Leasehold: What investors need to know

15th July 2011

Owning a leasehold property means you don't own the ground the property stands on, but a right to live in a property for a set period of time.

The land is owned by a freeholder or landlord who will charge a ground rent so it's important to know what this is before buying.

The freeholder or landlord will normally appoint a managing agent who will charge a service charge for upkeep on the communal parts of the building.

The service charge can cost anything from a few hundred pounds to a few thousand each year so it's vital landlords include this when working out whether a property is a good investment.

According to block management expert Urban Owners, there is a lack of transparency over the service charges that leaseholders are required to pay their managing agent or freeholder. The company says this is costing leaseholder hundreds of pounds a year in unnecessary fees – approximately £700m in total across all UK leaseholders.

Buyers should also find out whether any major works are planned as this will incur an extra cost on top of standard service charges.  

Another thing to check is the lease length. When flats are built leases tend to be for 99 or 125 years. In theory when this time period is up, the flat is returned to the freeholder or landlord. However, in reality most leases are extended well before then under the 1993 Leasehold Reform Act.

Under the act a qualifying leaseholder has the right to be granted a new lease for an additional 90 years from the expiry of their current lease. To be eligible you need to have owned the property for at least two years and the lease must have been for more than 21 years when granted.  

Properties with short leases will be difficult – or impossible – to get a mortgage on. Melanie Bien, director of mortgage broker Private Finance, says lenders are wary of lending on short leases because this severely affects the value of a property.

She says: "As a general rule, they will not lend on any property with a lease of less than 70 or 75 years left to run, depending on the lender, although some lenders may be more flexible on prime properties in Central London where short leases are more commonplace."

Landlords also need to read the lease carefully and look out for any clauses that might affect them. Some leases don't allow sub-letting which makes them unsuitable for BTL landlords. Others require landlords to pay for a license to sub-let. Most will have rules about pets and communal areas so bear these in mind as they will restrict the type of tenants suitable for the property.

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