However, the land on which the property is built remains under the ownership of the freeholder.
In a leasehold arrangement, the leaseholder has a contractual agreement with the freeholder, the terms and conditions of which are outlined in the lease. The lease typically includes details such as the lease term, ground rent, service charges and various other covenants, obligations and restrictions.
During the lease term, the leaseholder has the right to live in the property and enjoy its use, subject to compliance with the lease’s terms. However, once the lease term expires, ownership of the property returns to the freeholder, and the property may revert to its original state unless the lease is extended, or the freehold is purchased by the leaseholder through a process known as leasehold enfranchisement.
A lease gives the leaseholder the right to occupy the property for a set period subject to specific conditions that will be written into the lease. It is important that you understand your rights and obligations under the lease.
What is in a lease?
Some of these obligations can include:
- Initially, your lease may require you to pay a fixed amount of ground rent, but there could be a clause allowing the landlord to increase this rent in the future. However, as of June 2022, ground rent charges have been prohibited for all newly built homes.
- Service charges encompass the expenses incurred by the landlord in maintaining the building each year, such as cleaning communal areas and repairing the roof. Additionally, they cover the cost of running the management company.
- The service charge may also include a sinking fund to cover your contribution to planned future improvements in the building and communal areas.
- Administration charges may be imposed by the freeholder and/or the management company if you request services related to buying/selling or using your property. For instance, fees may apply for providing replies to leasehold property enquiries or granting consent for property alterations.
- A lease will typically outline the responsibilities of the freeholder. These responsibilities often include:
- Maintenance of the common areas: The freeholder is usually responsible for maintaining and repairing any shared or communal areas in the property, such as hallways, staircases, elevators, and gardens.
- Building structure: The freeholder is typically responsible for maintaining the structural integrity of the building, including the exterior walls, roof, and foundation.
- Insurance: The freeholder may be responsible for insuring the building against certain risks, although leaseholders may still be required to contribute to the insurance costs through their service charges.
- Grounds and landscaping: If the property has any grounds or landscaping, the freeholder may be responsible for their maintenance.
- Managing agents: In some cases, the freeholder may appoint a managing agent to handle day-to-day property management tasks on their behalf.
- Collecting service charges and ground rent: The freeholder is responsible for collecting service charges and ground rent from the leaseholders to cover the costs of maintenance and other services.
It’s essential to review the lease thoroughly to understand the specific responsibilities and obligations of both the freeholder and the leaseholder before purchasing or renting a leasehold property.
Who owns the freehold?
The freeholder is the individual or entity who owns the freehold title to a property so owns the land on which the property is built.
If the freeholder of a property is unknown, it can create certain challenges and uncertainties for the leaseholders. The freeholder is the legal owner of the land and building, so not knowing who the freeholder is could lead to difficulties in managing the property, addressing maintenance issues, or making important decisions regarding the building.
If the freeholder cannot be located, leaseholders might explore options like leasehold enfranchisement or other legal avenues to gain more control over the property or to resolve any issues arising from the unknown freeholder position. However, every situation is unique, and legal advice should be sought to understand the best course of action based on the specific circumstances.
How long is the lease?
The remaining lease term can impact your ability to secure a mortgage. Most lenders require a minimum of 70 years remaining on the lease, with some seeking over 80 years. Properties with shorter leases are typically less valuable and may incur higher costs to extend the lease. Moreover, they can be harder to sell, as potential buyers often seek properties with leases of at least 90 years.
As the lease term diminishes below 80 years, the cost of extending the lease becomes more expensive. If you are purchasing a property with a lease of fewer than 90 years, it’s essential to factor in the cost of a lease extension in the near future or negotiate with the seller on this matter.
Keep in mind that leaseholders are eligible for a statutory lease extension only if they have owned the leasehold property for at least two years. If you are buying a property with a short lease, you can request that the vendor start the lease extension process or wait for potential future leasehold reform.
Is there a management company?
A management company for leasehold properties is an entity that is responsible for managing and maintaining the shared areas and services of a property or development. In a leasehold arrangement, multiple individual leaseholders have rights to occupy and use their respective flats or units within the building, but certain parts of the property are commonly owned by the freeholder or management company and are usually managed by the management company.
