Largely, selling a leasehold property is similar to selling a freehold property.
Provided that the remaining length of the lease is long, it is not harder to sell a leasehold property. There'll just be extra paperwork for the buyer as a result of the additional checks that their conveyancer will need to make in respect of the lease during the sales process.
Key points for a smooth transaction
- Check when your lease expires. If there are fewer than 90 years remaining, consider extending the lease, or at least starting the process.
- Engage a conveyancer who has experience in with leasehold properties. They will be able to give you good advice before and during the transaction, and foresee any issues that the buyer's conveyancer may flag.
- Find all the paperwork you were given when you bought, and be prepared to fill out a few more forms.
What is a leasehold property?
A leasehold property is one where the owner (the leaseholder) has a right to occupy the property, given by the lease in return for a ground rent.
It is a popular way of owning property in the UK. Most flats are leasehold.
The owner of the land on which the property sits (and sometimes, the owner of the building in which the 'demised premises' are situated) is a third party, known as the freeholder or the landlord.
The lease term can be decades or even centuries - leases are often given for 99, 125, or even 999 years.
Why might selling a leasehold property be more difficult than selling a freehold one?
There are three major disadvantages of being a leaseholder rather than a freeholder.
The first is that a leaseholder must pay a ground rent. Recent law sets ground rent for new leasehold properties and extended leases at no more than a peppercorn, but for older leases, ground rent can not only be thousands of pounds, but can increase significantly as time goes by.
The second is that once the term of the lease expires, ownership of the property reverts to the freeholder. The law does give a leaseholder the right to extend the lease, but this can be expensive if the remaining term is below 80 years.
The third is that the lease may contain rules with which the leaseholder must comply. These are known as covenants. In particular, restrictive covenants - those that prevent the leaseholder from doing certain things such as making alterations or having pets - may put off prospective buyers when selling.
Can you sell?
For those asking, 'Can I sell my leasehold property?' the short answer is 'yes'. As the leaseholder, you have the right to sell your property at any point during the lease.
However, with a leasehold sale you have to consider that the new owner will be subject to the lease as you are now, and that the terms of the lease may influence how attractive the property is to buyers. It is less a question of can you sell, and more one of can you find a buyer at the price you want.
Challenges in selling a leasehold property
Short leases
Buyers, particularly those looking for a mortgage, may be cautious if the lease is short. Mortgage companies usually demand a minimum number of years left on the lease, typically at least 83 years.
There is a good reason why 83 is a magic number.
Once there are fewer than 80 years remaining on the lease, the freeholder is entitled to an additional sum if the lease is extended. This is an amount equal to half of the increase in value that granting the new lease gives.
Because the jump in value can be so much, many people who have a mortgage don't have spare cash to pay for an extension of the term of the lease. So they can't extend the lease.
Lenders are not willing to lend to buyers who might not repay the mortgage before the lease ends, only a cash buyer will be able to buy, which further suppresses the price.
The law only gives the right to extend a lease to someone who has been a leaseholder for at least 2 years. And because the process can take a year to complete, a new buyer will need 3 years to obtain an extension.
High ground rent
Ground rent is an additional cost of ownership. If the rent is significant, it may put off some possible buyers.
A greater risk for buyers is that the rent increases over time. On certain leasehold properties, ground rent doubles every ten years. This can affect the ability of leaseholders to repay a mortgage, which in turn affects the property's mortgageability.
Restrictive covenants and other clauses
If restrictive covenants prevent a buyer from enjoying the property as they want to live in it, they are unlikely to continue with the purchase.
The buyer's conveyancer is also likely to look at other expenses to see whether they are roughly the same as comparable properties. High charges, sweeping up clauses for management expenses, large contributions to sinking funds and administration fees may put off buyers.
Property condition
Finally, the property's condition is important.
Upkeep of the communal areas, such as gardens and staircases, might be managed by a managing agent. A well-maintained building can attract more serious buyers. Conversely, a poorly maintained one can make it challenging to sell.
Solutions to the challenges
Both high ground rents and short leases can be resolved by extending the remaining lease length before sale, or at least starting the process.
The law states that ground rents must be in effect zero and that the minimum that a lease can be extended (by following the statutory route) is 50 years for a house and 90 years for a flat.
A lease extension will cost money in legal fees, but can make your property more attractive, increasing the number of offers you receive and the offer prices. There is, however, a point where a long lease does not increase the property's value any further. So don't extend unless you really need to do so.
