Buying and Owning A Leasehold Flat
Purchasing leasehold property is far more complicated than that of freehold due to the enormous amount of information that surrounds the tenure. Whilst some elements remain the same for both types of tenure such as checking the property title, various searches and land charges it is leasehold purchasing where efforts have been made to make information easier to get and more transparent, starting with prescribed lease clauses. There are also 2 forms: LPE1 for use from 1st October 2015 and which has questions asked on behalf of the buyer, and LPE2, the buyers leasehold information summary with the latter being introduced in response to the Competitions and Market’s Authority market study on Residential Property Management Services. This study looked to improve the information given to buyers of leasehold property about the financial obligations they were committing to.
Note: Both LPE1 and LPE2 forms can be downloaded here.
LEASEHOLDERS AND FREEHOLDERS
Being a leaseholder is exactly what it says on the tin. You buy a lease to property, not the bricks and mortar. The tenure of leasehold is carved as an ‘interest’ from the dominant estate of freehold which in turn is the closest anyone can get to owning property outright in English common law.
Freeholders come in a number of guises: individuals, finance companies, ground rent investment companies, mixed use companies (owning both commercial and residential properties in the same development), and in the social housing sector, local authorities. A resident management company can also be a freeholder.
Some blocks of flats also have more than one freeholder because whilst a freeholder holds what is known as a superior lease, they can choose to sell what is called an ‘intermediate’ lease to someone else, who is known a head-lessee. This then results in 3 different levels of ownership in the building:
- The freeholder who has the highest level of overall ownership;
- The head leaseholder (also called the head lessee) who is directly responsible to the leaseholder;
- The leaseholder.
It is the freeholders who own what are called the common areas of blocks of flats i.e. the structure, roof, the land the building stands on, foundations, load bearing walls, gardens, landings, paths, gates, fences, drives, stairways, and any other outbuildings. Inside they own plant rooms, lift motor rooms, and meter cupboards.
UNEXPIRED LEASE TERMS AND COVENANTS
A brand new leasehold flat or house usually starts with a term of 99 or 125 years. Each time the lease is sold, the unexpired term (the number of years remaining) reduces. This is why leases vary greatly in duration with some having so few unexpired years left on them that they are difficult to market due to the criteria demanded by lenders. Others are of a duration of 999 years where the freehold has been purchased via collective enfranchisement, and other leases fall somewhere between the two where individual lease extensions have been granted.
At the heart of all leases lie the covenants (promises) which is what the leaseholder contracts to do and what the freeholder is bound to do. These covenants will either be expressly stated (written into a lease) or implied by law and it is important to note that if applied by law they are equally binding.
Leaseholders covenant to pay for the upkeep of the common areas through the payment of service charges, ground rent and to contribute to the cost of buildings insurance. So through these payments, freeholders covenant to carry out the repair and maintenance of those common areas and place the buildings insurance on behalf of the leaseholders.
Because leases are created by a deed and as a binding contract, the covenants are not only binding on the original parties to the lease but to their successors when the lease is sold.
Freeholders may not actually carry out repairs and maintenance themselves but instead use the services of a managing agent to comply with their covenants on their behalf.
The role of the managing agent is wide-ranging and depends on the type and size of the property. The management agreement is the contract between the managing agent and the leaseholders and all managing agents make their money from the fees they charge for their services. These are also paid for by the leaseholders and any management fee charged under a long residential lease is subject to s19 of the Landlord and Tenant Act 1985 (limitation of service charges: reasonableness). The RICS Service Charge Residential Management Code 3rd Edition states the basis of fee charging.
SHORT LEASES AND EXTENDING DURING CONVEYANCING
Some buyers want to know if the lease can be extended during the conveyancing process which it can, provided the seller has owned the property for 2 years or more.
The process is as follows:
- After agreeing with the freeholder on the price to be paid, the amount is inserted into a Deed of Assignment of the Benefit of the Notice which is then served on the freeholder. Note that this figure is for the lease extension only, and not the sale price minus the extension cost. It is also highly advisable for this figure to be determined by a qualified surveyor, for which the buyer should be prepared to pay.
- Whilst the conveyancing solicitors acting for both parties should agree the form, the rules for completion and service of these notices are very strict. If they are not adhered to then the notice will be declared invalid, involving the buyer in litigation about the validity of the claim. If the claim turns out to be invalid then the buyer will have no choice but to wait until he is legally entitled to serve notice himself (i.e. he will have had to have owned the property for two years or more).
- Once the seller has the cash from the sale, they pay the cost of that extension to the freeholder
- On completion the sellers rights stated in the Notice served on the freeholder will be properly assigned to the new owner at the same time as the assignment of the lease itself, i.e. when the buyer takes actual ownership. Note that if technical legal reasons prevent this then the claim will be deemed to be withdrawn.
The notice itself should be served between exchange of contracts and completion because if the buyer withdraws before exchange, the seller may have to a) complete the process himself and b) pay all the costs.
It is important however to be aware that the lease will not be extended at completion if it is carried out under statute as there are specific time-frames to adhere to for each part of the process.
Others prefer instead to try to enter into an informal arrangement with the freeholder, perhaps to try speed up the sale but this can be an extremely risky route to take because of no protection against it going wrong.
The school of thought is that it is always preferable for sellers to have obtained a lease extension before they sell, thereby allowing them to ask a higher price for the property. On the other hand they might not want to do this because the time taken to secure the benefit of a lease extension may add several months to the conveyancing process. Not only that but the buyer will not know what he is going to pay until the price is agreed with the freeholder. Some freeholders take so long to agree terms that the situation ends up having to be referred to the First Tier Tribunal for a determination.