When considering a new property purchase it is important to be aware of the fact that there are two very different types of legal property ownership in the UK; either leasehold or freehold. With the majority of flats in the UK and, increasingly, new build properties being sold as leasehold properties, understanding what you're buying is imperative. It can make the difference between an excellent investment or a very expensive mistake. In 2015, 90% of all property transactions in London were leasehold properties, mostly residential flats, and 50% of all property in London is leasehold.
A leasehold property means that you do not own the land the property is built on, you own the property but only for the length of time remaining on the lease. If your property has a lease of under 85 years you could see its value deplete, even if the price of property in your area is rising. Properties with shorter leases can also be harder to secure a mortgage on. A lease with approximately 130+ years unexpired is worth about 99% of its value. Therefore a statutory lease extension (a 90 year extension added to an existing unexpired lease term) is a good way to achieve near maximum value.
Owning a leasehold property comes with additional costs that should be factored in when purchasing. Service charges, maintenance charges, ground rent, buildings insurance and major works funds can all add to the outgoings associated with owning your home and you must also check that you can do renovation works once you own the lease, as some freeholders prevent this. When considering a leasehold property pay attention to the amount of ground rent and in particular the rent review clauses (if any), a doubling ground rent every 25 years is the equivalent to a compound RPI growth but shorter review patterns are far more punitive. A statutory lease extension automatically reduces the ground rent to a peppercorn, as the capital value forms part of the premium.
If you have owned your property for more than two years and it was originally leased on a 'long lease' (normally over 21 years) you are legally entitled to extend your lease by 90 years and this will be in addition to your unexpired remaining years, however this can prove expensive. Another option to consider if you've fallen for a property with a short lease is to get the seller to serve the relevant notice for a lease extension between exchange and completion and then assign the benefit over to the buyer. The buyer should not overpay for the lease as this will not make the cost of the lease extension cheaper! If you are not mortgage dependent, then buying a shorter lease followed by a lease extension can reduce the overall SDLT. This particularly applies to higher value properties. There are opportunities for a lower purchase price where there is a short lease and this should apply in the current weaker market.
Questions to ask when considering a leasehold property
- - What's the remaining length on the lease?
- - What is included in the service charge (ask for a summary showing how the charge is worked out and what it's spent on)?
- - Is there a sinking fund and are any major works planned?
- - Is the vendor up to date on all payments?
- - What are the ground rent implications in the future?
- - Check what restrictions there are in the lease about home improvements, pets living in the property etc to ensure you don't get any nasty surprises.
Interested in investing in a leasehold property? We've rounded up a selection of some of our finest properties currently on the market...
A spacious two bedroom apartment and parking space in this exclusive sought after Harrods Village development with access to an indoor swimming pool and gymnasium.
View more properties for sale in Barnes here.
A stunning first floor two bedroom apartment with parking in the center of Exeter. The accommodation has been finished to a high specification and the large open plan living / dining room offers superb views of Exeter Cathedral and the surrounding countryside in one direction and Princesshay in the other.
View more properties for sale in Exeter here.
A beautifully finished three bedroom penthouse apartment in this highly sought after location approximately half a mile from Preston Park mainline station, complete with balcony overlooking Withdean Park.
View more properties for sale in Brighton here.
If you're considering a leasehold property and require some advice please do not hesitate to get in touch with the team at Marr-Johnson & Stevens LLP.