Unfortunately, there is not much that you can do about restrictive covenants. You may be able to renegotiate them with the freeholder. You may be able to demonstrate to the buyer (or the buyer's solicitor) that they have not been enforced recently and thus one possible way around is for the buyer to take out insurance against any claim of breaking them.
High fees might be avoided by buying the freehold through a process known as collective enfranchisement. Again, this takes time and costs money, but it might be worth it.
Regarding the property's condition, investing in necessary repairs and maintenance before listing the property can increase its attractiveness to interested buyers.
Documents needed to sell a leasehold property
The most important document to have is a copy of your lease because it sets out so many of the rights and obligations you have as a leaseholder. Any buyer will go through it with a fine tooth comb.
Youâll also need a completed Leasehold Information Pack, otherwise known as a Leasehold Management Pack or TA7 form. Often, your conveyancer will complete it for you.
This is a summary of the lease, including:
- the ground rent
- service charges and administration fees
- the freeholder's plans for major works and whether you'll be required to contribute to a sinking fund
- information about the building insurance policy
- information about any management company that has been formed by the tenants
- findings of any asbestos surveys
- findings of any external wall fire reviews
If you decide to start the lease extension process, or if you complete it, then the seller's pack provided to the buyer's conveyancer should contain evidence of your progress to date and/or the new lease agreement. Extending the lease can display a proactive approach and could make your property more appealing to potential buyers.
You can read more about the other documents you need for selling your house or flat.
Preparation before selling your leasehold property
Choosing experienced estate agents
When selling your leasehold property, choosing an estate agent who understands the nuances of leasehold properties is valuable and often overlooked.
A knowledgeable agent can help effectively market your property and explain its features, including the lease's length and the ground rent, to interested parties.
It often boils down to experience - someone who has been in the business for a long time will have been involved in the sale of many different types of property, and is likely to have come across one like yours.
Managing service charges
Managing service charges effectively is part of preparing for the sale of a leasehold property. Most leaseholders pay a service charge for the maintenance of communal areas.
Make sure payments are up to date. Look back at payments you've made previously, record them and make notes as to why there might have been increases or decreases. If there have been issues with service charges, you might consider flagging them to your solicitor.
Providing a clear record of these charges to potential buyers can give them a better understanding of the costs associated with the property.
Lastly, talk to the people who come for a viewing about the charges they should expect to pay. That way, they'll feel more informed when they receive the information in detail.
How to sell a leasehold property?
The process of selling a leasehold property isnât much different from selling a freehold one.
Informing the landlord and other leaseholders
Not always, but sometimes, when you decide to sell, the managing agent and other leaseholders must be informed, as they may have first refusal rights on buying.
If these conditions are part of your lease, it's essential to fulfil them; otherwise, your sale could encounter legal stumbling blocks.
Find an estate agent to market the property
Although you can market the property yourself and arrange viewings, using an estate agent will save a lot of work. They may also be able to negotiate a higher offer for you that offsets their fees.
We cover what to look for when hiring an estate agent in another article.
Find a conveyancer
While you can carry out conveyancing work yourself, given the additional complexity of leaseholds, it is often easier to use a solicitor or conveyancer.
Prepare an information pack
The first task your solicitor or conveyancer will ask of you in the process of selling a leasehold property is to give them the information they need to prepare an information pack, also known as a seller's pack..
This pack includes documents such as the lease, service charge accounts, and building's insurance schedule.
Insurance often becomes a crucial point of discussion during the property transaction process.
In most leasehold properties, the freeholder arranges the building insurance and recharges the cost back to the leaseholders through the service charge.
Accept an offer
Your estate agent will inform you of all the offers received. You have to pick on which you think is best. That might be based on price, but you may also prefer some other quality such as being a family, or working locally.
Pre-sale questions
Your buyer may have some pre-sale questions. Your estate agent will contact the freeholder and get an answer. The freeholder may charge an admin fee to provide information as they are under no legal obligation to do so.
Exchange contracts
Once you have come to a deal with the buyer, you will be exchanging contracts with each other. This will bind both you and the buyer to complete the purchase.
Completion
You and the buyer will decide on a date for completion. This is the day when ownership transfers and the sale proceeds will be transferred to you.You may wish to read up on what happens on completion day.
Concluding thoughts on selling a leasehold property
Generally, leasehold property is not hard to sell, and despite extra steps, selling doesn't have to follow a complex process. But it's important as a seller to consider factors such as short lease terms, ground rent, and the property's condition on the sale.
Preparation, choosing a knowledgeable estate agent, managing charges and preparing an information pack, helps enormously.
Whether you choose to navigate this process alone or with the help of a professional solicitor, remember to approach it with diligence and patience.