Category: Buyer, First Time Buyer, Sale & Purchase
When it comes to buying a property in England and Wales, there are two types of ownership that generally apply: freehold or leasehold. There are key differences between the two, so it's important that you understand what those are before purchasing your next home.
Of the two, buying a leasehold can often prove the more complicated, as there are certain costs and responsibilities that you need to be aware of. The exact details of these are likely to be hidden in the small print of the contract, so it's crucial that you have a full understanding of the various leasehold fees before you make a commitment.
It can feel like a lot to get your head around, which is why we've put together this guide on everything you need to know about buying a leasehold property. We'll explain the differences between leasehold and freehold, the pros and cons, and we'll outline the fees you can expect to pay when buying a leasehold.
Read on to find out more, as well as how Homeward Legal's conveyancing services can help you make sense of it all.
What does leasehold mean?
What does leasehold mean?
A leasehold means you own the property but not the land on which it stands. That land is owned by the freeholder, also known as the landlord. When buying a leasehold, your ownership is for a set period - the length of the lease. Your lease can last for a number of years, decades or even centuries. A leasehold purchase will require you to pay ground rent and possibly service charges on the land, among other costs.
What's the difference between freehold and leasehold?
What's the difference between freehold and leasehold?
When you buy freehold, you own both the building and the land it's standing on outright. Your period of ownership is unlimited. Most houses are sold as freehold properties and once the purchase is completed the buyer owns the building, the garden, the driveway and any other land it sits on. By contrast, most flats are sold as leaseholds because there are multiple properties standing on one piece of land.
What happens when a leasehold expires?
What happens when a leasehold expires?
If your lease expires, the freeholder technically becomes the owner of that property. As a general rule, any property with 80 years or fewer remaining on its lease is considered a risk as it can be difficult to sell or remortgage. Extending a lease once it's fallen below that 80-year mark can prove hugely expensive, so you may want to carefully consider your options before buying a leasehold property of that kind.
The good news is that the Law Commission has recommended leaseholders should have the right to “a lease extension for a term of 990 years, with no ongoing ground rent under the extended lease.” However, it remains to be seen when any changes to legislation will come into force.
Leaseholds: The advantages and disadvantages
Leaseholds: The advantages and disadvantages
Let's break down some of the pros and cons of buying a leasehold.
The advantages of buying a leasehold property
- If there are any repairs or maintenance of communal areas, these should all be taken care of for you, as per the terms of your lease.
- Although you will still have to pay for it through a service charge, your landlord will usually organise your buildings insurance.
- The conditions of your lease normally mean that any issues with your living conditions - such as disruptive neighbours - will be sorted out.
The disadvantages of buying a leasehold property
- Your ground rent and service charge can be expensive.
- If the landlord plans on making alterations to the leasehold property or communal areas, you may be required to contribute to the cost, whether you're in favour of the changes or not.
- There may be strict terms of your lease, which could prevent you from having pets or making any major changes of your own.
Is my house freehold or leasehold?
Is my house freehold or leasehold?
It's likely that most houses will be sold as freeholds and the majority of flats as leasehold. However, you can check which category your property falls under by heading to the Land Registry website. From there, you should be able to obtain a copy of your title. Another option is to speak to your mortgage lender, who will be able to let you know whether your home is freehold or leasehold.
Can I convert leasehold to freehold?
Can I convert leasehold to freehold?
When buying a leasehold property, it's important to know that the option to purchase the freehold does exist. You can ask the landlord at any time if they would be willing to sell the freehold, which can be done on an informal basis as the result of an agreement between the pair of you. There is also a more formal route, which involves following strict legal procedures. Either process can prove expensive, and in January 2020 the Law Commission published a report exploring options to help reduce the costs for leaseholders looking to buy the freehold.
The charges to look out for when buying a leasehold
But before you think about how much the freehold might cost you, you need to be aware of the charges that come with buying a leasehold property:
Notice of Assignment
Even simply becoming the new lessee can bring a cost. Your conveyancing solicitor may have to provide a Notice of Assignment to the landlord informing them you are the new owner. You'll have to pay for that privilege, likely to be around £100 plus VAT.
Notice of Charge
If you are buying a leasehold with a mortgage, another essential document is a Notice of Charge that informs the landlord a third party holds an interest in the property. The cost of this could range from £50 to £200.
Deed of Covenant
Freeholders may also demand the new owner of a property enters into a Deed of Covenant with the landlord or managing agent. This is effectively a direct contract between the buyer and the freeholder that confirms you will agree to pay all service charges, including those for common repairs and maintenance. This deed might be part of a landlord's leasehold pack that's provided to your solicitor by the seller's solicitor and can cost up to £350, though it might be more.
Becoming a shareholder
Many leasehold properties in England are flats or apartments and some of them are what is known as commonhold, where the lease of the entire property is held by all of the owner-occupiers. That brings with it the possibility of another charge - becoming a shareholder in the management company or residents' association that runs the building. There is usually only a nominal fee involved in having a share certificate issued in your name.
Annual and monthly outgoings when buying a leasehold
There are some leasehold fees that you will be expected to pay on a regular basis, for the duration of your time living in the property:
Ground rent
When you buy a leasehold property, you are also buying what remains of the lease. It might have several decades still to run or it could be a much shorter one. Regardless of its length, the annual ground rent should be fixed for the term of that lease. So, you will know from the start what your annual outgoings on ground rent should be.
When buying a leasehold property, ask your conveyancing solicitor to check the terms of the lease to ensure there is no escalation in the ground rent. It has become a more common practice in leaseholds for ground rent to increase after 10 or 20 years.
Service charges
Monthly service and maintenance charges are likely to vary, depending on any work that is required. Fees to the management company engaged by the landlord to run the building should also be factored in, though these should be fixed. Details of these charges will be outlined in any leasehold pack provided to your solicitor. Make sure you ask for full information so you know before any deal is sealed what you're signing up for.
Unexpected expenses when buying a leasehold
While your ground rent and service charge will be paid at regular intervals, a leasehold purchase can sometimes throw up some unforeseen costs:
Reserve fund
Some communal properties run a reserve fund for residents. This means you will be asked to pay money up front to be kept in case of any emergencies, such as storm or flood repairs. Again, the time to find out about this is before you buy your leasehold property, so do ask your conveyancing solicitor to check if you will have to contribute anything to a reserve fund. The cost might be in the thousands, so it's an important factor to consider.
Acceptance fee
If you're downsizing and looking to move into a retirement property or one with warden assistance, you will have monthly management fees to take into account. Some even charge an acceptance fee that analyses your suitability for the property.
Transfer fee
Retirement properties may also be subject to a transfer fee, where the buyer has to pay for the remaining lease to be transferred to them. These fees were the subject of an investigation by the Office of Fair Trading in 2013, and while they have not been outlawed, many management companies running retirement properties no longer impose a transfer fee. Do ask your solicitor to clarify this matter before buying.
Ask Homeward Legal for help with buying a leasehold property
As you can see, buying a leasehold can sometimes prove complicated. That's why you need the help of a specialist in the field to help you understand the various fees involved. At Homeward Legal, we work with a nationwide panel of expert conveyancing solicitors who are vastly experienced in dealing with leasehold purchases and can give you the professional advice you require.
So, if you're thinking about buying a leasehold property, call our team now on or get a quick quote online. We'll help you make sense of it all and figure out which leasehold fees apply to your purchase, so you have a clear idea of what to expect when making your move.