If you’re a landlord or buy-to-let investor who owns or is looking to purchase a leasehold property, you need to consider many factors and rules to ensure a smooth-sailing process.
Whether you’re considering renting out the leasehold to generate some income or just want to understand the obligations of letting such properties, stay ready to get deep into some legal property lingo.
Let’s explore leasehold properties and their meaning for landlords and buy-to-let investors.
Leasehold Vs. Freehold Property
Owning a freehold property means that you outright own the property as well as the land it’s built on and can do as you please with it as long as it is within legal limits. A leaseholder is someone who makes an agreement with the freeholder and owns the property for a specific period. Reforms proposed by the government allow leases for up to 999 years.
A lease essentially means you own the physical space, a house or apartment, on the land, but this “land” technically still belongs to the freeholder. Because of this, some freeholders demand ground rent to cover the upkeep costs of common grounds or the area around your property.
Being a leaseholder also means you have to abide by any rules set by the freeholders. This may limit what you can do with the property as well. You may not be allowed to renovate, keep pets, run a business on the property, have a roommate, etc.
Why Does The Lease Length Matter?
It’s no surprise that the longer the lease, the better it is if you plan on letting a leasehold property. Most lease durations are valid for 99 years, but the legislation reforms discussed above allow lease extensions for up to 999 years.
As a landlord or property investor, you must understand that nearing the end of the lease comes with its issues, especially after the 85-year mark; this diminishes the property value and saleability because lenders usually mandate the lease term has at least 75 years until it expires.
You can solve this issue by applying for a lease extension, so let’s discuss the details about it in the following section.
Lease Extension Process
Fortunately, you can extend a lease, but the caveat is that it comes with additional costs that can get quite hefty based on the valuation. Plus, you have to be a qualified leaseholder to apply for an extension, i.e., you should have owned the property for at least two years.
If you meet the eligibility criteria, the first step is to inform the freeholder and appoint a solicitor to pursue the statutory route guide to ensure the legalities are in order. Next, you have to get a valuation of the property by a surveyor.
The lease extension valuation considers the remaining lease term, property value, annual ground rent, and other factors are included in calculating lease extension costs.
However, your solicitor will either negotiate this for you or ask that you do it yourself.
After this, you make your final offer to the landlord and serve your tenants’ notice; your solicitor will guide you. Some landlords require you to pay a deposit, which will be legally reasonable, around £250, and to be paid within 14 days.
Overall, you’ll be paying your solicitor, surveyor, freeholder’s legal costs, and land registry fees. Although the government is currently discussing reforms to simplify the extension process, there are no official changes as of now.
What Do Landlords and Buy-To-Let Investors Need To Know About Leases?
Apart from legal factors, investing in or renting out a leasehold property comes with additional requirements you need to consider. This wouldn’t be true for freehold properties since you own the property and land outright.
Lease Terms
If you plan on letting a leasehold, one of the first things you should check is whether the lease allows subletting because, in most situations, they may have restrictions, require you to ask permission, or outright don’t allow it.
Checking lease terms also gives you all the information on your rights and obligations as a leaseholder, including restrictions imposed by the freeholder, especially about subletting. Sometimes, freeholders allow you to sublet without any consent at all, but they can also choose to withhold consent as long as it’s reasonable.
Freeholders Can Change
If you invest in a leasehold property, there are chances that the freeholder can sell it to whoever they want, which means you can’t be sure about what can change in your leaseholder relationships or costs.
For instance, if the new freeholder doesn’t care about maintenance, this will drop the property’s value over time, or if the freeholder decides to add more amenities, you might end up paying more in service charges.
Similarly, other leaseholders on the property, for example, if you are the other apartment building tenants, must be reliable people. If the new freeholder doesn’t do a tenant background check, you could end up with problematic neighbors that negatively affect the property.
Ground Rent
The fee leaseholders pay the freeholder for the “land” of their property is known as ground rent. The charges can vary from close to more than a thousand pounds annually. Some leases have clauses for ground rent increases on specific dates during the term.
Thanks to the Leasehold and Freehold Reform Bill, the U.K. government is deciding through options that cap ground rent for leaseholders. These include establishing a maximum financial value, setting a peppercorn rate, cutting rent to a percentage of the property value, freezing current ground rent levels, or reverting to original lease values.
Sinking Fund
Many leases mandate that you regularly contribute to something called a sinking fund; it covers unexpected maintenance or repair costs and emergencies like changing the roof, replacing communal boilers, or installing new floors.
If you’re a long-term leaseholder, the sinking fund can be beneficial because it balances maintenance costs instead of spending thousands of pounds on repairs. It’s always better for first-time leaseholders to have a solicitor find out about any potential major works to confirm whether the sinking fund covers it.
Service and Other Charges
Service charge is a fee the leaseholder pays to cover the cost of communal services such as maintenance of gardens and communal spaces, building upkeep, etc. You are allowed to request invoices as proof of the expenses to estimate whether you’re getting your money’s worth.
