Watch out for these potential pitfalls of leasehold property ownership

Investing in residential property is a huge commitment. Whether you buy a home for yourself or for renting out, make an outright purchase or take out a mortgage, it’s a big decision with long-term consequences.

When you purchase a property in England and Wales, chances are that the ownership will either be on a leasehold or freehold basis. Freehold ownership means that you own the building as well as the land that it is built on. While houses are traditionally sold as freehold, leasehold properties tend to be flats, apartments or maisonettes – though there is a growing trend to offer new build houses for sale as leasehold that has caused much controversy in recent times.

As a leaseholder, you ‘own’ the property for a specified period of time but you do not own the land on which the property sits. And this is where the problem begins…

1. 1. Remaining lease period

2. Every leasehold property has a Lease – the legal document that, among other things, states how many years you are allowed to occupy and use the dwelling. A Lease can be assigned for 1-999 years. The higher the number of years remaining on the Lease, the higher the value of the property will be. Technically, when the Lease expires, ownership reverts back to the freeholder – but it hardly ever comes to that.

   While mortgage lenders differ in their lending criteria, you may find it difficult to get a mortgage if your Lease drops to 75 or 70 years. Less than 60 years remaining may make your property unmortgageable, meaning that should you ever want to sell the asset, your market is limited to cash buyers only.

3. 1. 2. Lease renewal

   2. The key number to watch out for is 80 years. That’s when the decline in property value really starts to accelerate. It’s also when it becomes substantially more expensive to renew your Lease for an additional 90 years. A lease extension is your legal right under the 1993 Leasehold Reform Act as long as you’ve owned the property for at least 2 years.

      The savvy thing to do is to keep a close eye on the remaining length of your Lease and renew it when it gets to 90-81 years. Lease renewals have a not inconsiderable cost attached, the amount of which depends on the current length of the Lease as well as the ground rent. If you are struggling to agree a fair cost between you and the landlord, you can take your case to the Leasehold Valuation Tribunal.

      In particular, be careful to take independent legal advice if the freeholder offers a private agreement that may look attractive but has some hidden dangers. As your lawyer is sure to point out, higher ground rent payments coupled with periodic ground rent reviews may look innocent but can add up to be prohibitively expensive in the longer term if there’s an accumulator involved.

1. 1. 3. Leaseholder costs and obligations

   2. While each Lease is unique, each one contains costs and obligations that the leaseholder has to comply with to keep within the terms of the Lease. Ground rent and services charges are a major element and they can vary widely in financial scope.

      Service charges can include repair and maintenance items for common parts such as internal hallways and garages, exterior walls, windows and roofs, communal gardens and the like. A share of the buildings insurance will also be payable.

      Often, there’s a clause in the Lease to say that express permission from the freeholder must be obtained before any refurbishment work can be carried out in your property. Here’s an example of what can happen when you don’t adhere to your Lease conditions.

   3. 1. 4. Unscrupulous landlords

      2. While most freeholders are reasonable people, there is always the chance that a rogue landlord may acquire the freehold and attempt to extract maximum revenue from his investment. In a highly profitable housing market, companies may be owning literally thousands of individual freeholds, while no personal relationship with individual leaseholders exists.

         Sharp practice is sadly not uncommon. When it comes to major items such as replacing the roof or communal lift, it’s easy for landlords to make excessive payment requests and blatantly overcharge. Worse still, working hand in hand with unscrupulous building companies can make it financially tempting to make a quick buck at the expense of the leaseholders.

   4. 

      1. 1. 5. Restrictive covenants

         2. Covenants are additional conditions attached to ownership of a property, and can be found in both freeholds and leaseholds. In flats and apartments, these restrictions can be quite onerous and may seriously affect your lifestyle choices. Restrictive covenants commonly include

• - Particular type of flooring to be used (e.g. carpet, not hard flooring)
• - Pets not allowed to be kept in the building
• - Restrictions of times when music or musical instruments may be played
• - No business activity in the property