You may be buying your first home, this could be a flat or house. Leasehold property is very different to a freehold property. Understanding the disadvantages associated with purchasing a leasehold property is really important.
When it comes to purchasing a leasehold property, there are pros and cons that can be argued against each other. As I experienced, there are unfortunately many disadvantages of buying leasehold property that far outweigh the positives.
Between rising service charges, unsaleable properties, money grabbing freeholders and not actually owning anything, it’s important to clearly understand the disadvantages of owning a leasehold property before signing on the dotted lines.
Disadvantages of Buying Leasehold Property
Essentially, All You Own Is A Lease
When you buy a leasehold property, all you buy is a lease agreement, and the freeholder owns the property, and the land. Thinking that you own the property, and just not the land on a leasehold property is the biggest misconception about leasehold. If you ever fall into ground rent and service charge arrears, the property could easily be repossessed by the freeholder, leaving you with nothing to recoup.
Onerous Ground Rent Levels
Ground rent is a huge issue with leasehold properties, ground rent that is already over £250 means that the property becomes an AST. Lenders will not lend on properties which fall into this band, unless a deed of variation or lease extension is undertaken which will reduce the ground rent to a peppercorn.
However, the Leasehold Reform (Ground Rent) Act 2022, which was passed earlier this year will reduce all ground rent to a peppercorn on NEW leases. This will not apply to existing leases.
If you are purchasing a leasehold, you need to check what the current ground rent levels are and what calculation is used for future increases, i.e RPI or doubling clauses.
It Costs To Increase The Lease On A Leasehold Property
When you enter into buying a leasehold property, you will become the owner of a lease which is a set period of time in years, which does need to be extended before there is less than 80 years left.
The cost of an extension of a lease can run into the cost of tens of thousands of pounds. This does all depend on who your freeholder is and legal costs, but this does seem to be the running ballpark figure.
If you don’t extend the lease before it hits 80 years, it will cost you considerably more, as it does attract marriage value.
You Pay Service Charges, Which Do Rise
Service charges are part of any lease agreement, the cost that you pay annually depends on how big the property your flat is in, and how many other dwellings it contains, who the managing agent/freeholder is, and if there are big maintenance works in the pipeline.
Service charges DO rise. Whilst the cost should include things such as property maintenance, cleaning, adhoc repairs and building insurance, service charge accounts are usually projected for the year ahead so many costs can be included, but not actually carried out.
Leaseholders unfortunately have no control over service charges, they can, and do increase which suddenly makes that first time buyer decision much more challenging as monthly outgoings increase.
Leases With Less Than 80 Years Left Become An Expensive Problem
Lease term is incredibly important when purchasing a leasehold property. You need to find out from the get go how many unexpired years are left on the Lease.
When the lease has less than 80 years left it can become a very expensive problem, creating an almost unsellable and un-mortgageble property.
As the lease becomes a ticking time bomb, it attracts marriage value, this means if you extend, the freeholder is entitled to 50% of value which the extension adds to the property. The less amount of time you have left, the more expensive it becomes if you want to extend the lease, costing in the region of thousands of pounds.
Leasehold Properties Tend To Have A Shared Entrance
Blocks of flats tend to have a shared, communal entrance that all owners, tenants use, although this is not always the case. Having a shared entrance means that you can’t just rely on yourself to keep the communal area tidy and presentable in between regular cleans that are part of your service charge.
It can create commotion and noise during the day and evening, especially if your flat is nearby the communal entrance. This can become incredibly frustrating when people do come and go at all hours of the day. You might not be able to choose your neighbours, but this is something you just don’t encounter with owning a house.
Freeholders Are NOT Regulated
Freeholders are not regulated which means they can charge leaseholders whatever they like, and there is nothing you can do about it. Lease extensions, deed of variation, requests for pets etc are all things that will need to be requested from your freeholder and will come with a charge. It will vary from freeholder to freeholder, but well established firms can charge into the tens of thousands of pounds for some of these services.
Before purchasing a leasehold property, you also need to find out who the managing agent is going to be. The freeholder can appoint whoever they want to, but if the managing agent is one of the well known managing agents who has a very poor reputation, you should consider not proceeding with the purchase. You must do your own homework, which could save you untold stress and trouble in years to come.
Conveyancing Fees Can Be Higher On Leasehold Properties
The fact that some conveyancers won’t even practice with the purchase or sale of leasehold properties tells you everything you need to know.
The sale of a leasehold property takes a lot longer than a conventional house sale due to the lease that is involved, and everything else that comes with that. Because of the additional work, and time that is required with a sale involving a leasehold, conveyancing fees are usually somewhat higher.
You Can Have Someone Living Above, and Below You
If you’re in a block of flats, unless you’re on the top floor, you will have someone living above you which can cause a whole world of problems. If the flooring above is not adequately insulated and carpeted, you will consistently hear your neighbours walking back and forth, any exercise they partake in, and hopefully not their conversations, and TV too.
It can be just as much a problem having someone living beneath you as noise, and smells travel. Unfortunately, you can’t control who your neighbours are. You might never have a problem, but you also might end up with neighbours from hell. And, if you live somewhere where there are Airbnb properties situated, then you never know who you could have from one night to the next.
It’s important to go in with your eyes open when purchasing a leasehold. If you are serious about going forward with a purchase of one, the main questions you need to ask and educate yourself on with the prospective property would be;
- 1. How many unexpired years are left on the Lease (do not ask how long the Lease is).
- 2. How much is the expected/current annual service charge?
- 3. How much is the ground rent and, if not zero/peppercorn, what calculation is used for future increases?
- 4. Who is the current Managing Agent?
Do your homework and ask the right questions before entering into a leasehold property. For further information on leasehold properties, please do join the National Leasehold Campaign group over on Facebook.