The search for your first property is an exciting one but for many it can be extremely daunting, not knowing what order to do things in or what hurdles you will face along the way. For this reason, it is important to surround yourself with the right professionals who can guide you through the house/flat buying process. These professionals can then assess the property from a legal, structural or value point of view, highlighting any issues of concern and helping you to move forward.
In this article, we consider leasehold flats, particularly if you’re looking to buy. Whether a cosy studio or a sleek penthouse apartment, it is highly likely the property will be leasehold and there are a few questions you should ask the estate agent when initially viewing the property and certainly before making an offer.
We aim to shed some light on the particularly confusing and complicated areas new buyers encounter when purchasing leasehold properties. Starting with what the term “Leasehold” essentially means. Largely speaking, you do not own the land which the property is built on therefore you will hold a lease for a period of time and pay what is termed a ground rent during that lease term. A lease of a flat is in essence a right to occupy the property for a period of years, subject to additional rights and responsibilities that are spelt out in the lease – the rights and responsibilities include rights of access, whose responsibility it is to insure the property, repair and maintain the flat, gardens, communal areas etc.
As time passes the lease will obviously decrease and at a certain point will begin to impact on the value of the property. Being aware at what stage the lease length affects the value of the property is critical and is likely to affect the offer you consider putting forward.
The first question you should be asking is:
What is the remaining lease term?
Some key points to take note are:
- The Royal Institution of Chartered Surveyors state that the value of a leasehold property is impacted once the lease drops below 85 years.
- Once the lease drops below 80 years the cost to extend the lease can significantly increase as something called marriage value becomes payable.
- Below 70 years many high street lenders will refuse to lend on the property whether you are purchasing or looking to remortgage.
To ensure the lease does not reduce to these levels, the leaseholder will need to seek a lease extension from the freeholder, for which they will pay a premium.
After you have confirmed the remaining lease length of the property, the next question to ask is:
What is the annual ground rent payable for the property?
Ground rent is rent which is paid to the freeholder for the land the property is built on. This can often be a nominal sum, circa £50 per year, however in certain situations the ground rent will be onerous and again could affect the saleability of the property.
What is an onerous ground rent?
- If the current ground rent is over 0.1% of the current market value
- If the ground rent is increased/reviewed every 10 years or less
The estate agent is likely to be aware of the current ground rent, however the key information you will need is ‘does the ground rent remain the same throughout the lease term?’. Surprisingly, it is very rare that the ground rent remains the same; typically it will increase, for example if a lease was initially granted for 99 years this could be made up of three lots of 33 year terms; £50 for 33 years, £100 for the next 33 years and £150 for the remaining 33 years. Again, we are looking for increases in the ground rent which are considered onerous.
Why is this important?
If the ground rent is onerous it could affect whether a high street lender will offer a mortgage on the property
The level of ground rent will impact/increase the premium payable when extending the lease
Should you find that the property of your dreams has a short lease or an onerous ground rent, do not fear as all is not lost. Leaseholders have the right to extend their lease and also reduce the ground rent to nothing (referred to as a peppercorn). The Leasehold Reform Housing & Urban Development Act 1993 provides for this. Unfortunately, as a buyer this is not something you can do in your current position, however the owner can, as long as they have owned the property for more than two years.
In an ideal world the current owner will extend the lease before you buy the property, however if the owner doesn’t appreciate that the current lease length is an issue you may have to take on the responsibility of the lease extension yourself. In order to achieve this and get around the two year ownership requirement mentioned above, you will have to ask the current owner to transfer a valid Section 42 Notice with the sale. This will enable you to extend the lease once you take ownership.
Before embarking down this route, we highly recommend you seek advice from a surveyor and solicitor who specialise in lease extensions.
- The surveyor will be able to provide a valuation of the likely premium you can expect to pay
- The solicitor will ensure the transfer and serving of the Section 42 Notice is done correctly
It is advisable these conversations take place prior to you making an offer on the property, so you can consider the likely premium you will incur once taking ownership.
All of this may appear extremely complicated after one read, however when taking the correct advice, it is a process that can be easily managed by the right professionals and will result in you buying a property that will hold its value and more importantly will remain saleable for you in the future.
Should you have any questions about the lease extension process, please do not hesitate to contact Chroma Surveyors on:
London Office: 020 7692 1883
Bournemouth Office: 01202 871116