While leasehold ownership has faced criticism considering the ground rent scandal, the government is implementing changes to improve the system. From 30th June 2022 onwards, ground rent charges will be banned for new residential leases in England and Wales. This change is the first in a series of reforms aimed at overhauling the leasehold system.
Before buying a leasehold property, it is vital to comprehend what that ownership structure entails to ensure you make a sound financial decision. Below are our top recommendations on the key factors to consider when purchasing a leasehold property.
What Sets Leasehold Apart from Freehold?
With a freehold title, you own both the building and the land it stands on. In contrast, a leasehold title provides the right to occupy the property for a specific period as outlined in the lease. Although leaseholders have exclusive use of the property during the lease term, they do not own the structure itself. Once the lease expires, ownership returns to the freeholder, though in practice, leaseholders often exercise their statutory right to extend their lease.
How Many Years Are Left on the Lease?
Leasehold properties are considered depreciating assets, so the price should reflect the number of years remaining on the lease. When the lease term falls to 80 years or fewer, obtaining a mortgage can be difficult, and renewing a short lease may come with inflated costs. Prospective buyers should prioritize finding out the remaining lease term, whether an extension is required, and how much they would need to set aside for it.
What is the Cost of Ground Rent?
Leasehold properties involve an annual ground rent payment to the freeholder, which may either be a fixed amount or rise over time. Excessive ground rents and problematic escalation clauses have been at the centre of the recent controversy surrounding leaseholds. It is crucial to thoroughly check the lease terms. If the ground rent exceeds 0.2% of the market value, it could make the property harder to sell or secure a mortgage on.
What Does the Lease Agreement Cover?
A lease is the official contract that defines the terms of leasehold ownership. It is important to fully understand these terms, so obtaining legal counsel is strongly advised. Pay particular attention to any clauses that could affect your use of the property, such as rules on operating a business, having pets, or subletting. Also, check if the lease includes a maintenance covenant, which ensures the freeholder is responsible for the upkeep of the building and communal spaces.
What Additional Costs Should Be Considered?
Leasehold ownership comes with several costs, including ground rent (as previously mentioned), service charges for the upkeep of the building and shared spaces, and administrative fees for securing necessary freeholder approvals. Another potential cost is extending the lease, which can be expensive. Service charges can be a complex area, as the freeholder determines them. It is important to request detailed information about these charges before committing.
Are You Thinking of Letting the Property?
For those making a buy-to-let investment, special attention should be paid to sub-letting clauses in the lease. Ensure that sub-letting is permitted and check for any restrictions, such as bans on holiday lets, occupancy by only single families, or limitations on pet ownership. These factors can influence your rental market. When estimating the rental yield, do not forget to include all associated costs. Additionally, to make a fair comparison with freehold properties, be sure to discount gross leasehold yields by about 20%.