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Essential Factors to Consider Prior to Purchasing a Leasehold Property

Essential Factors to Consider Prior to Purchasing a Leasehold Property

10th July 2023

The leasehold system is widely embraced by both homeowners and investors, with approximately 4.6 million leasehold homes in England, forming nearly 20% of its housing stock. Of these properties, 68% are apartments and maisonettes, while the remaining 32% are houses. London houses the majority of these homes, holding 34% of the total.

Despite past controversies surrounding the ground rent scandal, leasehold ownership has received a significant boost due to recent government intervention. Starting from June 30th, 2022, all new residential leases in England and Wales will no longer include ground rent charges. This is just the beginning of a series of anticipated reforms to the leasehold system.

Considering investing in a leasehold property in London?

It's essential to understand what exactly it entails to make a sound financial decision. At Taylor Freeman Kataria we have a team of experts with a broad range of property and surveying expertise at your disposal. We can assist with Building Surveys, Refurbishment & Restoration Advice, Licence to Alter, and all Party Wall Surveyor matters. Here are some important questions to consider when purchasing a leasehold property.

What sets leasehold apart from freehold?

Freehold ownership includes both the building and the land it stands on. On the other hand, a leasehold ownership allows the leaseholder exclusive rights to live in the property for a specified term, although they don't own the building. When the lease expires, the ownership reverts to the leaseholder. However, leaseholders generally have the legal right to extend their lease.

How long does the lease last?

A leasehold property is a depreciating asset. The price should reflect the remaining years on the lease. Mortgages become hard to secure, and renewing a short lease can be costly when the remaining term drops to around 80 years. It's crucial to know the remaining years, whether a lease extension is needed and its potential cost.

What's the ground rent?

Annual ground rent payments are required for leasehold properties. These can be fixed or periodically increased. In light of the recent scandal over high ground rents and harsh escalation clauses, this needs careful checking. If the ground rent exceeds 0.2% of the property's market value, it could affect the property's saleability and mortgageability.

What are the lease terms?

Understanding the rights and obligations outlined in the lease document is critical. Legal advice is recommended for clarifying restrictions on business operations, pet ownership, subletting, and to ensure the lease mandates freeholder responsibility for building and common area maintenance.

What other costs are involved?

Ground rent, service charges for building and common area upkeep, administrative fees for necessary freeholder consents and approvals, and lease extension costs are all part of leasehold ownership. Detailed records of current and past service charges are crucial to understanding the regularity and magnitude of fluctuations.

What is the property's condition?

A comprehensive inspection by an independent surveyor is highly recommended to gauge the property's condition and state of repair. Taylor Freeman Kataria provides a variety of building surveys tailored to your needs. Also, inquire about the future expenses for the building and the existence of a sinking fund for upcoming works.

Planning to rent the property?

If you plan to rent out the property, pay special attention to the lease's sub-letting clauses. Restrictions may limit your potential rental market, so these must be considered when calculating the likely rental yield. Bear in mind that gross leasehold yields should be discounted by around 20% before comparing them to freehold yields.

Get in Touch

Leasehold ownership can work perfectly for both homeowners and investors in London, provided thorough due diligence is conducted on the property condition and lease terms. Exercising caution and discernment initially is the best way to ensure a successful purchase and ownership. For expert advice on your next leasehold property purchase, please contact Taylor Freeman Kataria.

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