Leaseholders can challenge services they find unreasonable via the Property Chamber of the First Tier Tribunal, which will help decide whether or not the leaseholder is liable to pay those charges. Knowing the details of current and future service charges will not only help your budgeting but will also give you an estimate of your potential ROI on the rent.
Sometimes, the lease also includes additional charges, which you must be aware of. If you plan on transferring ownership of the lease or adding a new mortgage lender, some will require that you pay a notice fee for these changes. You may also have to pay for the management pack when selling the leasehold or asking for consent to a restriction.
Restrictive Covenants
While covenants also show your rights as a leaseholder and how to exercise them, the restrictions in there can have severe consequences if you breach them. That’s why you must be aware of the fine print and seek legal advice to prevent any disputes or issues in the future.
In the case of breach of contract, the freeholder can bring your lease to an end via a court order, known as lease forfeiture. As an investor, a forfeited lease is a lost asset because you won’t be able to transfer or sell it.
How To Prepare For Renting Out A Leasehold Property?
If you’re ready to let out a leasehold property it’s time to get onto landlord duties, and navigating these can prove to be challenging. The checklist below mentions the steps you should follow when renting out a leasehold property to tenants:
Secure Financing
Investing in leasehold property can be lucrative, but securing the right financing is crucial. Complications can arise where the length of the lease falls below 85 years, and where you as the leaseholder also have an ownership interest in the freehold. Whether you’re a seasoned investor or a first-timer, a mortgage broker can really add value here.
Remember, buy to let finance can make or break your deal. Choose wisely, and soon you’ll be on your way to a successful investment.
Get a rental bank account
Keep your landlord admin as simple as possible by having a separate bank account to pay rental income into and property expenses out of. If you are incorporating a new Limited Company you’ll also need to open an account for the company.
We’ve teamed up with Cashplus Bank to give you access to a free business bank account that you can apply for online in minutes. It’s easy to use and of course it’s fully regulated and FSCS protected.
Apply via this link and you’ll receive a welcome gift of a £9.95 card issue fee refund into your new account.
Appoint A Solicitor
Property regulations and laws can be complex, especially when considering anything to do with a leasehold, let alone subletting. Finding a qualified solicitor can explain the legalities of your rights and obligations to you in simple terms.
Solicitors can help clarify whether your lease agreement allows short-term holiday rentals like Airbnb and if you missed any restrictions or considerations in the fine print. Similarly, if the freeholder raises concerns about consenting to your request for subletting, a solicitor can help with an alternate plan of action.
Tenancy Agreement
When drafting the tenancy agreement, don’t forget to include the lease conditions set by the freeholder to your tenants; this way, you ensure the tenant is aware of any restrictions and avoids violating any of the requirements.
Permissions
After checking your lease terms, you’ll know if you require any permissions from the freeholder, so that’s the first thing you should do before starting any of the subletting process. Not doing this could result in your lease being forfeited. The same applies to buy-to-let mortgage lenders as well.
Ensure you get this done in writing to have a recorded proof of permissions granted by the freeholder to avoid future disputes. Involve your solicitor to draw up this agreement.
Complying With Conditions
Some landlords might lift restrictions or give you specific permissions only if you’re willing to comply with their conditions. These could include the subletting duration, tenant background specifications, rental terms, etc., and you must abide by them.
Building Insurance
To be able to rent out a leasehold property, you’ll also have to apply for the correct building insurance and change it from residential to building. You can easily check your insurance options online to find the right plan at a price that fits your budget.
Similarly, you must take out a landlord’s insurance; this is crucial because while a building insurance policies cover insurable peril, it does not cover the rehousing of subtenants, so getting insured as a landlord will not only take care of this but will provide you with financial protection.
Obligations As A Landlord
Suppose you’ve completed all the legal procedures and are now a landlord. In that case, your new position also comes with certain obligations according to the Landlord and Tenant Act 1985 to ensure the property is maintained and safe for subletting.
What about the freeholders’ maintenance responsibilities? This could cause confusion about who is responsible for the maintenance and repair of the common area or the property’s exterior. Keep in mind that the Act doesn’t override the obligations of the freeholder.
Guaranteed Rent Scheme
Bear in mind that becoming a landlord by completing the renting process is not the end. You still have to find tenants, ensure they pay rent on time, regularly inspect the property, check that tenants abide by lease conditions, and deal with queries, repairs, and general upkeep.
While this can get daunting, choosing a guaranteed rent scheme will take care of the tenancy agreement and property checks. It’ll also assist in sourcing and referencing potential tenants, making your search much more manageable. In addition, you will receive a guaranteed monthly rental income whether the property is rented out or not.
Conclusion
Although many estate experts will advise you against buying a leasehold property over a freehold, if you already own one and are considering letting it, we hope this article helped address any questions you have so that you make informed decisions.