BUYING A LEASEHOLD FLAT
What is leasehold?
The vast majority of flats sold in England and Wales are leasehold. Unlike a freehold house that sits on its own plot of land a flat is only a part of a building that contains other dwellings. An individual occupant cannot own the freehold because the land on which the building is constructed is shared with other occupiers. Consequently the developer of the building usually retains the freehold and sells long-term leases to individual flat owners or 'leaseholders'.
In leasehold blocks there will always be a freeholder or landlord and even if a flat is advertised as freehold it just means its owner has a share of a freehold, which would be held by a resident freehold company. There are very few flats that are commonhold, which is a relatively recent form of tenure where the flat-owners also own the communal areas and there is no landlord/flat-owner relationship. Owners of commonhold flats have no rights or protection under landlord and tenant legislation and a prospective purchaser should seek legal advice before buying.
What is a lease?
A lease, which is a legally binding written contract, transfers possession of a flat for an agreed fixed period of time known as the lease ‘term’. It defines the occupier’s obligations such as the payment of service charges and ground rent and the facilities available such as parking and the access to and enjoyment of communal areas, such as gardens or residents’ lounge.
There is no standard form of lease for existing or newly built properties despite the fact that most leases will include many similar terms. Residential leases within the same property will usually be substantially the same but may vary in some respects such as the proportion of the service charge payable.
The terms of the lease
In most cases it will be difficult to change the lease terms and therefore prospective buyers of leasehold property should seek specialist advice at an early stage in the buying process to ensure they fully understand the obligations and costs involved.
The Leaseholder Association (LA) advises any prospective buyer of leasehold property to obtain a copy of the lease at an early stage. In some cases a Leaseholders’ Handbook will be offered by the seller but this will only include a summary of the main lease terms. This is no substitute for the full lease, which will need thoroughly examining by a solicitor or professional adviser to see if all of its terms will be acceptable to the prospective buyer.
When a leasehold property is sold or transferred, all of the rights and responsibilities of the lease will pass to the purchaser, including any future payments of ground rent and service charges. It will either be impossible or extremely difficult to change the terms of the lease and therefore the prospective buyer should be aware they would be legally bound by its terms. (Please see the LA Information Sheet 110 Lease Variations)
The lease should set out in some detail the contractual rights and obligations of the leaseholder and the freeholder. In some cases there may be a third party to the lease such as a management company and if so the lease should also provide a summary of their responsibilities. Typically the freeholder will have the contractual responsibility for the management and maintenance of the structure, exterior and common parts of the property, which may include any gardens or grounds. Many freeholders will appoint managers to carry out the above along with other duties such as setting and collecting service charges and producing accounts. The leaseholder should bear in mind that they will be liable for all of the costs of the services being provided.
The lease will usually set out some conditions, called covenants, relating to not only the use of the communal areas but also the use and occupation of the flat itself, which may need to be considered in advance. A purchaser of a leasehold flat will often be required to enter into a new deed of covenant which gives the landlord the right to take enforcement action if the flat-owner fails to abide by the agreed conditions.
What are service charges?
Flat owners are usually required to pay a contribution towards the upkeep of the whole building and the common parts. This is known as a service charge. The lease should stipulate the proportion of service charges payable, which may be equal with all other occupiers or individually calculated to reflect the size of the flat and the services enjoyed. If the lease makes provision for a parking space this may incur an additional charge.
A prospective buyer should obtain details of the level of charges for the property they are thinking of buying at an early stage and request copies of the accounts for the previous two to three years. They should also enquire whether there are likely to be significant increases. The amount of service charges will vary from year to year in relation to the costs of the upkeep of the building, which will inevitably rise. The prospective buyer should be aware that these increases might often be higher than the rate of inflation. (Please see the LA Information Sheet 103 Service Charges).
If I am buying my flat why do I have a landlord?
The freeholder is also known as the landlord because he owns the land or ground on which the building is built. This entitles the freeholder to charge an annual ground rent to all occupiers of the building and the lease should specify the proportion of rent payable, which my vary according to the size of the flat. The landlord is responsible for the maintenance of the grounds and all the shared parts of the building such entrances, corridors, stairways and any shared facilities such as a lounge, laundry room or guest room. These are collectively known as the ‘common parts’.
