Why are most flats leasehold?
In the UK, flats are predominantly leasehold due to a blend of legal and practical circumstances.
A leasehold property is one where the land on which it's built isn't owned by the person who buys the flat.
Instead, the flat buyer is effectively buying a long-term rental agreement, or lease, for a set number of years from the freeholder - the landlord.
Freehold versus leasehold
Ownership of the freehold implies full ownership of the land and the property built on it.
This contrasts with leasehold, where the leaseholder owns their flat, but not the building it's in or the land it's built on.
Freehold flats, while relatively rare in the UK, do exist. However, due to the potential complications around shared responsibilities, such as maintenance costs, most mortgage lenders hesitate to lend on freehold flats.
Assessing whether a leasehold flat is a smart choice
Opting to buy a leasehold flat (we'll call it just 'a flat' from now on and assume its leasehold) can be a sound decision if it aligns with your personal circumstances and objectives. It can offer a more affordable way of buying your own home compared with buying a freehold house.
However, the decision to buy should be balanced with a clear understanding of the responsibilities and financial obligations involved.
Financial obligations linked with a leasehold property purchase
Ground rent is an annual fee paid to the freeholder by the leaseholder. Originally, ground rent was a token fee to provide 'consideration' (something of value) in return for the rights given by the lease, but modern leases may specify higher amounts and, notably, increasing amounts.
It's important to check the terms of the lease before buying a leasehold property as some ground rents can escalate dramatically over time, turning a minor cost into a substantial burden.
Service charges and their impact on your budget
Service charges can be a significant outlay for leasehold property owners.
Professional management companies often oversee the day-to-day running of a block of flats or an estate.
Their duties include organising routine maintenance, occasional repairs such as to water pipes, managing expenses, and coordinating major works.
The services of a professional management company can offer peace of mind and administrative ease, but they also come at an additional cost to leaseholders.
Service charges are payments made to the freeholder or a management company for the general maintenance of communal areas, buildings insurance, and potentially major repairs.
The scale of service charges varies widely and they can fluctuate annually, so it's essential to factor these into your budgeting plans when buying a flat.
Additional costs when buying a leasehold flat: sinking fund and major repairs
It's important to be aware that you might be expected to contribute to a sinking fund, a pot of money set aside for extensive work in the future.
Large repair works can be costly, and a sinking fund ensures that these costs are spread out over many years rather than hitting leaseholders with a large bill in one go.
But bear in mind that if you owned a freehold property, you'd still need to budget for repairs and improvements. All property ownership is expensive.
The implications and rights associated with a leasehold flat
Buying a flat as a leasehold property means entering a contract (a lease) that grants you certain rights and responsibilities as a property owner.
Understanding these implications can make a big difference in your experience.
Modifying your property: rules around internal walls and planning permission
The question often arises: can you remove or knock through walls or make significant modifications? The answer largely depends on the terms of your lease, which outlines all the restrictions.
In many cases, you need written consent from the freeholder or management company to make significant changes to the structure of your flat. Your estate agent can help you understand these terms.
Noise restrictions: what you can and can't do
Noise restrictions are common with leasehold flats.
These provisions exist to prevent disturbances like those caused by a neighbour playing music at full blast every night (whether a quiet old lady who happens to be a secret heavy metal fan or a child learning the recorder).
Leases often dictate noise levels, indicating when and how loud you can play music or have your tv volume high.
Moreover, leases might also restrict other types of noise. These could include heavy machinery or loud pets.
Right to Manage
If you're dissatisfied with how your building is managed, you might consider the Right to Manage. This right allows flat owners to form a separate company and take over their block's management from the landlord.
Notably, under UK law, you don't have to prove any mismanagement to use this right.
Assessing the lease before buying your flat
The lease is a crucial document when buying a flat. It defines the legal relationship between you, the leaseholder, and the landlord.
Evaluating the remaining lease: its significance and implications
Before buying a flat, it's essential to understand how much lease remains. Leases are usually long-term, starting from 99, 125 or even 999 years. However, the length of the remaining lease can affect the property's value and your ability to mortgage it.
If you're looking at a new flat, the lease is likely to be lengthy. Nonetheless, it's always worth double-checking.
A short lease can be financially risky. A flat with a lease of less than 83 years might face reluctance from mortgage lenders. As a result, you could encounter difficulty if you decide to sell your property later on.
