Quiz - how well do you understand your lease?
Understand the key things you should know about your lease. If you are a purchaser, this can help make sure your solicitor has covered all of these points and explained them clearly to you.
If you are buying a leasehold flat your estate agent should pass on any information they have about the property and its lease. This can include, but is not limited to:
- The ‘term of the lease’
- The ‘demised premises’
- Have any alterations been made to the property?
- How much is the ground rent?
- Does the ground rent change?
- How much are the Service charges?
- Is there a ‘sinking fund’ or ‘reserve fund’?
- Is there any major work scheduled for the building?
- Are there any ‘administration charges’?
- Are there any restrictions on how you live in and use the property?
The term of the lease
If you are looking to buy a leasehold flat it is important that you know how many years remain on the lease. The remaining years left of the lease are known as the ‘term of the lease’ and this is significant, as a shorter lease can impact the value of the property and increase the price of extending it. If the property has a short lease it might also be difficult to get a mortgage, as the property is less attractive to mortgage lenders.
The value of a leasehold flat reduces as the term of the lease gets shorter. If the lease term comes to an end you have certain rights if you live in the property. If you are to continue living in the property you are likely to have to pay market rent.
If you are considering a leasehold flat with a term of less than 99 years, you should think about extending it. A lease extension is particularly important if the lease has less than 80 years remaining, as it is more expensive to extend. When the term of a lease drops below 80 years, the cost to extend it increases because ‘marriage value’ becomes payable. Marriage value is the increase in the value of the flat arising from the grant of the new lease.
You have the legal right to a lease extension once you have owned the property for two years. To exercise this right, a formal process must be used that requires you to serve a specific notice on your landlord. If you are purchasing a property, and the lease needs extending, it is possible for the seller (if they have owned the lease for at least 2 years) to start the formal lease extension process and you then continue it after you have purchased the leasehold flat. This means that you will not have to wait 2 years to extend the lease. This has to be done at the same time as the purchase of the property is going through.
If you are in this situation it is advisable to get professional help from an experienced solicitor.
What are the ‘demised premises’?
If you are planning to buy a leasehold flat it is important that you know what is included in the ‘demised premises’. The “demised premises” is what is included in the leaseholder`s ownership under the terms of the lease. It is usually defined in the lease, and this will typically include the interior of the flat (including the surface of the interior walls) and up to the ceiling above and joists below. It will not usually include the structural, external walls, or roof, although each lease should be checked for the specific details. For example, a loft space may sometimes be included in the demised premises, sometimes not.
Areas of a building that are not part of a leaseholder`s demised premises will, normally, be part of the landlord`s retained property, which is part of the freehold. Examples include the external and structural walls of the building and the roof.
If you wish to carry out alterations or improvements, the lease needs to be examined carefully to check what is included in the demised premises. For example, if you want to add an extension to the property and it involves cutting into an external wall that belongs to the landlord, the landlord may refuse the alterations or ask for a payment as a condition of granting permission to you.
Have any alterations been made to the property?
If you are planning to buy a leasehold flat it is important to read through the lease to work out if any alterations have been made to the property. If the previous owner has made alterations to the property without obtaining consent you may be forced to pay the costs of obtaining retrospective consent from the landlord.
To check if the property has been altered you should review the original lease’s plan and compare it to the current layout of the flat. If you make an offer on the property which is accepted, the seller’s solicitor should send you a contract pack including a ‘Property Information Form’ completed by the seller and the ‘Leasehold Property Enquiries form’ completed by the landlord or their managing agent.
These two forms should disclose any building works to the property, and the landlord or managing agent should disclose if consent has been given to alterations or additions to the property. You should also check that building regulations approval was obtained for any alterations. If approval was not obtained, your solicitor should request an ‘indemnity insurance policy’ from the seller. The indemnity insurance will protect you (and subsequent owners) against legal action if the local authority takes enforcement action.
How much is the ground rent?
As with any costs, you should check how much the ground rent will be before you commit to purchasing a leasehold flat. If you need to pay ground rent, it will be stated in your lease along with the due date by which the rent should be paid.
Does the ground rent change?
