Buying a leasehold property can be a daunting process. There’s just so much to it that many people don’t know if it’s worth their time and money.
So we want to simplify things for you right from the basics. Read on to know what a leasehold property is, the terms and conditions that apply to leasehold properties and everything you should consider before buying one.
What’s a Leasehold Property?
Leasehold means that you have the right to reside in a property only for a fixed time period. Neither do you own the building outright nor the land upon which it stands. It remains the property of the landlord.
You’re only entitled to occupy the property as long as the lease is valid. The understanding is based on a legal contract between the landlord, also referred to as the freeholder, and the buyer, the leaseholder.
Leases are generally made for periods ranging between 99-125 years. However, there are no fixed criteria. They can go up to 900 years, and some may be as brief as 40 years or less.
The Difference between Freehold and Leasehold Property
Both freehold and leasehold properties have their respective set of pros and cons. When you own the property as freehold, it means that you own the building and the land on which it’s built, outright and in perpetuity. A freehold owner has his name in the land registry as “freeholder” of the property.
The freeholder of a property doesn’t have to pay any yearly ground rent. They’re responsible for maintaining the building fabric. This includes the roof and the outside walls. However, the freeholder doesn’t have any legal obligation to maintain the interior in a certain way.
On the other hand, owning a leasehold property would mean you have to abide by a contract. The contract sets out the rules and responsibilities of both the leaseholder and the freeholder. They have to pay the annual ground rent, maintenance charges, service charges, and part of the building’s insurance.
As a leaseholder, you will need permission from the freeholder (the landlord) to make changes to the property. This should be described in your lease. You may have to face other restrictions such as not keeping any pets. The landlord can also prohibit you from any redecoration work, painting the walls a specific color, etc. In addition, you may be asked to pay for any damages.
What Kind of Properties Are Usually Leasehold?
Apartments, condominiums and some townhouses are usually sold as leasehold. These are often part of bigger projects with shared facilities and communal spaces like stairs, hallways, driveways, community halls, etc.
In most cases, the owners will take the services of an agent to maintain the common areas of the building including, elevators, driveways, gardens, or more. These agents will also be responsible for the collection and management of maintenance and service charges.
What Is a Lease?
A lease is a legal contract or an agreement between the landlord and the leaseholder. It gives temporary ownership of the property on specific terms and conditions.
The document explains in detail the rights, obligations, and responsibilities of both the landlord and the leaseholder. They’ve to abide by them throughout the term of the contract. It imposes certain conditions on the leaseholder’s ownership and use of the property as well as the services they can expect to be fulfilled by the landlord.
As a leaseholder, you are to expect that the management, repair, and maintenance of the building structure, shared spaces, and surrounding land will be taken care of by the landlord. Whereas, you will be expected to follow certain other obligations. These include keeping the property in good order, behaving in a friendly manner and not doing certain things like keeping pets. Making alterations or carrying out home improvement projects without the prior consent of the landlord will not be allowed too.
The lease will also have details of all the expenses that are to be incurred by the leaseholder. These include the payment of annual ground rent, payment of service and maintenance charges, and building insurance.
At the time of selling the leasehold property, the seller will pass on the existing lease to the buyer. The current buyer will consequently inherit all the rights and responsibilities mentioned in the lease.
9 Things to Watch out for When Buying a Leasehold Property
1. Steer Clear of Short Lease Periods
Leaseholds have a limited lifespan. Therefore, before you view a leasehold property, be sure to check the remaining lease period with the seller.
Typically, the lease period is for about 99 years. However, the timeline has now been extended to 125 years. In some cases, it can even go up to as long as 999 years!
Any lease under 80 years should make you carefully think about whether to proceed with the deal or not. Mortgage lenders and real estate agents consider a lease that’s less than 80 years to be dangerous territory. It may affect the property value and its ability to be mortgaged in the future.
Similarly, a lease that’s valid for 70 years or less can have a significant impact on the value of the property as compared to other properties having a longer lease.
2. You Will Not Be the Legal Owner of the Property
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.
3. Be Wary of a Cheap Leasehold Property
If you come across a leasehold property that seems cheap compared to similar properties, it should put you on your guard. The property may require a lease extension.
Some sellers might even try and sell a leasehold property at a price comparable to the market, hoping that the buyer will not realize that the property requires a lease extension. This makes it all the more important to check the expiry of the lease period before you make any decision.
Whenever you decide to proceed, consider lease extension requirement a crucial factor when putting forward your offer price.
4. Agreeing to a Lease Extension Is an Important Decision
The process of getting a lease extended with the landlord can be a complicated and highly costly process. The cost can depend on various factors such as the property value, the ground rent, the lease length, etc.
If a lease extension is required for a property, the seller has a critical role to play. Since they’re the current owner of the property, it’s their responsibility to claim the right of extension of the lease. They can then give this to you after you’ve made the purchase.
Therefore, it’s much better to have the lease extension done by the seller at their expense before you proceed. Although this would require some intensive negotiation, so be prepared.
5. Check and Understand the Terms and Conditions on the Lease
This is really important as the terms and conditions can be burdensome. For example, you may have to pay thousands of dollars to the landlord just to carry out improvements or do a few simple changes to the house.
You may be prohibited to sublet the property, own pets and abide by any other restrictions set out by the freeholder.
The point is to ensure that you and your lawyer find out every detail mentioned on the lease. You should know exactly what it entitles you to.
6. Check the Ground Rent
Particular attention needs to be paid to the ground rent terms explained in the lease. Although the ground rent is often a nominal amount, sometimes it can be very costly.
The ground rent is also increased periodically, usually doubling every 10 years. This could be a significant amount. Make sure you know what’s the review method for the ground rent to increase and if it’s feasible for you or not.
7. Watch out for Any Excessive Maintenance Fees or Service Charges
The freeholder is responsible for maintaining the shared spaces of the building along with the roof and exterior walls. He will decide what needs to be done and when, who will do it, and what it will cost. The cost will be shared by the leaseholder who will pay for the maintenance and repairs through service charges.
Many leaseholders complain about high maintenance fees or about middle agents who charge well above market rates. Just be sure you’re being dealt with fairly and responsibly.
Ask for prior data for the service fees and predicted expenditures.
8. Beware of Heavy Insurance Cover
A leaseholder is also required to share the insurance cost of the building with the landlord. You must do a careful review of the insurance terms too. This is because some freeholders partner with insurance brokers to buy hefty insurance packages and pass on a large chunk of the cost to leaseholders.
9. Make a Smart Future Decision
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.