According to Land Registry data, the number of properties sold under a leasehold agreement soared last year. This increase happened despite a government ban on leaseholds for almost all new-build houses.
Leasehold flats still dominate – in fact, leasehold is by far the most common form of flat ownership, with only 2.13% of flats sold in 2017 were freehold.
The leasehold system seems here to stay, so what will the increasing numbers of leaseholders actually own and what are their rights?
What is a leasehold flat?
Leasehold flats or maisonettes are properties situated within a purpose built block, in a converted house or other building, or alternatively above a shop.
There are also a number of houses that are leasehold, but the government is bringing in measures to restrict abuse of the the leaseholder sector and leasehold houses, due to housing developers taking advantage of the leasehold agreement in the past.
If you own the leasehold on a property you effectively rent it for the period of time stated on the lease. You own the right to occupy it, but you don’t own the bricks and mortar building itself.
The ‘Demised Premises’ is the term used in the lease for everything the leaseholder owns. The leasehold covers everything within the walls of the property – even including the plaster – but it does not include the external walls or structure.
The building itself and the land it stands on is owned by the freeholder. A garden can be included in the demise of the leasehold of a property providing it is not a communal garden.
The freeholder bills the leaseholder for the maintenance and repair of the building in the form of a service charge.
The freeholder of a leasehold property can be a company, a housing association, a local authority or an individual.
Alternatively, leaseholders can buy the freehold through a residents’ management company or enfranchisement company.
Under Right to Manage legislation, leaseholders may not own the building, but they can manage the building.
What is a lease?
A lease is a contract that states what the leaseholder is legally bound to do and what the landlord – the freeholder – has to do. It also states how long the leaseholder owns the property.
The leaseholder’s legal responsibilities include payment of maintenance costs and ground rent.
The landlord will usually be legally bound to maintain the buildings and common areas, collect service charge and record all the financial details.
If you find it hard to fully understand the wording of your lease, seek advice from a solicitor as the understanding the legal terminology is vital to understanding the lease itself. Make sure that you comprehend all the conditions on the lease before you buy as it is complicated to change them after the purchase.
How do you extend a lease?
The shorter the lease, the lower the asking price should you put your property on the market. By extending the lease you can usually increase the market value of your home by a substantial amount. An extension usually adds 90 years to the term of your lease.
If your lease has less than 70 years remaining, mortgage rates may increase and you will struggle to remortgage at 60 years, so it’s advisable to look into extending your lease.
At 80 years remaining, leases become more costly to extend, so the sooner you extend the better. However, you need to have owned the property for two years before you can apply for a lease extension.
A seller can start the lease application process for the buyer, so if you are buying a flat with plans to extend the lease, don’t wait until after completion or you will have to wait for two year before you can apply.
What are your contractual rights as a leaseholder?
As the leaseholder, you have the right for ‘quiet enjoyment’ of the property which means that you are able to reside in your home without any interference from the freeholder.
Sometimes the leaseholder might have a ‘self-repairing lease’ but otherwise the landlord is responsible for the maintenance of the building.
You will also be expected to pay all charges on time and not do certain things without the freeholder’s consent, such as extensions to the property or subletting rooms.
Why do I have to pay service charges and ground rent?
Services charges are paid to the freeholder by the leaseholder in line with the terms of the lease. This money is used for maintenance and repairs of the building and common areas, including:
- Window Cleaning
- Estate staff
- General maintenance
- Lift maintenance
- Communal utility bills
As the service charges are paid in advance, any extra money leftover at the end of the year will be returned and likewise, any shortfall will be collected.
When you are buying a leasehold property, check the cost of the service charge before buying and inquire about any future building works that may be planned and might increase the cost further. Also ask if there are any reserve funds as these contribute to future work.
You are also obliged to pay ground rent to the freeholder in line with the terms of the lease.
If you don’t pay your service charge or ground rent to the freeholder on time your lease could be forfeited by the freeholder and the flat resold without the freeholder being liable for your mortgage. In order to forfeit a lease, the freeholder would have to obtain a County Court Judgment (CCJ) against you, then serve a Section 146 Notice.
Who pays for the insurance?
There will usually be a legal requirement in the lease for the freeholder to pay building insurance. As the leaseholder, you must take out sufficient contents insurance to cover your possessions in the property.
Does a leaseholder have any other rights?
As a leaseholder, you have certain powers available to you to make sure that the relationship between you and the freeholder is fair:
- Groups of leaseholders can request the freeholder to sell under collective enfranchisement and can buy the freehold if they satisfy certain conditions
- If the landlord wants to sell the freehold he must offer it to leaseholders first
- The freeholder has to talk to the leaseholder – or leaseholders – before any major works are started, if the work will cost the leaseholder more than £250
- Leaseholders can challenge service charges, administration charges and can appoint a new property management by applying to the First Tier Tribunal
- Leaseholders have the right to demand and see copies of the invoices and paperwork from any maintenance and repair that has been contracted
- Leaseholders also have the right to complain about a property manager
- The landlord has the consult the leaseholder on contracts over 12 month and costing over £100 a year
Owning a leasehold flat should be straightforward and perfectly manageable as long as you know and understand the terms on your lease.
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