When leasehold flats are advertised for sale the identity of the landlord is not always made clear. The landlord could be an individual, a private company, the local authority, a housing association or a Resident Freehold Company (RFC). A potential buyer should consider the implications of each type of landlord and would be advised to discuss this with the solicitor or conveyancer. Where there is an RFC the buyer may be entitled to purchase a share of the company that owns the freehold, which may bring additional responsibilities as well as benefits. (Please see the LA information sheet 113 Enfranchisement).
What does the purchaser own?
Strictly speaking a purchaser will never actually own a flat or apartment because one cannot individually own the bricks and mortar of the building or the land the building sits on. What is acquired is the right to exclusive possession and occupation of the property for the period or term of the lease, typically 99 years or more. A lease is simply a contract with the freeholder of the building that grants the right of possession. The longer the term of the lease the greater is its market value. Unlike a rent-paying tenant, a leasehold owner retains the right to sell the leasehold ownership and benefit from increases in property prices.
Ownership will generally apply to everything within the boundaries of the flat but it would not usually include the external walls or windows. Typically the structure, the common parts of the building and the land the entire premises are situated on would be owned by the freeholder. The freeholder would be responsible for the repair and maintenance of the parts of the building they retain. This responsibility is usually delegated to a professional company known as a managing agent, which may be an independent company or a subsidiary of the freeholder. The freeholder has no obligations to finance the maintenance of the building or grounds. All these costs must usually be met collectively by the leaseholders. The prospective buyer is advised to ask their solicitor to check the lease to clarify the parts of the building the flat-owner will be responsible for and the likely costs involved.
What information is essential before buying?
The length of the unexpired term of the lease is one of the first considerations to a prospective buyer as this will be one of the main factors affecting the price paid for the property and the re-sale value. Although the vast majority of leaseholders will have a legal right to a lease extension at a later date this will involve additional costs. In most cases purchasers would be advised to ensure there is over 80 years remaining on the lease. (Please see the LA Information Sheet 112 Lease Extensions). In the vast majority of cases the lender will only grant a mortgage if there is an appropriate period left to run on the lease, usually at least 60 years.
A leaseholder's financial obligations are set out in the lease, which will make flat-owners responsible for service charges and in most cases ground rent. If charges are not set out clearly and unambiguously in the lease they are unlikely to be payable.
A buyer should be satisfied the building has been properly maintained. It is important to see three years service charge accounts and observe the trend in the amount owners have been required to contribute. The accounts will show if there is a high level of service charge arrears, which could result in other leaseholders paying additional sums to meet the cash shortfall.
Potential buyers should know whether there is a reserve fund and how much there is in the fund. It will often be called a sinking fund, contingency fund or future maintenance fund and should be represented in cash to meet future major expenditure. This is an important consideration when buying a flat as the lack of a reserve fund or inadequate balance in the fund could mean that the purchaser will need to pay a significant lump sum when any major works are required. Diligent landlords and managing agents will undertake a building survey and prepare a cyclical maintenance plan showing how much money will be required to fund the future upkeep of the building. Buyers should ask to see this plan and compare it with funds in the reserve fund.
The lease should state whether a reserve fund is financed from leaseholders’ annual service charge contributions, a lump sum at the time of re-sale or a combination of both. (Please see the LA Information Sheet 105 Reserve Funds).
A flat owner will become part of a community of owners and the lease will set out basic rules that are necessary for everyone’s well being. These obligations, which are sometimes referred to as covenants, are enforceable in law and if they are persistently disregarded in breach of the lease it could ultimately result in the forfeit of the lease and repossession of the flat. Before purchasing a flat buyers should read the lease carefully and fully understand these obligations.
In many cases the prospective purchaser will need to obtain a mortgage and therefore will need to take into account the level of service charges and rent that will be payable when considering the amount of mortgage repayments that might be manageable. A mortgage lender will usually require a valuation of the property to be carried out but the prospective buyer needs to be aware that this is no substitute for a professional survey and satisfactory enquiries about future planned maintenance.
