While leasehold properties are usually cheaper than freehold, they are more complicated and so if you’re looking at buying a leasehold property, here are five things you need to consider before proceeding.
How long is left on the lease
This is the most important consideration, but it’s often left out of the estate agents’ brochures. Most leasehold properties have more than 100 years left, but once the lease falls below 80 years or so, the cost of extending it rises sharply and it can be harder to get a mortgage.
If the property you’re looking at is likely to fall below the crucial 80-year level before you’re likely to sell, then you should think about another place as it may become hard to sell. If you really want the property, then you need to note that you must have owned it for at least two years before qualifying for a statutory lease extension.
You can ask the seller or the leaseholder to complete the lease extension for you before you buy it, but neither of these parties are obligated to do this for you.
The cost of the ground rent
If you’re buying a leasehold property then you’re essentially buying the remainder of a very long rental contract. This means you have to pay a small rent each year to the freeholder. Generally, it’s no more than £200 each year, but there may be a clause in the contract that makes the ground rent double every ten years or so. It’s fair enough as this rise insulates the freeholder against inflation, but an extra £200 a year might be a squeeze if you’re on a tight budget.
What’s the service charge and what does it include?
Most service charges are around £2,000 a year and this charge is so that the landlord can repair and maintain the communal areas of the building, like lifts and lights, as well as to employ cleaners and gardeners. It also includes insurance for the building and may also include a sinking fund that can help to cover non-routine expenses like, for example, repairing flood damage. Some sinking funds are charged separately from the service charge, so do check.
You’ll have to pay service charges once you own the property so find out if there are any works planned and if they’re covered by the annual charges or if you’ll be liable for extra payments.
Does the seller owe any service charges?
If the vendor owes any service charges then you’ll become liable for them once you own the property. You can sue the vendor for breach of contract, but this isn’t always successful. If the arrears are only small, then it’s often better to settle up rather than risk expensive litigation costs.
Your solicitor should make sure that any arrears are known about before you complete and, preferably, make sure they’re paid and get evidence of this. It’s also possible to ask the vendor’s solicitors to undertake that the arrears are settled before completion. You should ask about arrears early on so that if they look problematic you can withdraw your interest.
How much does the Management Information Pack cost?
The Management Information Pack contains vital information about the property and the freeholder and it’s provided by the freeholder or their agents.
It’s the seller that has to provide it and as they can cost up to £600, it’s something you need to factor in if you’ll be selling again in another few years. At present the fee is unregulated, so it’ll probably rise year by year.
