When deciding whether to invest in a leasehold property, there are a number of pitfalls that Landlords need to consider before completing their purchase. This article does not provide an exhaustive list but highlights a number of issues.
An obvious pitfall to consider is that your main revenue source is dependent upon the rent received from your tenants. If your tenant falls into arrears, you will not only be short of the rent but you will likely to be also be facing solicitors fees for its recovery. It is therefore essential that Landlords carefully select who they choose to occupy their property; references are a must and a guarantee provision in the Tenancy Agreement is advisable.
A further pitfall to be aware of is that a lease will, sooner or later, come to an end. Mortgagees will generally not lend on properties with leases of less than 70 years. As a general rule, investors should wisely consider investing in leasehold properties with 80 years or more.
For example, if a landlord has owned a leasehold flat for at least 2 years, if he wanted to exercise his legal right to extend the term of his lease by 90 years with a zero ground rent, then the premium to be paid to the freehold owner of the building can be much higher if there is less than 80 years remaining on the lease. Landlords considering purchasing a property with a short lease should be wise to the cost and practicalities of extending it. Extending a lease comes at a price (the longer your lease the less you pay).
A third pitfall to consider is that you will not own the property outright. A leasehold property is, by its very nature, subject to the terms and covenants of a lease. This means that the “owner” must adhere to the lease provisions which are likely to include, in addition to a number of general covenants, payment of an annual service charge and ground rent. Such charges are unquantifiable year on year and, although they are required by law to be reasonable, and levied in accordance with the terms of the lease, may rise without limit.
There are of course many benefits to purchasing leasehold property such as clearly defined responsibilities for maintaining the property, regular rental income from tenants and whilst it is a depreciating asset, it is an asset nevertheless.
By John Midgley & Jemima Faircloth, Seddons Solicitors
THE ABOVE IS ONLY A SUMMARY & IS NO SUBSTITUTE FOR TAKING SPECIFIC LEGAL ADVICE IN RELATION TO INDIVIDUAL CASES OR TRANSACTONS
Further information on the services provided can be found by contacting John Midgley on 020 7725 8000 or by email on john.midgley@seddons.co.uk
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