Additional information will be obtained by the buyer’s solicitor sending to the seller’s solicitor a standard questionnaire published by the Law Society, known as LPE1.
A copy of this questionnaire is available on the LA website or from the Law Society at www.lawsociety.org.uk. Buyers are advised to study this information carefully before completion.
What rights does the leaseholder have?
One of the most important is the right of quiet enjoyment of the flat for the term of the lease, which means the right to occupation without any undue interference from the landlord or manager. This right should extend to the landlord or manager addressing any neighbour or nuisance issues that may arise. The leaseholder has the right to expect the landlord to carry out all of the duties that are required by legislation and the terms of the lease such as the maintenance, looking after the finances of the block and ensuring no occupant causes noise or nuisance that affects their neighbours. The leaseholder has a number of legal rights in relation to challenging service charges, obtaining financial information and taking over responsibility for the management, which are covered in detail in other LA information sheets.
What are the leaseholders’ obligations?
As leases are differently worded leaseholders in one block may have different obligations to another block nearby. However, there will be some standard clauses that would be found in almost all leases and these are some of the most commonly found obligations:
- To keep the inside of the flat in a reasonable state of repair.
- To pay the service charge and ground rent in full without delay.
- To behave in a way which will not create nuisance for neighbours.
- To request landlord's consent, typically for structural alterations or subletting.
What is shared ownership?
Shared ownership allows the buyer to buy a proportion of the interest in the property and the landlord, which is usually a housing association, retains the remainder. This can apply to freehold property but it is most commonly offered in relation to flats to make them more affordable. In most cases the buyer will be permitted to ‘staircase’ at a later date, which means to purchase another proportion or all of the leasehold interest in the flat. It is essential for buyers to have the lease examined when considering shared ownership particularly in respect of the level of rent on the share the landlord retains, the contractual right to staircase and any restrictions on the sale or transfer of the property.
Is a structural survey recommended?
If a flat is being purchased in a newly developed block the condition should be covered by the National House Building Council (NHBC) warranty or a warranty provided by a similar organisation. These warranties provide some cover in relation to defects arising from construction, for a limited period, but leaseholders will still be responsible for maintenance costs from day one. A prospective buyer would still be advised to have a survey, as these warranties are rarely comprehensive. In most cases they cover all defects for the first two years but only cover defects relating to the load-bearing structure for the next eight years.
As leaseholders will be responsible for meeting the full costs of maintaining the entire building the flat is situated in, the condition of the building is likely to be a significant factor in the decision whether to buy. The past and current service charges will not necessarily reflect the level of future financial commitments, especially if major works will be required in the foreseeable future. It is for this reason The LA would advise prospective buyers to ensure they make enquiries regarding any major repair works that are planned and request sight of a survey and cyclical maintenance programme for the entire building and not just rely upon a survey for the flat they are purchasing.
Is a solicitor necessary?
Whereas, the LA can provide initial advice on all aspects of buying a leasehold flat, as soon as the actual process begins the prospective buyer is strongly advised to employ a solicitor with the relevant experience, or a licensed conveyancer.
Prospective buyers are advised to consider those who are members of the Law Society's Conveyancing Quality Scheme, as their members have agreed to meet the high standards set by the Law Society. Buyers can phone the Law Society on 02073 205650 or use the Law Society website www.lawsociety.org.uk/findasolicitor and search 'conveyancing residential' to source details of solicitors in their area.
The solicitor will request a number of documents from the prospective buyer and although this is not an exhaustive list these will include:
- Personal identification of prospective purchaser(s).
- The purchase price.
- An approximate time for completion of the sale.
- The method of paying for the property and if a mortgage is being applied for.
- Any agreement with the seller regarding fixtures and fittings.
- A copy of the energy performance certificate for the property.
If an estate agent is involved, the estate agent will usually confirm the above with the seller’s solicitor in writing.
What is an energy performance certificate?
