LEGAL MATTERS
THE DANGERS OF BUYING LEASEHOLD
EVEN before the recent economic downturn, with the development of sometimes brownfield sites, a trend was established to sell properties on long leases rather than selling the freehold. The difference is important. If you own the freehold, then you own the property and the land that it’ s built on. It’ s yours, and whilst you may have to pay a service charge if you live on a development where there are common areas to maintain, you won’ t have to pay any third parties to live there.
If you buy a lease, even if it’ s for 125 years, the legal position is different. You are essentially buying a right to live at someone else’ s property. That someone else is called the Freeholder; in other words a landlord. The freeholder may still be the original developer or may be a person who has purchased the freehold as an investment. Either way, you will have to pay a ground rent, as specified in your lease. This ground rent is probably low and is usually fixed for 25 years. However the lease will probably also specify that you pay a service charge to maintain areas common to the development. These range from lighting and decoration in hallways in blocks of apartments, to large individual houses that are sold on a leasehold basis on developments with left over pieces of land that the developer wants to abdicate responsibility for.
The issue of service charges can arise in both freehold and leasehold properties and the problems are the same. The service charge is sometimes administered by a management company, usually a third party, and is in turn collected by a managing agent. It is these managing agents who set the service charge budget year on year( unsurprisingly it usually goes up year on year) and how the money is spent( cleaning windows, cutting grass and administration fees). The worst possible case scenario is that you have little control over rising costs of service charges and to add insult to injury you can actually see what the money is being spent on.
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The management company or agents can stop you selling your house if your payments aren’ t up to date. To get the necessary information to sell your house can cost £ 100s.
Some owners decide to take the matter into their own hands, taking over the management company so that they can set and spend the budget. For this to work, regular accounts must be kept, and the striking off of the management company at Companies House for the non filing of accounts can cause a real problem. Even worse, if the arrangement involves 3 or 4 individuals rather than a company owning the freehold, if one of these people refuses to co operate, the property can’ t be sold with its share of the freehold.
The advice is simple. If you are buying leasehold or if you are buying freehold with a service charge, pause a moment to consider the cost year on year and whether the arrangements in place will suit you and your new neighbours.
Andrew Burrows Partner Residential Property 01538 399 332
44 Leek Life July / August 2013