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Property Leaseholds

Property Leaseholds – What You Need to know

Most people in the UK dream of one day owning their own property. But even if you manage to attain the necessary financial security, there are still several obstacles that you need to overcome before you can become a homeowner. One of the biggest obstacles for many people is simply getting to grips with all the different terminology and working out what the best route to property ownership is for them. One of the terms property buyers need to understand is leasehold and how a leasehold property differs from a freehold property.

What Is A Leasehold Property?

There are two types of property ownership in England and Wales – leasehold and freehold. A leasehold property is one that you have the right to occupy for a fixed period of time, even though you don’t own the property itself. Instead, you enter into a legal arrangement or lease with the landlord. The terms of the lease will stipulate how long you have the legal right to occupy the property. Once the lease expires, the property will return to the full ownership of the landlord. There are currently around four million properties in the UK that are available under a property leasehold.

Leaseholds usually apply to communal buildings such as flats. Landlords will often lease these buildings to letting agents and will employ managers to oversee the communal areas on a day to day basis.

However, a regular house can also be a leasehold property; there are no laws preventing this. In fact, of the roughly four million leasehold properties registered in England today, approximately 1.2 million are houses.

What Rights Do Property Leaseholders Have?

The rights of leaseholders are defined in several pieces of legislation that have been changed and updated over the years. Below is a brief guide to leasehold rights and how they have evolved over the years.

Since the concept of a leasehold property was first introduced, there have been a number of acts of parliament aimed at introducing leasehold reform.  The first was the leasehold reform act 1967, which gave leaseholders the right to buy their homes from their landlords at a reasonable price. This Act applied to leases with a long duration and relatively low rent.

The subsequent leasehold reform act 1993, or the leasehold reform housing and urban development act 1993 to give it its full title, further expanded the rights of leaseholders by granting them the right to either renew leasehold or buy their freehold. This process is known as ‘collective enfranchisement’ and means that multiple leaseholders living on a property could pool their finances in order to purchase the freehold for a fair market price.

Initially, the right to collective enfranchisement was rarely used. However, the introduction of the commonhold and leasehold reform act 2002 strengthened this right and encouraged more leaseholders to take advantage of it.

Any leaseholders who are unsure about the laws surrounding their leasehold can contact the leasehold advisory service, LEASE. This is a service that provides free legal advice to any leaseholders in England and Wales.

Understanding Property Ownership

Before you commit to a leasehold property, it is essential that you are clear on exactly what the implications are in terms of property ownership. A leasehold will give you exclusive possession of the property for the duration of the lease. During this time, you will, for all intents and purposes, be the owner of the property for the duration. However, legally, you will never own the property, unless you buy it later, of course.

This applies to both the property itself and the land that it is situated on. You can think of a leasehold as being like the long-term rental of a property. Remember that many leasehold properties will house a number of other people as well, and they will all have the same stake in it as you.

Be Careful Of Short Property Leases

Whenever you are viewing a leasehold property, one of the first questions that you should ask the estate agent or seller is how long is left on the lease. Once there is less than 80 years remaining, most mortgage lenders and estate agents agree that the value of the property will be adversely affected by the length of the lease. This will also have an impact on how likely it is to be mortgaged. Some lenders will still be willing to do so, but not all.

Once the time remaining on the lease drops below 70 years, the property will depreciate in value rapidly when compared to those with a longer duration remaining on the lease.

Think Carefully Before Agreeing To A Property Lease Extension

Before you commit to any extension, you need to carefully consider the leasehold extension cost. In some cases, extending a lease can cost tens of thousands of pounds. There are a number of variables that affect the renewal cost; these include the value of the property itself, the ground rent the property commands, and the time remaining on the lease.

If you want to purchase a property whose lease needs extending, you will need to speak to the current owner. They will need to claim the right to extend the lease. They can then pass it on to you after the purchase has been finalised. If they don’t do this, then you won’t be able to extend the lease until you have owned the property for two years.

If at all possible, it is better to have the seller extend the lease before they sell the property to you. This will mean that they shoulder the costs of it, and it will make things simpler and cheaper for you. Be prepared to negotiate if necessary.

Be Wary Of Cheap Property Leaseholds

The old adage ‘if it seems too good to be true, then it probably is’ is one that you should always keep in mind when you are dealing with property. If you come across a property that is considerably cheaper than equivalent properties on the market, proceed with caution. Make sure to raise the price with the estate agent or seller, as there might be a valid reason for the discount.

One thing that you need to be careful of is a seller who is trying to quickly offload property before the lease extension is required. Unscrupulous sellers might try to hide it from you, but others will be open and upfront that this is why they have reduced the price significantly. If you decide to proceed with the purchase anyway, remember to factor this into the offer that you make.

A good conveyancing solicitor will spot any issues with the lease.

Plan For The Future

Regardless of how much longer is left on the lease, you still need to consider what you are going to do when it expires. Some leases last for more than a century, so it might be that you aren’t going to have to worry about the end of the lease yourself. However, if it looks likely, or even possible, that you will have to decide whether to buy an extension in the future, then you should consider your options now.

Check The Maintenance Fees

When it comes to blocks of flats, it is usually the freeholder who takes responsibility for ensuring that communal areas are properly maintained and that the exterior walls and roof of the property are kept up to scratch. However, while the freeholder is the person that makes final decisions about what work should be done and how it should be done, it is the leaseholder that ultimately shoulders these costs through service charges.

It is, unfortunately, not uncommon for a leaseholder to find themselves paying far more than they expected in maintenance and management fees, as well as repair work. In some cases, the managing agents tasked with managing the property day to day will use contractors with whom they have a personal connection to carry out work, sometimes at above-market rates.

To get an idea of how much you can expect to pay in maintenance charges, ask for some historical figures. It is also worth asking if there are projections available for you to look at.

The Transaction Can Be More Complicated Than Usual

Buying a property is rarely a completely straightforward affair. There are so many components to it that the chances of something going wrong are quite high. Fortunately, the things that go wrong are usually minor and relatively easy to put right. However, when it comes to buying a leasehold, things can become even more complicated than usual.

For one thing, there is a lot of preliminary work that needs to be done, usually by your solicitor. They will have to gather the necessary information from the freeholder or their management company. This information includes things like the monthly service charges, the ground rent, proof that the property has buildings insurance, and other documentation of that nature.

Property leaseholds can be quite complicated, especially if you have never encountered them before. In fact, many people don’t know about leasehold properties until they see their dream apartment for sale and then note that it is marked as a leasehold property. However, there is nothing to be afraid of when dealing with leaseholds. As long as you have a trustworthy solicitor and estate agent to help you navigate the process, a leasehold can actually be very beneficial.

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