The significance of an EWS1 Form: fire safety requirements
Post-Grenfell, the EWS1 form has gained importance when purchasing a flat.
This certificate proves that the building meets certain fire safety requirements.
Without it, the process of buying your flat could stall as most mortgage lenders require this document.
The current owners or estate agent should be able to provide it.
Identifying potential hidden issues
One of the big hurdles that trips up potential buyers is not recognising hidden issues.
Often masked by the charm of the property or the urgency of the market, these problems may only make themselves apparent after you've crossed the threshold.
Performing property searches is one of the most effective tools in your toolkit when it comes to uncovering potential problems regarding the location of the property in the local area.
From potential planning permission disputes to issues with former mines or local noise levels, searches can reveal a treasure trove of information.
To avoid any unwelcome surprises, use a reputable conveyancer to perform these searches.
Other issues can be legally complicated or hard to spot.
As examples: it may not be very clear in the lease that the colour of your front door needs to be precisely the same as your next door neighbours'; or it may be hard to assess how good the sound insulation is when you visit the property during the day.
Working closely with agents can also prove instrumental in mitigating potential problems. Estate agents often hold a wealth of knowledge about the local area and the properties you're interested in.
The current owners may seem shy about discussing any potential issues, but a good estate agent will strive to help you get to the bottom of things.
However, it’s wise to remember that while agents can be very helpful, they do represent the seller, not the buyer. Therefore, it may also be useful to enlist independent professional help for an unbiased view.
Considering shared ownership as an alternative for first-time buyers
Shared ownership properties have emerged as a popular alternative for first-time buyers.
Offering a different route into home-ownership, this type of property arrangement can be an attractive solution for those finding the prospect of buying outright daunting.
Under a shared ownership scheme, you buy a portion of a property - often between 25% and 75% - from a housing association. You then pay a subsidised rent on the remaining share. The housing association owns the freehold and you hold a lease for the part you own.
You'll still need to consider service charges, ground rent and any restrictions. However, shared ownership can be a good way of stepping onto the property ladder, especially if buying outright seems out of reach.
Weighing the pros and cons of buying a flat
Taking a steady stride into the world of property ownership can seem intimidating. Deciding on the type of property to purchase becomes a critical task. Now, let's take a look at the benefits and potential pitfalls of buying a flat.
Purchasing a flat often presents an economical route into property ownership. Especially when compared to freehold properties, like most houses, these usually come with a lower price tag. If you're buying for the first time, a flat could offer a feasible entry point into the housing market.
Many leasehold properties, including those in larger buildings or complexes, come with access to shared amenities. These could range from communal gardens, gyms, and swimming pools to concierge services. The cost of maintaining these shared facilities is generally spread among all leaseholders through the service charges.
On another note, leasehold properties frequently offer a higher level of security. For instance, flats in a block or a gated community often have controlled access, dedicated security personnel, or CCTV systems in place.
Drawbacks to consider
While buying leasehold property does have certain advantages, there are potential drawbacks to consider. One of the most notable is the lack of complete autonomy. For example, if you wish to remove internal walls or replace the same windows, you might need written consent from the freeholder or management company.
In addition to the purchase price, other costs such as ground rent and service charges can accumulate. Paying service charges for amenities you may not use can seem frustrating.
Moreover, the lease is a contract with a fixed term. A property with a short lease remaining can be difficult to sell, and this can also affect your ability to secure a mortgage.
Final steps in the process
After weighing the pros and cons, if you decide to move forward with buying a flat, there are a few more steps in the process.
Exchanging contracts is a key step in any property purchase in the UK. This is when the deal becomes legally binding. From your initial offer to the point where you can exchange contracts, it usually takes many weeks.
Before this, you should have conducted all the necessary searches, checked the lease terms, and clarified all the restrictions. At this point, consider asking a conveyancer to check all legal documentation is in order can be a wise decision.
Though you may be able to handle some parts of the purchase process yourself, using a conveyancer can reduce risk, save time, and potentially save costs. Solicitors can ensure there are no unconsidered issues, and handling the exchange of contracts. They will provide invaluable advice, helping to simplify what can be a legally complicated process.
Once you've completed the purchase of your first flat, you're officially a homeowner. However, owning a property comes with ongoing responsibilities and costs. These include paying your mortgage, ground rent, and service charges, maintaining the property, and complying with the terms of your lease.