Owning a Flat and the Importance of Leases by Gerry Purcell

If you own a flat or an apartment it’s more than likely that you own the Leasehold of the property and not the Freehold. But does this matter? It’s your flat, right? Leasehold, Freehold, is there much difference? Well, yes there is. If you own a Leasehold property, or are thinking of buying a Leasehold property, it is in your interests to understand what Leasehold means and what is documented in your Lease.

The Basics

House owners probably own the ground the house is built on. This is called Freehold. However, with a property comprised of multiple flats or apartments that are sold separately to each other, these are usually sold as Leasehold. The flat owner has purchased a flat and is allowed to use that flat within the terms set out in the Lease for a fixed period of time. Someone else owns the land the flats are built on. The flat owner is the Leaseholder and the land owner is the Freeholder or Landlord. 

There is a relationship between the Freeholder and the Leaseholder, where both parties have responsibilities. The terms of this relationship, including the responsibilities and restrictions of both parties, are defined in a document called a Lease. When a Leasehold flat is sold, the new flat owner agrees to abide by the terms to meet their responsibilities and adhere to the restrictions detailed in the Lease document. The Lease is a legally binding contract.

It is the responsibilities and restrictions detailed in the Lease every prospective or existing Leaseholder must be aware of and not taken lightly. Not every Lease is the same. There is no ‘one size fits all’. The Lease will have been drawn up by the Freeholder or land owner so there may be parts of the Lease that favours the land owner and disadvantages the Leaseholder. When flats are purchased the focus of the buyer may be on the size of the flat, location, spec of the kitchen and bathroom etc. In many cases, there is little attention given to the Lease or contract the buyer is agreeing to whilst they own the flat. The detail in the Lease is far more important than the type of integrated cooker there is in the kitchen, if the sale includes the light fittings or how old the boiler is.

What should you look out for?

The Length of the Lease

The Lease will have a fixed term, an end date. When this end date is reached, the ownership of the flat reverts back to the Freeholder. A Leaseholder is buying time to use a property for a fixed period. The longer the Lease the better. Many new builds have a 999 year Lease, some are 125 years. Many houses that were converted into flats in the 80s and 90s were given 99 year Leases. Once a Lease drops below 80 years it can be much more difficult for a buyer to get a mortgage to buy that flat, significantly impacting the selling price of the flat. Leaseholders can extend the time period on the Lease. There is a cost to this which can be determined by a tribunal, with the Leaseholder paying for the Freeholders legal costs as well as their own. The cost of extending a Lease increases as the years left reduces, especially when it falls under 80 years.

Ground Rent

Leaseholders will need to pay the Freeholder rent each year. This is rent for the land the flat is built on. Older Leases may state that the ground rent is for example £30 a year until the end of the Lease. However, newer Leases can be far more costly to the Leaseholder and the amounts increase over the length of the Lease. It’s important you understand any increases that are detailed in the Lease. There are some Leases out there that double every 10 years. This may not be an issue when you first buy the flat and perhaps not an issue for the first 10, 20 or even 30 years. If the ground rent is £500 for the first 10 years, after 80 years it could be £128,000 per annum. You might not be around then, but it will significantly impact the resale value of the property in the near, as well as distant, future.

Pets

Some Leases will state that pets are not allowed to reside on the property. If you have pets and this is not brought to your attention until after the sale when someone complains about you having a dog or cat or gerbil in your flat, you’ll find yourself in an unfortunate dilemma. Either the pet goes or the flat goes. It’s that simple as the Lease is legally binding. Here’s an example of what a Lease could detail on the ownership of pets: ‘Not to keep or permit any bird, dog or other animal upon or in the demised premises which may cause a nuisance, damage or annoyance to the tenants or occupiers of any other part of the building or to which an objection shall be notified by the Company.’

Renting your flat

Don’t assume that you are allowed to rent your flat to others. As a Leaseholder you are considered a tenant and by renting the flat to someone else you are sub-letting the property. Even though you own a flat and there may be conditions in the Lease around sub-letting. Some Leases will not even allow it. Others will insist on an annual administration fee to the Freeholder for it to be allowed. There may also be conditions around how long the contract must be between you and your tenant. If you are a Landlord or are thinking of becoming a Landlord through buying a flat, check the Lease to see if you are acting within the terms.

Service Charge

The Lease will state that the Leaseholder must contribute to the upkeep and running costs of the communal parts of the building, usually either 6 monthly or yearly by a specified date. The amount will usually not be detailed but will state that a reasonable amount will be charged. The Freeholder or Landlord will usually pass the collection of services charges and maintenance of the building to a management company. They will determine what is reasonable. However, you can challenge this amount via tribunal. Leaseholders can also take it a step further and take over the management themselves via a Right to Manage process. It is important though that Leaseholders pay their service charge as the Lease will usually allow for additional charges to be added upon non-payment and late payment. It may also allow for the Freeholder to take the Leasehold flat back, resulting in the Leaseholder losing their property.

Restrictions you may not Expect

As the Leaseholder you have agreed not to carry out a host of activities related to the building. These are put in the Lease in good faith to avoid confusion and help resolve disputes between neighbours. There will be obvious restrictions in there such as no loud music to be played, no rubbish to be left in the corridor, no satellite dishes to be installed on the side of the building, no smoking in communal areas. There may be other restrictions that you may not be expecting such as no vehicles to be left in the car park with commercial writing on them, no door mats to be left outside your door, no washing to be left to dry in the garden. Here’s an example: ‘No clothes or other articles shall be hung exposed or shaken outside the premises or in the reserved parts; No clothes or other articles shall be hung in the premises except curtains or good and reasonable colour and quality.’

Buying and owning a flat comes with responsibility and conditions, more than you may initially think. It’s really important to understand the Lease, it’s a legally binding and enforceable agreement a flat owner enters into when purchasing the property. The wording in Leases is not always an easy read and can be lengthy but don’t let this put you off. Don’t rely on the estate agent or your solicitor to summarise for you. Read it yourself so you are fully informed. Make sure it is fair and suits you. The devil is in the detail.

 

Gerry Purcell is our Right to Manage Expert and Managing Director of Purco Limited

http://www.purcolimited.co.uk/


Share this post

Most read

16/06/2015

Hair & Son shares helpful nuggets of advice for those hoping to step on the property ladder and buy their first home in Essex or across the UK.

Read more

28/07/2015

Our beloved town is gaining more and more positive press in recent months, but why do people choose to live in Southend-on-Sea and surrounding areas rather than London?

Read more