The lease may initially oblige you to pay a fixed amount of ground rent. Ground rent is what a leaseholder pays each year to their landlord. It can be a small amount (£10), or substantial (£200) per year. In some cases, the ground rent can increase considerably over short periods. Your solicitor or conveyancer should advise you if this is the case, but it is a good idea to ask early on how much the ground rent is, whether it changes (and when) as well as the consequences of any increase.
If the ground rent does change, the basis of that change should be set out in the lease, for example as a percentage, or by reference to an inflation-measuring index, such as RPI or CPI.
For most leasehold properties the ground rent will be reviewed in line with the Retail Price Index (RPI). In some leases, the ground rent increases over time regardless of inflation.
Some lenders will only offer a mortgage on properties with an indexed ground rent or similar. Lenders may be reluctant to offer a mortgage on a leasehold flat with excessive ground rent to avoid issues of non-payment down the line and to ensure future saleability of the property.
How much are the service charges?
Service charges are typically payable by a leaseholder as a share of the cost of managing and repairing the building. Service charges allow the landlord to recover the costs of providing these services under the lease.
Your obligations regarding the service charges and the landlord’s obligations regarding managing and repairing the building should be set out in the lease. The charge normally covers the cost of services such as general maintenance and repairs, buildings insurance and, if these are provided, central heating, lifts, porters, and lighting and cleaning shared areas, and so on. The charges may also include the costs of management services provided by the landlord or by a professional managing agent and contributions to a reserve fund.
Is there a ‘sinking’ or a ‘reserve’ fund?
As part of the service charges, you may also be asked to contribute towards a ‘reserve fund’ or ‘sinking fund’. The purpose of these funds is to build up a sum of money to cover the cost of irregular and expensive work such as decorating the outside of properties, carrying out structural repairs or replacing the lift.
Leases sometimes say how much must be contributed to the reserve fund each year, but usually they do not, and it is left to the landlord to decide the amount of the contributions. If the lease makes no provision for any type of reserve fund you may be able to find the information in the buyer’s leasehold information summary (LPE2 form).
There are usually two reasons for maintaining a reserve fund. The first is to make sure that all tenants contribute to the cost of major work, not just those who are living in the building at the time it is carried out. The second is to even out the yearly charges, avoiding large one-off bills, and to help leaseholders’ budget for these costs.
Is there any major work scheduled for the building?
If you are planning to buy a leasehold flat, you need to find out if there are any major works planned for the building and what the works will be. You should also ask if the works already have the funding in place (e.g., through a reserve fund), or whether you will be liable for the cost of the works in the future.
It is important to check this detail, as service charges for major works can be large. Your solicitor should check with the freeholder or managing agent if they have already set up a fund to pay for future major works. Sinking funds are useful as they ensure that any unplanned major works or big expenses are covered.
Are there any ‘administration charges’?
An Administration charge is any money the landlord demands from the leaseholder for granting approvals under the lease, for the provision of information or documents, for dealing with a failure by the leaseholder to pay ground rent or service charges, or in connection with a breach of the lease.
If you are looking at a leasehold flat it is important to check if there are administration charges, what they cover, and what the amounts are. If you have any concerns about the administration charges of a property you are considering buying, your solicitor or conveyancer should be able to review the lease and advise you.
Are there any restrictions on how you live in and use the property?
If you are thinking of buying a leasehold flat, it is important that you ask your conveyancer or solicitor to examine the lease thoroughly and to flag up the existence of any ‘covenants’. Once you are a leaseholder, you, and the landlord, are bound by these covenants.
A covenant is effectively an obligation owed by one party to another. ‘Positive covenants’ are obligations to do something, such as to contribute towards a sinking fund. ‘Restrictive covenants’ basically bar certain things from being done, such as keeping pets or using the property for business purposes.
Before you purchase a leasehold flat, you should consider whether any covenant may be unattractive to a future buyer when you come to sell. For example, a covenant prohibiting extensions or alterations may discourage future buyers.
If you are concerned about any covenants in a lease you should speak to your solicitor or conveyancer for advice.
Take our Understanding your lease quiz, to find the parts of the lease that you would like to understand better.