Buying or Selling a Leasehold Property – Causes of and Ways to Avoid Frustrating Delays

This is a guest post written by James Swede. James is Managing Partner and head of property law at Darlingtons, a law firm in London well known for all aspects of property law.

There are few things in life as exciting and stressful as buying or selling a property. Much of the stress typically arises after a deal is in place. By that point, typically, both buyer and seller are very keen to push ahead to exchange contracts and completion as soon as possible. Delays are often deal killers and the blame is often given to lawyers. However, there are many situations where there are legal issues which are beyond the lawyer’s control.

The earlier you make yourself aware of potential delaying issues before buying or selling the better opportunity to resolve things before a delay creates a hold-up. This is much more the case, obviously, for a seller, who can often take steps before or while marketing the property, to resolve issues and prevent delays later.

Legal issues can arise with any property, whether house, flat, freehold or leasehold and are more common than many owners believe. However, it’s true to say that there are a lot more legal issues that can arise with leasehold properties.

How many properties are leaseholds?

It comes as a surprise to many people that leasehold properties comprise houses as well as flats.

Last year the Department for Communities and Local Government reported that there are 1.4 million leasehold houses and 2.9 million flats in England. In relation to flats, these can range from large purpose built developments such as many of the new build developments seen in UK cities through to converted houses.

In terms of converted houses, these are where many of the potential issues arise which can delay property transactions. Converting a house into 2 or more flats became far more common from around the 1960’s as a way of maximising property sale value and it’s especially common in London, where 72% of properties are now flats compared to 36% in the rest of England.

Most common leasehold pitfalls

The single most important and increasingly common issue is the remaining length of the lease.

When houses are converted and flats sold off on leases, the person converting and then selling may retain the freehold but the leases are always long leases so in reality the freehold is worth little and is of residual, abstract value.

However, with many houses having been converted 30,40 or 50 years ago, typically with leases granted of 125 years, each year more and more go into the zone of having just over 80 years left.

The importance of this is that before selling (and this, of course, is also highly relevant to the buyer – see below) it is both desirable and in many cases necessary to extend the lease back up to at least 99 years and more commonly 125 years left to run. There is a statutory right to do this, subject to process but in reality, most extensions are agreed by consent, in terms of the premium payable, because freeholders know that they can only charge so much if there is no agreement and the statutory process is adopted.

The most important things to know about the lease extension process are:

• There are 490,000 flats which require leases to be extended soon in London alone. There is a current Appeal case, which depending on the outcome, could mean a 30-year saving when extending. The typical premium, although it varies, if a lease still has over 80 years left is somewhere between £7,000 to £12,000.00.
• to be eligible to extend your lease you need to have owned for at least 2 years and the lease term must have been for more than 21 years. This often means that a seller starts the formal process and then assigns the benefit to the buyer, who will not have the requisite 2-year ownership on the purchase.
• Many mortgage lenders will not lend on short leases which means either the lease must be extended before the transaction or a suitable firm agreement to extend straight after completion with money set aside, either paid for by the seller by a reduction or allowance in sale price or by a bigger mortgage.
• The process starts by instructing a specialist valuer to report on the premium. This generally costs between £500 to £750 plus VAT and on top of this, the leaseholder will have to pay the landlord’s legal and other costs as well. Budgeted costs in total should be about £3,000.00 on top of the premium.

For more on the process involved a good summary can be found here.

Other defects in leases

There are 4 other common problems that arise with residential long leaseholds:

• In very large blocks and typically blocks where flats are part privately owned and part Council owned major works issues and costs can be problematic. The freeholder under the lease may decide. For example, that all windows for flats need to be replaced or perhaps lifts or common parts. The leaseholders must pay for this and the costs can be significant. So when buying it’s important to find out about any potential major works as early as possible in the buying process.
• Defective or incorrect lease plans – these are more common than you may think and to correct a wrong plan, a deed of variation would be needed which can take time and add cost.
• With converted houses or leases which started say 20,30 or 40 years ago, even though the lease terms were fairly standard at that time, they are no longer acceptable to lenders today. A mortgage lender may insist on lease terms being varied to meet its requirements which again causes frustration, delay and cist at best. The solution is a deed of variation of the lease where possible.
• Where the current owner or even a previous owner (and the issue was not spotted by the lawyers who acted when the current owner bought) has breached the lease, perhaps by making internal alterations without the freeholders’ consent or doesn’t have necessary Building regulations sign off.

 

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