When you own a property on a leasehold basis, it means you’re essentially renting the inside of a property for a fixed period of time. Leases are commonly issued with an initial length of between 99 and 999 years.
The exterior of the property, main structure of the building and any communal areas e.g. hallways and stairwell, as well as the land it sits on are owned by a freeholder, who can also be referred to as a landlord. As a leaseholder, you pay an annual ‘ground rent’ to the landlord and a service charge to cover general maintenance of the building and land.
As such, most leasehold properties are flats although leases can be attached to houses. In the case of leasehold houses built over the last decade, some have proved hard to sell on because of high-cost ground rent and service charge increases attached to the lease agreement, as well as prohibitively expensive lease extension costs. Although the number has now fallen dramatically, around 15% of new build houses were sold via leasehold in 2016.
Are leasehold properties ‘bad’?
There are around 4.3 million leasehold homes in England, with 67% of these being flats and 33% houses. This translates to around 54% of flats being leasehold, but just 8% of houses, although that rises to 27% of houses in the North West.
Given the number of properties owned via a leasehold agreement, in my opinion it isn’t a problem for most - as long as you fully understand the terms of the lease and how various aspects of it can impact on the property’s value.
So, if you own and are considering selling or buying a leasehold property, here are some of the lease terms and other aspects of the property and its management that I find tend to cause issues:
A clause that allow ground rents to double every 10 years
When you buy a leasehold property, you will usually have to pay ground rent and service charges either monthly or annually. These can be perfectly reasonable, with the average service charge considered to be around £1,250 a year and ground rents between £250 and £350 per year. They can be much higher or lower, though, so do seek advice from a leasehold expert, either a surveyor or legal company.
However, some leasehold properties have been sold with service charges that can rise much faster than inflation and ground rents that can increase exponentially. This was particularly the case with some of the new housing built in the last decade, where the lease stated that the ground rent would double every ten years. Because this is understandably off-putting to potential buyers, lenders are not keen to lend on properties with this type of lease.
These poor practices are currently being investigated by the CMA but, until we have a conclusion - and with the government’s recent announcement that it intends to stop the practice of new build houses having leases attached - these properties are can be difficult to sell, unless it’s to a cash house buyer.
Leaseholds with fewer than 80 years left on the lease
A property’s original lease term may have been anything from 99 to 999 years. For properties built in the late 1990s that were given a 99-year lease, this means the lease could now be down to under 80 years and that’s a problem.
Why? Well, at the end of the lease period, the property ownership reverts back to the freeholder. In reality, that very rarely happens and an extension to the lease is simply negotiated between the leaseholder and the freeholder. However, because of the potential cost involved, properties with shorter leases are less attractive to buyers, which reduces the property’s value. As a result of all those factors, it becomes more difficult to secure a mortgage, as lenders don’t want to take on the risk of a property that’s hard to sell.
It doesn’t mean a flat with a short lease can’t be sold or isn’t good value for a buyer. For instance, it may be possible to buy a property with a lease of 70 years at a reduced price, then extend the lease term back to 99, 125 or more years, increasing the property’s value for a relatively low cost.
If your property has a short lease and you either can’t raise the funds to extend the lease or don’t want the hassle of the paperwork, then you could sell the property to a cash or professional buyer.
High-rise flats and conversions
Some high-rise flats have fantastic views, however there are practical considerations that can make them harder to finance and sell.
If the property has a lift, these are typically quite costly to operate and, in particular, to fix when something goes wrong. Meanwhile, while the lift is out of service, you could have an awful lot of stairs to climb to reach your property and the thought of that could be very off-putting to buyers. As such, flats on higher floors are likely to take longer to sell and could sell for less than similar ones nearby on lower floors.
Add to this that not all lenders will lend on flats on or above the 5th floor, so financing a high-rise purchase could be difficult. Some lenders will also refuse mortgages for flats that have been converted from a house – they all have their particular ‘likes’ and ‘dislikes’.
No sinking fund
As well as covering regular maintenance costs, the service charge for a leasehold property should include an amount to cover the larger periodical costs, such as a new roof. This contingency is called a ‘sinking fund’.
Assuming works have been budgeted for correctly and everyone within the building has been paying their fair share, there shouldn’t be a problem. But if there’s a shortfall when major works are needed, you could find yourself with a bill for thousands or even tens thousands of pounds, either because the previous owner of your flat didn’t pay or because the sinking fund has been mis-managed.
So, before you buy a leasehold property, always find out:
- how much is in the sinking fund
- what repairs are budgeted for in the service charge
- what minor and major repairs are planned
- how works and costs are agreed
- how long you have to pay your share of repairs, if required.
How can you be sure a leasehold property is ‘safe’ to buy?
Whether you are considering buying a property with a lease yourself or need to sell a leasehold property to a professional buyer, the key to making sure it’s ‘safe’ to purchase is to have a professional legal company and surveyor assess the terms of the lease, making sure none are considered ‘onerous’, i.e. difficult for an owner to deal with. At the same time, the management of the building and state of the service charge sinking fund should be checked thoroughly.
Jason Harris-Cohen, Managing Director of Open Property Group commented:
"So far this year we have purchased 3 short leasehold flats. All had a short lease (under 80 years) and the sellers had been struggling to find buyers due to the fact that anything less than 80 years can cause problems when applying for a mortgage. In some cases, you may find a lender who is willing to lend on a lease over 70 years, however the product will reflect the increased risk for the mortgage lender.
We base our offers for short lease flats by evaluating the cost of the individual lease extensions and also take into account something called the ‘marriage value’. This is where any increase in the property’s value once the lease is extended has to, by law, be shared with the landlord/freeholder. This is a very complex calculation and you should instruct a specialist surveyor to provide a valuation”
Our YouTube video will explain more here.
In all cases, the reason we was able to purchase these short-lease properties is because we buy with cash rather than a mortgage, so are not bound by any lender’s rules and regulations. As professional buyers, we also have systems in place to be able to purchase a property quickly should you have a deadline for selling your property.
If you need to sell your property quickly or are having trouble finding a buyer because of lease concerns, we can help. Contact us today for a no-obligation discussion and cash offer.
Watch the video below which explains more about selling your property fast or click here to continue reading this article