Key Considerations Before Buying A Leasehold Property

Leasehold remains a prevalent form of property ownership among both homebuyers and investors. Official statistics reveal approximately 4.6 million leasehold dwellings in England, accounting for nearly one-fifth of the housing stock. Surprisingly, 68% of these leasehold properties are apartments and maisonettes, with houses comprising the remaining 32%. London boasts the highest proportion of leasehold homes, at 34%.

While leasehold ownership has faced criticism due to the ground rent scandal, the government has taken affirmative steps to address the issue. As of June 30, 2022, ground rent charges are banned on new residential leases in England and Wales, marking the initial phase of long-awaited reforms to the leasehold system.

For individuals contemplating the purchase of a leasehold property, it’s crucial to comprehend the implications thoroughly to make well-informed financial decisions.

At Roger Hannah Chartered Surveyors, our seasoned team offers a wealth of surveying expertise and property industry knowledge to residential and commercial clients in the capital.

We specialise in building surveys, refurbishment & restoration advice, licences to alter, and all party wall surveyor matters, delivering professional advice and guidance on various building-related issues. Here are our recommendations on the essential questions to consider when acquiring a leasehold property.

What is the difference between leasehold and freehold?

A freehold title grants ownership of both the building and the land it stands on, while a leasehold title provides the right to occupy the property for a specified period outlined in the lease. Leaseholders enjoy exclusive possession of the property for a set term, yet they do not own the building itself. Upon expiration of the fixed term, ownership typically reverts to the leaseholder, although this outcome is infrequent as leaseholders commonly possess a statutory right to extend their lease.

What is the remaining duration of the lease?

In essence, a leasehold property is considered a depreciating asset, indicating that its asking price should align with the remaining years on the lease. When the remaining term dwindles to approximately 80 years or less, securing a mortgage for the property becomes challenging, and renewing a short lease can incur disproportionately high costs. Therefore, essential information for any potential buyer includes determining the remaining lease term, assessing the need for a lease extension, and budgeting accordingly for this extension.

How much is ground rent?

Leasehold properties typically entail an annual ground rent payment to the freeholder, which may either be a nominal fixed sum or escalate at regular intervals. The recent scandal has brought attention to excessively high ground rents and burdensome escalation clauses, underscoring the importance of thorough scrutiny. Should the ground rent escalate to 0.2% or higher of the property’s market value, it’s crucial to recognise that this could significantly impact the property’s marketability and eligibility for mortgages.

What are the lease’s other terms?

The lease serves as the official document outlining the terms of leasehold ownership, making it essential to grasp its contents fully, with legal advice strongly advised. It’s vital to ascertain the rights and obligations delineated within the lease, particularly those impacting your desired property usage, such as restrictions on business operations, pet ownership, or subletting. Additionally, confirming the presence of a maintenance covenant within the lease, obligating the freeholder to uphold the building and common areas, is crucial.

What other costs should be considered?

The primary expenses linked with leasehold ownership encompass ground rent (as discussed previously), service charges aimed at maintaining the building and communal spaces, and administrative fees for obtaining freeholder consents and approvals when needed. Additionally, there’s the prospect of incurring expenses for lease extensions. Service charges, in particular, can pose challenges as they are determined by the freeholder. Thus, it’s crucial to request comprehensive details concerning current and past service charges to assess expenditure levels, understand potential fluctuations in frequency and extent, and navigate this aspect effectively.

What’s the property’s current condition?

We advise undergoing a thorough property inspection conducted by an impartial surveyor to obtain crucial insights into the condition and maintenance status of the leasehold property. At Roger Hannah Surveyors, we provide a range of customizable building surveys tailored to your requirements. Additionally, inquire about anticipated future expenditures for the entire building and ascertain whether a sinking fund is in place to address forthcoming works. The absence of a sinking fund, coupled with signs of building disrepair, should raise concerns.

Do you intend to let the property go?

For buy-to-let investments, it’s essential to carefully review any sub-letting clauses outlined in the lease. Determine if subletting is allowed and assess any restrictions, such as prohibitions on holiday lets, requirements for single families only, or bans on pets, which could impact your rental market prospects. When estimating the potential rental yield, consider all the aforementioned costs. Additionally, it’s crucial to note that gross leasehold yields should be discounted by approximately 20% before comparing them to freehold yields.

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Leasehold ownership can be advantageous for both owner-occupiers and property investors. The key lies in conducting meticulous due diligence and comprehensive evaluations of both the property’s condition and the lease terms governing its ownership. Exercising caution and discernment from the outset is paramount to ensuring a successful purchase and ownership experience.