The main functions of a management company for leasehold properties include:
- Maintenance and Repairs: The management company is responsible for maintaining and repairing the shared areas of the property, such as hallways, staircases, elevators, gardens, and communal facilities. This ensures that the property is well-kept and in good condition for all residents.
- Service Charge Collection: The management company collects service charges from each individual leaseholder. These charges cover the cost of the maintenance, repair, and management of the common areas and services. The service charges are typically used to fund ongoing expenses and create a reserve for future maintenance or improvements.
- Insurance: The management company will usually be responsible for arranging building insurance to cover the entire property against certain risks, such as fire, flood, or structural damage.
Leaseholders may contribute to the insurance cost through their service charges.
- Financial Management: The management company manages the financial aspects of the property, including budgeting, accounting, and auditing. They ensure that the collected service charges are appropriately allocated to cover the property’s expenses.
- Enforcement of Lease Terms: The management company ensures that all leaseholders comply with the terms of their leases, including any regulations or restrictions related to property use, alterations, and conduct.
- Dispute Resolution: The management company may act as a mediator in resolving disputes between leaseholders or between leaseholders and the freeholder (if applicable).
- Compliance and Legal Matters: The management company ensures that the property complies with relevant laws, regulations, and safety standards. They may also handle legal matters on behalf of the leaseholders when necessary.
It’s important for leaseholders to be aware of their rights and obligations concerning the management company, and in some cases, they may have a say in decision-making through the company’s structure if they hold shares in the management company.
In some cases, leasehold property owners may join forces and collectively purchase the freehold of the property. Subsequently, they establish a management company to handle property maintenance and insurance. Each leaseholder may hold shares in this management company.
What other information do I need?
- Charges. What charges will you be liable for as the leaseholder, these will include the service charge and ground rent.
- Planned major works. Are any renovations or repairs planned for the property that could affect the value of your home, or your enjoyment of it, or the service charge.
- Balance of the service charge account. Service charges are usually based on an estimate of what the landlord thinks will be spent over the year. They should produce an end-of-year statement to show how much has been spent and how much remains in the account.
- Sinking fund. This is a fund to deal with any building work on the property. Check if there is a sinking fund, what is the balance in the fund and is it sufficient to cover any planned works.
Do I need leasehold indemnity insurance?
Whether you need leasehold indemnity insurance depends on your specific situation and the advice of your solicitor or conveyancer. Leasehold indemnity insurance is a type of insurance that provides financial protection to the leaseholder in case there are issues with the lease or title of the property. It is typically taken out by the buyer during the purchase of a leasehold property.
Here are some scenarios where leasehold indemnity insurance might be considered:
- Absence of Freeholder: If the freeholder’s identity is unknown, or they are absent, this creates uncertainties or potential legal issues and leasehold indemnity insurance could provide protection.
- Leasehold Extension: When buying a property with a short lease, where the lease term is close to or below 80 years, leasehold indemnity insurance may be advisable. This coverage can help protect against the risk of future costly lease extension premiums.
- Lack of Consent for Alterations: If the previous owner made alterations to the property without obtaining the necessary consent from the freeholder or the management company, leasehold indemnity insurance can provide cover against potential enforcement action.
- Breach of Lease Covenants: If there is a known breach of lease covenants, such as unauthorized subletting or use of the property, the insurance can offer protection.
- Defective Lease Documents: In cases where there are errors or defects in the lease documents that are not compliant with a lender’s requirement or could lead to legal disputes, leasehold indemnity insurance can be beneficial.
- Missing Management Company: If the property should be managed by a management company, but one is either missing or not fulfilling its responsibilities, insurance coverage can be useful.
It’s essential to consult with your solicitor or conveyancer to assess whether leasehold indemnity insurance is necessary for your specific property and circumstances. They will be able to review the property’s history, the lease terms, and any potential risks to advise you on whether such insurance is recommended, and which policy would suit your needs best.
Remember that leasehold indemnity insurance is not a substitute for resolving underlying issues with the property’s lease or title. It provides financial protection but does not address the root cause of any problems. It’s crucial to thoroughly investigate and address any concerns during the due diligence process of purchasing a leasehold property.
