Properties can be purchased as a leasehold and for this reason as the owner of a leasehold property it is in your interest to understand the legal status of ownership of a leasehold property.
Lease hold properties can be purpose built flats, flats in converted houses, flats and maisonettes above retail premises or indeed many houses are sold as leasehold properties.
Typically a property would be sold as a leasehold where there are interdependent relationships between property owners, for example the hall, stairs and landing in a block of flats or a joint passageway between two terrace houses where there is no other access to the rear of the property.
Owning a leasehold property should not be of any concern as long as the rights, reservations and covenants contained in the leasehold title are suitable to the needs of each of the leaseholders within the development, flat or neighbouring properties.
The lease is usually granted out of what is known as the freehold title and the owner of the freehold title is the person who grants the lease, this person is known as the Landlord. The owner of the leasehold property is referred to as the Tenant.
The landlord can either be a person, a company, a housing association or a Local Authority for example.
In some situations the tenants jointly own the freehold or take shares in the company that owns the freehold.
Landlord – An individual or company who owns the freehold land. Sometime referred to as a Lessor or Freeholder.
Tenant – The current owner of the leasehold property, sometimes referred to as the Lessee or Leaseholder.
Term – The length of the Lease.
Residue – The time remaining on the Lease. This can be anything from 999 years with a house to 125 years with a modern flat.
Ground Rent – The annual payment made to the Landlord in accordance with the requirements of the Lease.
Service Charge – A periodic charge, usually monthly, paid to a management company for the repair and maintenance of the common parts of a development.
Sinking Fund – This is a fund which is reserved in advance in anticipation of major works, for example replacement of windows, roof or other high cost items used jointly between the leaseholders.
Forfeiture – This is the Landlord’s right to obtain possession of the Lease if the covenants or promises in the Lease are breached, the most common breach that would lead to forfeiture is non payment of rent or service charges.
Notice of Assignment/Charge – Where a property is held on a Lease notice must be given to the Landlord when a transfer takes place. The landlord usually charges an administration fee for receipting and returning the seller’s notice of assignment. When purchasing with the assistance of a mortgage the Council of Mortgage Lender Rules requires notice to be given to the Landlord and a receipt for the notice be given by the Landlord wherever possible.
Compliance Certificate – Quite often the Landlord will put a restriction on the leasehold property requiring a certificate be provided by the Landlord before the property can be transferred into the new owner’s name. Where a compliance certificate is required your solicitor will obtain all of the information necessary to obtain the certificate once completion has takenplace. There is usually a fee payable in respect of the provision of this certificate.
What is a Lease?
A Lease is a Deed entered into between the Landlord and Tenant giving ownership of the property to the Tenant for a fixed period of time and subject to certain conditions. Once a Lease has been entered into it is often difficult to change the conditions of a Lease, particular where there are a number of properties let on similar leasehold terms. The Lease sets out the relationship between you as the Tenant, the Landlord and other tenants within a development.
Leasehold ownership is usually a long tenancy containing the right to occupy and use the property exclusively for a period in time (“the term”). The term of a Lease is usually 125 or 999 years and the property can be transferred during the term.
The remaining period of the term is known as the residue of the Lease and in most cases the owner of a residential property can renew or extend their Lease under a legal right to do so.
Where a Lease is held on a short-term, depending on the residue remaining, some lenderswill be reluctant to lend on a leasehold purchase. However for the vast majority of cases lenders will be agreeable to fund a leasehold purchase.
As mentioned above current legislation entitles a tenant to request an extension to the lease term, a further 90 years once they have owned the property for 2 years or more. Quite often a seller may start the process of purchasing a leasehold extension and then sell the property and assign the right to the extension to the buyer at the same time as selling the property.
A Landlord will of course be entitled to compensation in return for the lease extension and the amount of compensation depends very much on the length of the residue remaining. If the residue is less than 80 years then this can add further costs to the purchase and this should be taken into consideration when purchasing a leasehold property with a residue of 100 years or less. The process of extending your lease can be technical and you will be required to pay the Landlord’s costs as well as your own together with the compensation to the Landlord for providing the lease extension.
A lease will usually contain a requirement for the tenant to pay what is known as a Ground Rent to the landlord. The Ground Rent is a requirement of most leases and is payable usually on an annual basis. Some leases are subject to increasing Ground Rents depending on when the lease was entered into, some contain fixed incremental increases and some increase by way of a formula usually connected to the Retail Price Index or a similar index.
Some leases however particularly older leases of residential houses contain a rent known as a peppercorn. A peppercorn is a nominal sum, usually £1.00, and is often neither paid nor collected.
A service charge is a payment made by the tenant and the tenants of neighbouring properties within a development to the landlord or management company, the payment is contribution for the maintenance and repair of those common parts used by all tenants within a development including the roof, foundations, the common parts to the property, lifts, estate staff, lighting and cleaning of the common areas, usually parking spaces, roads and other jointly used property and services.
Service charges may vary from year to year, they can go up or down and details of what can and cannot be charged is usually set out in the lease. Service charge is normally paid in advance on a estimate of what the service charge is liable to be for the year and then adjusted when the accounts for the previous year have been finalised.
The law allows a management company only to recover costs for service that are reasonable.
Under current legislation tenants have rights to challenge service charge that they feel are unreasonable and when considering whether or not to purchase a leasehold property it is important to find out what the current and future ground rent and service charges are likely to be.
As part of the work carried out on your behalf your solicitor will obtain this information prior to you entering into the contract and purchasing a leasehold property and an apportionment of service charge and ground rents payments will be made on completion. What this means is that where a seller has paid service charge and ground rent for a period after completion he will be reimbursed.
As a tenant of a flat with common parts you will be obliged to enter into a Deed of Covenant or more commonly the lease itself will contain covenants for your contribute to the cost of maintaining and managing the building.
The lease will also place restrictions on the use and occupation of the property and will include covenants for the protection and benefit of all occupiers of the property including covenants such as not to cause a nuisance to owners of neighbouring property, not to obstruct halls or passageways and other such covenants.
Some leases contain covenants specific to the type of accommodation, for example where the development is for the occupation of elderly persons then there may well be an age restriction on either ownership or occupation of the leasehold property and it is important when considering purchasing that such covenants are identified and considered early in the transaction.
There are usually covenants contained in a lease made by the landlord and these are promises by the landlord for such things as being required to manage and maintain the structure and common parts of a property, to collect service charge and to carry out or cause the maintenance and repair to be carried out upon the building.
The basic structure of a lease contains the following:-
- A description of the property.
- The rights that come with the ownership of the leasehold property.
- The reservations which are rights that are excluded and/or reserved to the landlord or owners of neighbouring property.
- Covenants – which are promises made by both the landlord and tenant relating to the use of the development.
Agreements – which, although are not promises, are agreements between the landlord, tenant’s and other tenants as to certain aspects of how the development is managed.