UK Buyer and Seller Insights: Leasehold Property and Auctions
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This excerpt is from a chapter in the book, THE TRUTH ABOUT PROPERTY, written by NRLA trainer, Henry Davis, www.henrydavisproperty.com.
Leasehold apartments can have any number of other issues, which should be declared in the ‘Leasehold Information Pack’. Older conversations often do not have any management company in place, which will be a problem for some lenders. Some older flats may have conversions where the title of each flat was split and where the developer didn’t bother to set up or employ a management company to manage and maintain the common areas. This is automatically done for new builds.
Where leasehold properties are concerned, one of the most common issues is establishing there are no outstanding liabilities which could be transferable to you.
You also need to know who controls the management of the building and how well it has been maintained. Has the freeholder gone ‘missing’? This often happens. Are there any major works planned for the building, and, if so, do they have enough money in the sinking fund (i.e., a fund set aside for future expenses, such as maintenance, debt repayments, refurbishment costs)? If not, you may have to pay out yourself, which means an increase in your monthly costs, thus making it less saleable should these costs rise too much.
Worst case scenario could be a substantial bill for you to pay for upgrading outside cladding, post the Grenfell disaster. A recent article published in March 2020 by Inside Housing summed up these difficulties:
“Inside Housing has spoken to a resident living in one block in Birmingham that has seen its building insurance premium increase by more than 390% this year, from £39,000 to £191,000, which will have to be split between the tower’s 141 households. Other blocks have seen their insurance cost more than double. Residents of the Islington Gates development in central Birmingham were made aware that their block had dangerous cladding last year and are now facing a combined bill of £8m – between £35,000 and £100,000 per leaseholder – to cover the costs of removing the cladding and other fire safety measures.”
One of the most common issues you will face as an auction buyer in terms of being able to mortgage flats is, anything above a food outlet severely restricts your lending options with funding via a commercial investment mortgage, rather than a standard buy-to-let mortgage. Another common issue is forfeiture of the lease for unauthorised alterations carried out by the seller, which was already subject to forfeiture proceedings by the landlord. This can leave the service charge account massively in arrears. I have noticed that instead of these arrears being discharged by the seller as is normal in a conventional sale, the special condition sometimes makes you liable for these arrears, plus the liabilities from disputes or proceedings.
Points to take into account:
- Any flat with a lease less than 75 years will be impossible to mortgage, yet many traders buy these as they are a good potential opportunity.
- Any flats in blocks over ten storeys can be problematic to finance, although blocks in London tend to be easier as high rise is more common there.
- If the property has been tenanted by a tenant before 15th January 1989, then the tenant could be considered a regulated tenant which is another issue for lending and for you getting vacant possession in the future.
Flying freeholds or creeping freeholds are also problematic where part of your property goes over or under a neighbour’s property, or vice versa. This could be a balcony overlapping a neighbouring property, or perhaps an added room that overhangs next door’s driveway. A mortgage may be difficult to obtain or only given as long as the flying freehold is within certain size limits.
The important question to ask is if it is currently bridgeable now or mortgageable after issues are resolved. If not, can all issues be resolved under your control so that it can at least be bridgeable to complete for the auction and mortgageable at a later stage?
Talk to the other residents in any leasehold block of apartments; they are a valuable information resource. Don’t be afraid to knock on neighbours’ doors.
Henry is the CEO of We Buy Any House and Genii Developments Ltd and a developer for over 32 years. He is also an accredited Property trainer for the National Residential Landlords Association.
Copyright, Henry Davis. www.henrydavisproperty.com