On leasehold properties, ensure the client fully understands the lease they are taking on – or they could pay a high price
Recently I found myself dipping into the world of leasehold properties, after a friend inherited her parents’ large flat in a much sought-after area.
The term remaining on the lease – not something she had ever thought to check – is only 45 years and leaves her with a depreciating asset, with an upfront cost of £35,000 to renew the lease. This is not an option financially so she is contemplating a potentially lower sale price to attract a buyer who can afford to renew the lease.
This reduces the number of potential buyers for the property because most lenders require 30 years remaining at the end of the term. Therefore, assuming a 25-year term, a minimum of 55 years would be required at the outset and some lenders require 70 or 85 years.
While cash buyers may be able to snap up a bargain, this case highlights the need to make sure the client fully understands the lease they are taking on, because there will be a high price to pay if they do not.
In 2015, 43 per cent of all new-build registrations with the Land Registry in England and Wales were leasehold, and 3,000 of those were detached houses. The minefield of service charges, ‘sinking funds’ (money charged separately and held for major works) and buildings insurance charges requires thorough checking on behalf of the client.
Clients have the right to request a detailed breakdown of the service charge and paperwork to support it, but there is no legal obligation to supply it. The landlord holds all the cards in agreeing to extend the lease and deciding how much to charge, although under the 1993 Leasehold Reform Act most owners of flats are entitled to extend their lease by 90 years at a “fair market price”, once they have owned the flat for two years
This is something to consider with clients who may be in a position to extend their lease now in order to protect their current assets, or even, as in this case, their future assets as part of a wider mortgage review.
Sally Laker is managing director at Mortgage Intelligence