Leasehold issues for landlords

It's well-known that leasehold properties come with additional restrictions and obligations that don’t apply to freehold houses. As a landlord and investor, there are some additional things you need to be aware of and consider before making a leasehold purchase.

In order for your investment to continue to generate the returns you expect, it’s vital you know what the real costs are - both today and in the future. You also need to be as sure as you can that the property will retain its core capital value and rise in price, at least in line with the local market average.

Here are some key questions you should be asking before committing to buy a leasehold property:

Are there any letting restrictions?

Some leases state that the property cannot be let at all; others might specify that it cannot be let to students, to more than one person, or on a short-term basis. So, before making an offer, ask whether there are any restrictions on the leasehold property. Furthermore, make sure it’s one of the first things your solicitor or conveyancer checks once they have a copy of the lease. 

How long is left on the lease?

Once a lease length drops below 85 years, the number of mortgage lenders who will accept it begins to reduce; virtually none will consider fewer than 70 years. So if you are planning to hold the investment for 15-20 years, you must consider how many years will remain when you come to sell.

Extending the lease is usually possible and this may be a money making opportunity if you buy a short lease property with cash, then extend it. However, make sure you know how much it would cost and work with an experienced leasehold property extension legal company.

What are the ongoing costs for a leasehold property?

You must consider the ongoing cost of the service charge. This is the amount payable by the leaseholder or tenant, consists of buildings insurance, maintenance, as well as a 'sinking fund.' Ordinarily tenants would cover the bill, but any gaps in letting would create a shortfall.

The sinking fund is important to consider, and this would be for larger periodical repairs and upgrades, such as roof repairs and painting the exterior of the building. Your solicitor should ask for the management company accounts and check that all flat owners are repaying their service charge on time, in full, and that there are sufficient reserves. If there isn’t very much in reserve, that suggests the service charge might need to be increased in the future. It’s these kinds of queries you need to get answered.

Sometimes the accounts and committee meeting paperwork indicate that the property is not being well managed. Ideally, freeholders should use an agent who is a member of ARMA (Association of Residential Managing Agents). They are the leading trade association for residential managing agents in England & Wales. All member agents are compliant, audited, independently regulated, transparent and hold the service charge in trust.

Currently there is no overarching statutory regulation of private sector letting, though managing agents and companies are still subject to consumer protection laws. 

The cost of ground rent

Other ongoing costs will include ground rent and alterations costs.

Ground rent can vary widely in cost, and is typically paid annually. It’s important to check when, and by how much ground rent will increase in the future, particularly when it comes to new build flats and houses. You also need to be aware that if the ground rent is not paid, the freeholder has the contractual right to seize the property.

In addition, if you want to make alterations to the property, you may have to pay a fee to the freeholder, which can run to thousands of pounds for an extension. Ensure you are clear on any such fees before you buy.

Can you buy the freehold?

Yes, but you will need to ask the landlord to sell you the freehold. You can do this at any time. For flats, you would likely buy a share of the freehold. For a house, you may have the right to buy the freehold.

It's important that you know how ownership works as well as who owns the property. 

This is particularly important when it comes to leasehold new build houses, because it is becoming more common for the original developer to sell on the freehold to another company, which the property owners may not know anything about until they come to sell.

Consult a legal company independent of the developer to check what your options are. You may be able to agree in writing on a purchase price for a certain period of time.

How good is the freeholder at communicating with leaseholders?

By law, freeholders do have to communicate and respond to queries or requests from their leaseholders, but some may have inherited the freehold or bought it without appreciating or understanding their responsibilities.

If there are any issues that cannot be resolved, it can become a long and complicated redress process. It may, therefore, help to try to speak to some of the other leaseholders first and find out whether they have had any problems with the freeholder. This means you can gauge whether you are likely to run into any challenges. 

Where can I turn to for help?

LEASE, the Leasehold Advisory Service, was set up in 1994 to provide information and advice on leasehold law free of charge to the public. All their advisers are legally qualified, independent and impartial. Their website provides the answers to common leasehold queries and you can contact them for a short telephone consultation on your specific issue.

If necessary, your dispute may need to be advanced to the First-tier Tribunal (Property Chamber), the government service that handles applications and appeals.

Working with professionals in the industry

Take care to engage specialist legal representatives and financial advisers, who are experienced in handling leasehold transactions. For example, you could work with members of the Association of Leasehold Enfranchisement Practitioners.

Help with new builds

If you are buying a new build, check that whoever is carrying out the conveyancing has experience in investigating those particular lease terms relating to ground rent, fees for making alterations, and purchasing the freehold.

Getting a mortgage for a leasehold

It’s important to remember that most leaseholders don’t experience any significant problems with either their lease or their freeholder. If you have any concerns or are interested in further investigating a leasehold property for investment, get in touch with one of our expert, specialist buy-to-let mortgage advisers.