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The costs of a leasehold explained

At The Sethi Partnership Solicitors we have seen a significant rise in the purchasing of residential leasehold properties vs. freehold properties in recent years. The appeal for many buyers is that these flats are brand new, or in the process of being built. It is important to note that there can be pitfalls to buying leasehold, but here in this article we will look at the costs connected with the purchase and the issues that buyers should be aware of from the start of the process.

One thing to be aware of from the outset, is that with a leasehold property the buyer owns the property for a fixed period of time. There is a legal agreement between you and the Landlord/Freeholder (the ‘Lease’) that sets out a number of agreements and conditions in connection with the use, maintenance and costs of the property throughout the term that the lease is granted for. Usually residential leases are for a period of anything from 99 – 999 years.

What are the typical Costs found in a Lease?

Ground Rent
You may be required to make regular payments of ground rent to the Landlord, or their appointed agents. The ground rent is usually fixed, although this may be subject to an increase in years to come so it is important to know the current and future costs payable for ground rent. We have found that a number of New Build Flats have a very high ground rent which you should be aware of.

Service Charges
These are costs which are spent by the Landlord or their instructed agent each year for the upkeep of the building as a whole, including things such as cleaning of the common areas. The service charges usually contain the building insurance contributions, but can sometimes be quoted separately. Service charges are usually a fixed amount/percentage/reasonable proportion of that amount. It is important that you are provided with up to date service charge accounts and that there are no arrears or any anticipated rise in the same.

Substantial Works/Section 20 Works
It is important to be aware of any proposed works to the building that are significant, e.g. roof repairs. Usually if the Landlord is proposing such works a Section 20 Notice will be issued to all the Leaseholders advising them of the proposed works and the associated costs. The Landlord can look to the Leaseholders for payment of these works.

Sinking Fund/Reserve Fund
There can also be a reserve/sinking fund’ in place, which is a fund where a proportion of the service charges are paid into and accumulated to save for any significant works. Usually works such as redecoration can be recouped from the reserve or sinking fund. More substantial works can be most costly and in that event the Leaseholders would be expected to contribute towards such works. Please note that notice and consultation must take place in the event of such works.

It is important to be aware of any proposed works in your overall budget.

Administrative Charges
The Landlord or their Managing Agent will usually charge an administrative fee in connection with buying, selling, or use of the property (including re-mortgage). With a purchase of a Leasehold Property, the purchaser will need to be aware of the administrative costs in connection with the documents required to be served on the Landlord or Managing Agent to inform them of the new owners details. The costs are usually detailed in the LPE1 form which will be provided during the initial purchase procedure. The Landlord or Managing Agent will require notice of the incoming Tenant’s Assignment and any charge.

There may also be a fee payable to issue a document called a ‘Certificate of Compliance’ to assist with registration of the change of ownership. If a Deed of Covenant is required, that is a contract between the incoming Leaseholder and the Landlord or Management Agent to confirm that the Lessee (the new owner) will continue to comply with the terms of the Lease and payments of rent and service charges.

If you are required to become a member of the Management Company there will also be an administrative fee payable for that membership, or for the issuing of share membership to become a member of the Management Company (if applicable). If under the terms of the lease, a Licence to Assign is required that is a licence from the Landlord or Managing Agent to sell which requires a vetting of the new owner, a fee will be payable. If the property is a retirement flat there could be an ‘exit’ or ‘transfer’ fee which is a percentage of the value.

A prudent buyer should always be aware of such costs in managing their overall budget for the purchase, the stamp duty, registration and legal fees. For more detailed advice on any Residential Leasehold matters, contact Inderdeep Johal in our conveyancing department for specialist and professional advice on 020 8866 6464, or email indu@sethi.co.uk.

This article was written by Sethi Partnership Solicitor, Inderdeep Johal, and first published in the Apr-May issue of India Link International magazine.