The energy performance certificate contains a rating for the energy performance and efficiency of the property, and includes recommendations for improving this. When a house or flat is offered for sale, the vendor or the estate agent selling it on their behalf must arrange for an energy performance certificate if one is not already in existence.
What are the additional costs of buying leasehold property?
In addition to the purchase price, the buyer will need to consider the costs of conveyancing which include search fees and Land Registry fees. In most cases the buyer will also have to pay Stamp Duty Land Tax (SDLT). SDLT has to be paid on any residential property that is sold for more than £125,000.
If more than £125,000 is paid for a residential lease, 2% SDLT is payable on the amount above the £125,000 threshold. This percentage starts at 2% but rises to 5% on the amount payable over £250,000, 10% for the amount payable over £925,000 and 12% for the amount payable over 1.5 million. Please see example below for a flat sold for £400,000;
|SDLT payable on £125,000 of the sale price||= 0|
|SDLT payable at 2% on the amount between £125,000 and £250,000||= £2,500|
|SDLT payable at 5% on the amount between £250,000 and £400,000||= £7,500|
|Total SDLT payable on a £400,000 property||= £10,000|
The prospective buyer will also have to meet the full cost of having a survey and/or valuation report.
What is the purchasing process?
- Once the buyer appoints a solicitor, that solicitor will contact the seller's solicitor, who will provide the buyer’s solicitor with a draft contract and any other information that has been requested, including the seller’s responses to the Law Society Questionnaire LPE1.
A form with a list of the fixtures, fittings and contents, which will remain in the property following sale, should also be given to the buyer’s solicitor at this stage and this will need to be checked thoroughly.
- The buyer’s solicitor will need to carry out searches, which will include contacting the local authority. The local authority will be able to provide information relating to planning and any other local developments that might affect the property.
- The buyer’s solicitor should then meet with the prospective buyer to answer any questions and to explain:
- the terms of the lease;
- the responses in the LPE1 questionnaire; and
- the obligations and liabilities of the flat-owner.
The prospective purchaser would be advised not to commit to buying the flat until they have considered the answers in the questionnaire and understood their implications.
- If the prospective buyer does not have the capital to meet the full sale price they will need to ensure a mortgage is in place before contracts are exchanged. The prospective buyer will need to consider the mortgage offer letter and the mortgage conditions before proceeding and the solicitor should be able to help with this.
- If the buyer wishes to proceed, the solicitor will finalise the terms of the contract and explain it to the buyer. The buyer will then be required to sign the contract and provide a deposit, which is typically between 5% and 10% of the sale price.
- The exchange of contracts can then take place, which is the most significant stage of the purchase of the property interest as this is a binding agreement between the seller and the buyer. At this stage the buyer and sellers’ solicitors will agree a date for completing the sale.
- After the exchange of contracts and prior to completion, often on the day of completion, the buyer’s solicitor will receive the required funds from the mortgage lender and capital from the buyer, this will include all of the additional costs referred to above. The buyer’s solicitor can then carry out any final searches and liaise with the seller's solicitor to ensure that any existing mortgage on the property has been satisfied. The buyer’s solicitor can then draft a transfer deed and send it to the seller's solicitor for agreement and signing.
- The final stage in the conveyancing process, known as ‘completion’, is where the buyer’s solicitor transfers the remainder of the funds to the seller’s solicitor and the keys are provided. The buyer’s solicitor will register the purchaser’s title with the Land Registry. All new flat-owners are advised to check with their solicitor that this has been carried out to avoid problems at a later stage.
This information is intended to make prospective buyers of leasehold flats aware of factors that need to be considered to avoid any misunderstandings at a later date.
Disclaimer: This is a very general explanation of the subject. Where issues are not governed by statute the information is our opinion or best practice. You are advised to seek professional advice before acting on the guidance contained herein. Whereas The Leaseholder Association endeavours to ensure that published information is correct, it does not warrant its completeness or accuracy. The Leaseholder Association assumes no responsibility or liability for any injury, loss or damage incurred as a result of any use or reliance upon the information and material contained herein.
Info Sheet: 101/3/15 ©Copyright