The additional/hidden costs of leasehold properties

This article was co-authored by Dharampal Singh, Trainee Solicitor

As well as the usual outgoings associated with owning a property, owners of leasehold properties are subject to additional, sometimes hidden, costs which can involve significant sums. The most obvious is the payment of ground rent, which can increase if the lease contains rent review provisions. There could also be charges if a leaseholder wishes to make changes to their home. The lease may provide for payment of the landlord’s fees for approving any alterations and this could run into hundreds of pounds. Some leases also provide for the buildings insurance cover to be taken out in the name of an insurance office approved by the landlord. Again, the leaseholder may have to pay the landlord’s fees for this consent.

Owners of leasehold flats/apartments are also invariably responsible for payment of an annual service charge which goes towards the costs incurred by the landlord or a management company in repairing and maintaining the exterior of the building and providing any other services in accordance with the terms of the lease, such as providing building insurance cover.

Service charges are payable on a regular basis (as prescribed by the terms of the lease), usually quarterly and/or monthly, based on the landlord’s or the management company’s estimate of the cost of the services for each financial year per term. At the end of the financial year, there is a reconciliation which could involve the leaseholder having to pay the landlord or the management company further monies, which could, depending on the circumstances, again run into hundreds of pounds.

Buyer be aware

Simply purchasing a leasehold property can also bring extra hidden costs! Examples of additional/hidden costs for buyers include the cost of a Notice of Assignment served on the landlord by your conveyancing solicitor informing the landlord that you are the new owner. The costs can vary in price.                             

If you are buying a property with a mortgage, another essential document is a Notice of Charge that informs the landlord of any third party holding an interest in the property. This cost can also vary in price.

Landlords may also demand that the buyer enters into a Deed of Covenant with the landlord or the management company. This is effectively a direct contract between the buyer and the landlord or the management company confirming that the buyer will pay the rent and service charges and will observe and perform all the other tenants covenants contained in the lease.

Seller be aware

There are also additional hidden costs to the seller of a leasehold flat such as obtaining a leasehold property information pack from the landlords or the management company or their managing agents. The pack contains details of the service charge payments for the previous three years, to whom the Notice of Transfer and the Notice of Charge, if applicable, should be served and the landlord’s or the managing company’s charges for dealing with the Notice of Transfer and the Notice of Charge, if applicable, and for dealing with a Deed of Covenant involving the buyer, if required.

Moreover, if the seller has a share in the management company and the seller has lost or misplaced the share certificate, the landlord or the management company will invariably make a charge for providing a new share certificate.

 The problem is further exacerbated for the seller if the landlord and the management company have both appointed managing agents to act for them as this could result in some of the above charges being almost doubled.

Change

There is some good news on the horizon as a result of a crackdown on unfair leasehold practices. Sajid Javid, the former Chancellor of the Exchequer announced in December 2019 new measures to “cut out unfair and abusive practices within the leasehold system, including a ban on leaseholds for almost all new build houses”. Measures to be introduced include:

  • Making certain that ground rents on new long leases for both houses and flats are set at zero
  • Providing leaseholders with clear support on the various routes to redress available to them
  • A wider internal review of the support and advice to leaseholders to make sure it is fit for purpose in the proposed new legislative and regulatory environment.

Comment

When either owning or purchasing leasehold property, it is sensible to have a contingency when budgeting your finances to account for additional/unexpected costs. It is therefore recommended that you should fully familiarise yourself with the terms of the lease in order to gain an understanding of the costs you are likely to incur.

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