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9th September 2021

Buying a leasehold property

Buying a leasehold property

Following the Grenfell Tower fire and the independent review of the building regulations and fire safety, if you’re buying a flat, now or in the future, there are several matters to consider. Residential Property Solicitor, Robyn Reid, and Property Litigation Solicitor, Molly Frankham, discuss the risks involved.

What are the main differences in the conveyancing process between buying a freehold or a leasehold property?

The main difference in the conveyancing process between buying a freehold or leasehold property are the additional checks that are conducted by the solicitor representing the buyer. In addition to the ordinary checks when buying a freehold, in the case of a leasehold there may also be ground rent and service charges that the prospective leaseholder may have to pay to the freeholder.

The conveyancer for a party who wishes to purchase a leasehold property will also need to verify whether there are outstanding planned improvements to the property, and if the buyer will be required to contribute to the cost. For example, if the purchaser was buying a leasehold flat, and the freeholder wants to re-carpet communal areas, they may require compensation for the leaseholder’s share of the costs. Additionally, if the buyer is purchasing a leasehold flat, the conveyancer will need to obtain a copy of the block buildings insurance policy and ensure the buyer of the leasehold is aware of the freeholder’s obligations.

By comparison, freehold properties have no lease to comply with, there are no third parties or management companies to deal with, simplifying the process. As a result, there less additional costs and no charges for management agents.

What are the main differences in owning a freehold and a leasehold property, and what is commonhold?

The main difference in owning a freehold and a leasehold property is that the freeholder owns both the property and the land it stands on for an unlimited time. However, a leaseholder only owns the property and has no ownership of the land. Additionally, the leaseholder’s ownership of the property is also limited to a set period.

As a result of not owning the land, the leaseholder will normally have to pay an annual ground rent to the freeholder. Leaseholders must also obtain permission for major works done on their property. In some cases, freeholders may also insert conditions on their leases that can prohibit the leaseholder from owning pets or subletting for example. Ultimately, if a leaseholder does not satisfy the terms of the lease, then the lease can be terminated. Another important difference in owning a leasehold as opposed to a freehold property, is that while some leaseholds can last decades or even centuries, the value of shorter leases can drop rapidly. For example, a flat with a lease of 60 years is worth upwards of 10 per cent less than if it had a lease of 99 years.

Alternatively, given that the freeholder owns both the property and the land there is no requirement to pay annual ground rent. They also have the sole responsibility for maintaining the building. As a result of the fewer restrictions of freeholder, the buying and selling process is also much more streamlined than in the case of a leasehold.

Commonholds were created by the Leasehold Reform Act 2002 and sought to overcome some of the weaknesses of leaseholds. A commonhold is where multi-occupancy buildings are divided into several freehold units, so each individual flat owns its own freehold. The Commonhold Association (a company owned by the freeholders of the flats) own and manage the common areas of the flat, such as the staircase and hallways. The result is that there is no superior freeholder, instead the owners of the flats manage the common areas of the property jointly. This arrangement has the effect of protecting would-be leaseholders from conflict with landowners and the problems of short leases.

What impact will the Leasehold Reform Bill have on future leaseholders?

The Leasehold Reform (Ground Rent) Bill (“the Bill”) is advertised by the Government as the Bill that will “put an end to ground rents for new, qualifying residential leasehold properties”. The Bill aims to put in place law that any new residential long lease where ground rent is demanded, will be limited to no more than one peppercorn per year – essentially meaning leaseholders will not receive ground rent demands.  There will be financial penalties for landlord who do not comply of between £500 and £5,000.

What impact could the Building Safety Bill and the Fire Safety Act 2021 have on leaseholders?

The Building Safety Bill (“the BSB”) and the Fire Safety Act 2021 (“the Act”) have far reaching consequences for leaseholders, freeholders, management companies and developers. The Act is relatively short but has significant consequences for those responsible for fire safety. The Act amends the Regulatory Reform (Fire Safety) Order 2005 to the extent that the external walls of a building, and fire doors, must now be assessed as part of fire risk assessment. The Act also requires owners and managers of relevant buildings to ensure fire risk assessments are reviewed and updated. The effect on leaseholders will likely mean that they might feel safer in their homes, but at potentially a greater cost – as generally, the costs of any works and assessments will be recoverable through service charges.

The BSB is not yet law, but is expected to pass soon. The BSB creates obligations in respect of qualifying multioccupancy high rise residential blocks from construction to occupation. Including (but not limited to):-

  • Establishing the Building Safety Regulator (BSR) as part of the HSE, with wide ranging powers relating to building safety, especially in relation to the safety of “higher-risk buildings”.
  • Creating five duty holder roles responsible for the safety of a building and compliance with Building Regulations during design and construction (client, principal designer, principal contractor, designer and contractor), together with the concept of an Accountable Person who looks after higher risk buildings once they are occupied.
  • Introducing the role of Building Safety Manager, to support the Accountable Person during the building’s occupation.
  • Placing some limited obligations on residents, relating to safety and complying with requests from an Accountable Person in the conduct of their duties.

The BSB will apply to new and existing buildings where relevant. It currently includes a very controversial clause that enables a section to be inserted into leases which states that the cost of complying with the terms of the BSB can be recovered from leaseholders as a separate building safety charge. This, of course, is very worrying to new and existing tenants.

I own a leasehold property which passed all safety inspections before completion. The cladding has since been deemed unsafe. Who is liable for the costs to make the necessary replacements?

Who pays for the cost of remedial work relating to cladding will depend on its height. If the building is over 18m, there is a glimmer of hope for government funding – although both of the larger funds have now closed. There is talk, though, of government backed low interest loans. If the building is smaller than 18m, there may be the option to explore third party claims against developers for installing unsafe cladding (subject to limitation considerations). If these options are not available, then consideration needs to be given to the wording of the lease as to the extent of what can be recovered via the service charges.

How can Ellisons help? 

For most people, buying or selling their home is the largest financial transaction they will ever make, so it is important to get it right! Our Conveyancing Solicitors in Essex and Suffolk offer a wealth of experience and expertise in all aspects of residential property work. Contact the Ellisons’ Residential Conveyancing team today on 01206 764477 or email us at [email protected].

If you have any queries in relation to purchasing a flat where you believe Building Safety may be an issue, please do not hesitate to get in touch with our Building Safety Team via Ian SeeleyJoe BrightmanMolly Frankham or James King. Or drop us at email at [email protected].