Buying a leasehold property is not as easy as a freehold

Few city homes are likely to be sold outright, which leaves many people buying a property which carries a number of legal obligations

Extra costs and obligations, not to mention the fact that you won't own the property forever, are among the downsides of leasehold property (Rex)

Outright ownership of property in the UK’s major cities could soon be a thing of the past according to new research, that suggests the number of freehold urban properties is dwindling fast.

Increasing property prices and a high population density make property development a profitable enterprise in these areas – which has led to an increase in the number of leaseholds as houses are split into flats and new apartment blocks are built.

More than half of homes in London and almost half of those in Manchester are leasehold with parts of Liverpool, Birmingham and Newcastle almost devoid of freehold homes. In fact, in London’s newly redeveloped King’s Cross area and a growing number of other postcodes, there are no freehold properties at all. (At the other end of the spectrum, buyers in Berwickshire and rural Wales rarely have the same problem.)

But this isn’t simply a legal distinction. Not only are leasehold properties more expensive than their freehold cousins to buy, the leasehold market has long been the source of controversial calculations and questions over fairness that have caught the attention of the Office of Fair Trading among others. Leasehold homes also come with additional legal obligations.

Above all, thousands of buyers remain in the dark about the true nature of their contract – crucially that the property will be ultimately be handed back to the landlord. Leasehold owners may technically own the bricks and mortar, but not, as freehold owners do, the land it stands on or the rest of the building it’s located in.

“The redevelopment of England and Wales’ towns and cities over the past 30 years means there are more leasehold properties on the market, as new-build apartment blocks are constructed and old warehouses are converted into flats,” says Doug Crawford, chief executive of My Home Move, which analysed more than 20 million property transactions. “Controversially, even some new-build houses in suburban and rural areas are now sold as leasehold properties. The investment has given the countries’ housing stock a welcome boost, but it also means that buyers are more likely to encounter a leasehold property than ever before.

“While the high proportion of leaseholds in the centre of major cities will shock few developers and estate agents, would-be buyers looking to claim a little piece of the city as their own may be in for a surprise. Leaseholds make up almost all of the housing stock in some of our cities’ redeveloped districts, and the proportion of leaseholds could grow even more as additional new developments come onto the market.”

Beginner’s guide to buying leasehold property

1. As the leaseholder you will be required by the lease to pay ground rent, service charges, management fees and buildings insurance to the landlord or their appointed managing agent, on top of any mortgage repayments, utility bills. Such charges may vary from year to year.

2. Be clear who the landlord is and whether they have a managing agent acting for them. In some cases there may also be a management company involved in running the site as a whole and you may need to make payments for different charges to different people. Where there is a management company it may also have its own managing agents and may make its own charges on you as the tenant, which will increase the overall costs that you have to pay while owning the property.

3. Before viewing any leasehold property always check the length of the lease remaining with the estate agent or the seller. Be aware; sometimes a leasehold property may seem cheap, but that is because the length of the lease is short. Most mortgage lenders won’t lend on short leases which limits who the property can be sold to. If the seller can successfully sell a short lease they can avoid the additional costs involved in extending the length of the lease. Therefore, if you find that the property you are buying has a short lease you should request that the seller obtains an extension of the length of the lease at their expense and before you buy it. It is usually the responsibility of the seller to extend the lease with the landlord as the cost of doing so can be tens of thousands of pounds. You may have a lender who is willing to lend on a short lease, however bear in mind that when you sell your buyers may not be so lucky or you will be required to extend the term of the lease at your expense before you can sell. If the number of years left on a lease falls below 80 it is more expensive to extend it, as the landlord is then allowed to charge the tenant something called “marriage value” which can increase the cost of any extension dramatically.

4. When considering whether a lease extension is required there are two ways of obtaining this. First, the landlord can grant an extension at any time voluntarily. Second, a tenant who has lived in the property for at least two years can force a landlord to grant a lease extension. This is called a “Section 42 Claim”. To start such a claim the current tenant has to claim the right to extend the lease, then pass this on to the buyer to complete after they have purchased it (because otherwise the buyer won’t have the right until they have owned the property for two years). This can be very complicated and costly and so ordinarily, it is far better to get the length of the lease extended by the seller at their expense and before you buy it.

5. In some instances it is possible to buy a share of the freehold of the property. This has two main advantages. First, as you and your fellow-freeholders own the freehold you are in effect your own landlord and can exercise greater control over the running of the building. While this may mean more work for you, it can mean lower charges for things like the repair and insurance of the building and you may decide to suspend the payment of any ground rent on an informal basis. Second. It should be easier extend the length of the lease to whatever number of years you choose, such as 999 years.

6. If you are not able to buy a share of the freehold with the leasehold property it is possible for you and your fellow leaseholders to force the landlord to sell you the freehold at a later date. However, this can be costly and complicated as it requires at least 50 per cent of the leaseholders within the building to want buy the freehold.

7. For further advice, and a rough guide to the cost of extending a lease, see the "Lease Extension Calculator" available on the Leasehold Advisory Service website: www.lease-advice.org

8. Always check the description and plans of the property within the lease carefully against the physical layout. If there are any discrepancies you must alert your chosen lawyer as soon as possible. Any discrepancies can have serious consequences and can be expensive and time-consuming to correct. Therefore it is vital to have any amendments made by the seller at their expense and before you buy it.

Source: My Home Move