Conway was in breach of his lease, that the temporary lettings were damaging to the building’s community, and that they had not given consent for the flat to be used in such a manner.
The County Court judge found that it was a breach of the lease and applied the injunction.
At the appeal on 1 May, the judge at Central London County Court was asked to consider the breach and also the injunction. The appeal judge upheld the decision on both counts – the leaseholder was firmly in breach of his lease and the injunction was continued.
What did the residential lease say?
Mr Conway’s lease contained a set of covenants that are common to most residential long leases. These covenants included:
- Not to part with or share possession of the whole of the flat or permit any company or person to occupy the flat save by way of an assignment or underlease of the whole of the flat.
- Not to assign or underlet the whole of the flat without the prior written consent of the landlord.
- Not to use or permit the use of flat or any part thereof otherwise than as a residential flat with the occupation of one family only.
The County Court found Mr Conway to be in breach of all three covenants, a decision that was upheld at appeal in 2018