If you’re in the market for a new home in the UK, you have the choice to buy a freehold or leasehold property. When you buy a freehold, you own both the property and the land on which it sits. But this is not the same when buying a leasehold property.
What is Leasehold?
As a leaseholder, you don’t own the property outright. You’re only holding/renting the property on behalf of the landlord for a set number of years, decades, or centuries. This is why buying a leasehold property is a little more complicated than buying the freehold.
While most leasehold properties often block of flats, there are a total of about 4 million leasehold properties in the UK, and at least about 1.2 million are traditional houses.
Buying a Leasehold Property: Important Things You Should Know
Leasehold properties have gained quite some notoriety these days. The recent ground rent scandal that has subjected more than 12,000 leaseholders to doubling ground rents every ten years or even, more frequently.
But that should not mean that buying a leasehold property is terrible. You only have to be wary of bad leases and contracts. This means you have to exercise due diligence, along with working with an experienced real estate agent and an impartial solicitor.
You’ll have to pay annual ground rent to the owner of the freehold of your leasehold property. While this is usually a fixed amount, the lease may contain clauses that may allow the landlord to make increments often within five to eight years from the build date.
Your buying agent, conveyancer, or solicitor should help you understand if your contract contains rent review clauses and how this may affect you. If you’re buying a new build, the ground rent is always negotiable.
Leaseholders and all residents of leasehold properties are expected to pay service charges of the building’s upkeep. This fee is often spent on general maintenance and the cleaning of outdoor and communal spaces.
The service charge is also a fixed fee but can change with time. It also pays to get a better understanding of what this will cost as well as whether there are future developments that may put you in a position to pay more in service charges.
Important questions to ask when buying a leasehold
It’s always good to work with an estate agent who is highly experienced in the process. While there are a lot of things you want to know, you should try to seek clarifications to some critical questions like;
- How many years do you have left on the lease?
- How much will you pay in ground rents and how will this increase over time?
- How much will you pay in service charges, and when is it payable?
- How much is the total sinking fund?
- Are there any other charges associated with the lease?
- How much rent will you pay if this is shared ownership?
- Are there any rules or restrictions regarding the use of the property?
Other things you should know
As a leaseholder, you still don’t legally own the property. In the eyes of the law, you’re still a tenant. If you would be buying a leasehold property, you should understand that the lease won’t be there forever. But even more importantly, you should be wary of short leases. Anything under 70 or 80 years may significantly affect the value of the property.
You also have to check the terms of your lease and pay attention to the fine details. This is important if you want to avoid unpleasant surprises down the line.
Can you buy the freehold?
It’s possible to buy the freehold of a property in some cases. There are specific steps to take if you want to go this route. You can ask the sales office to quote a price for the freehold if the property is a new build. If you’re living in an apartment complex, you’ll have to look into whether it’s possible to buy the freehold.
Some distinct advantages come with buying leasehold. For instance, most issues that have to do with maintenance and upkeep won’t be part of your worries and responsibilities. Building insurances as well are usually sorted by the freeholder.
The most important thing when buying a leasehold property is to go into this with your eyes opened. This is important if you don’t want to enter into bad leases that may ruin your homeownership experience in the long run.
Buying a leasehold property? Get a survey to understand the condition and your responsibilities of the property.