Disadvantages of Buying Leasehold Property in 2023

Purchasing a home is a significant milestone in one's life. However, the process can become complicated when dealing with leasehold properties. When I purchased my leasehold I wasn't aware of some of the potential disadvantages of buying leasehold property.

These disadvantages have turned problematic to an extent. If you fail to understand what you're buying correctly, you could quickly find yourself in trouble needing to find money for all sorts of costs you hadn't considered.

In this insight, we cover the disadvantages of buying leasehold property, and I share my personal experience of being a leaseholder.

Key Takeaways

• When purchasing a leasehold property, you acquire a lease agreement rather than owning the property and land itself. The landlord retains ownership of the property and land, which is a common misconception.
• Falling into arrears with service charges and ground rent can lead to the freeholder repossessing the property, resulting in a potential loss of investment.
• Fire safety checks and associated expenses can be burdensome for leasehold property owners, both in terms of financial costs and time.
• A failed fire safety rating can significantly impact the ability to sell the property, particularly to buyers requiring a mortgage, limiting the pool of potential buyers.

What Are The Disadvantages of Buying a Leasehold Property?

There are many disadvantages to consider when buying a leasehold property, the main considerations are as follows:

• Fire Safety Checks and Costs
• Ground Rent and service charge expenses
• Lease Extensions
• Shared Communal Spaces
• Lack of Regulation for Freeholders
• Less flexibility if you need to let the property
• Higher Conveyancing Fees
• Noise from Neighbours
• Restrictions Imposed

When buying a leasehold property, you technically acquire a lease agreement rather than the property and land itself. The landlord, or the freeholder, retains ownership of the property and the land it resides on.

This is a widespread misconception about leasehold properties. Thinking you own the property and only rent the land is a common error. 

In extreme scenarios, should you fall into arrears with your service charges and ground rent, the freeholder could repossess the property.

This could leave you with no way to recover your investment, making it one of the significant disadvantages of buying leasehold property.

Here are some of considerations of buying leasehold property:

Fire Safety Checks and Costs

Fire safety checks and associated costs present a significant disadvantage when owning a leasehold property.

These checks are necessary to ensure the safety of residents and comply with regulations. However, they can be burdensome both in terms of expenses and time. 

Paying for Waking Watch:

If a building fails fire safety checks, one potential consequence is the requirement to implement a waking watch. A waking watch involves employing trained personnel to patrol the premises and raise the alarm in case of a fire.

This additional security measure can be expensive and adds ongoing costs to the property's maintenance.

Impact on Selling the Property:

A failed fire safety rating can have serious implications when trying to sell a property, particularly to prospective buyers who require a mortgage. Lenders are increasingly cautious about granting mortgages for properties with subpar fire safety standards.

Consequently, a failed fire safety rating can hinder the property's marketability and limit the pool of potential buyers.

My personal experience with these checks has been problematic. The leasehold I own has a B2 fire safety rating. This means there is remedial work to be carried out to bring the building in line with the fire safety standards.

Consequently, this has meant many owners have struggled to sell their flats as mortgage lenders have been reluctant to lend against the building. It has also resulted in an increase in our service charge to compensate for further costs.

Ground Rent

Ground rent presents a substantial challenge with leasehold properties. Ground rent is a charge for leasing the land on which your property sits. The landlord owns this land, and as a leaseholder, you are essentially paying for the right to use this land for the duration of your lease.

This practice is an integral part of the UK property landscape and is completely legal.

However, the Leasehold Reform (Ground Rent) Act 2022, introduced recently, is set to reduce all ground rent to a nominal level on new leases. This change, however, does not apply to existing leases.

It's vital to check the current ground rent levels and the calculation method for future increases when purchasing a leasehold property.

An alternative form of Ground Rent is Peppercorn Rent, Peppercorn rent is a form of ground rent that is exceptionally low, typically less than £10 per year. In many cases, landlords may not even bother to collect such a nominal amount.

That's not so bad then, for some, hey?

Lease Extensions

A lease agreement is time-bound, typically for a set number of years. This lease requires extension before it has less than 80 years remaining. The cost of a lease extension can run into tens of thousands of pounds, depending on your freeholder and legal expenses.

Further, if you fail to extend the lease before it hits the 80-year mark, you're likely to incur significantly higher costs, as it attracts 'marriage value'. This essentially means that the freeholder is entitled to 50% of the value added to the property by the lease extension.

when considering lease extensions, there are three things you need to consider:

Extend your lease early

 It's important not to delay when considering a lease extension. If you're proactive, make sure to extend your lease well before it drops below 80 years remaining. The good news is that any lease with more than 80 years remaining can be extended without incurring any marriage value costs.

Watch out for delaying tactics

If you're within a year or less of reaching the 80-year mark, be cautious. Some freeholders and landlords may use tactics to delay the process and push your lease below 80 years.

They might agree to informal lease extensions that surpass 80 years but then purposely delay until the lease drops below that threshold. Once it does, they withdraw the informal offer and demand a formal or statutory lease extension, which triggers the payment of marriage value.

Act promptly if the lease has dropped below 80 years

If your lease has already fallen below the 80-year mark, it's crucial to take action as soon as possible. The longer you wait, the higher the marriage value will be.

Don't delay extending your lease any further to avoid incurring additional costs.

Rising Service Charges

Service charges form a part of any lease agreement. These charges cover property maintenance, cleaning, ad hoc repairs, and building insurance. Unfortunately, service charges can and do increase over time, making the financial commitment of owning a leasehold property increasingly challenging.

Shared Communal Spaces

Leasehold properties, particularly blocks of flats, often feature shared, communal entrances. This can lead to disruption and noise at all hours of the day, becoming a nuisance if your flat is located close to the communal entrance.

I have myself experienced a particular issue with balconies above mine leaving cigarette butts out, which easily blow in the wind down to min. There's also a young boy who likes throwing bread for the birds, which attracts a lot of cleaning. Whilst you can't choose your neighbours, this is something you wouldn't get with a freehold property.

Lack of Regulation for Freeholders

Freeholders are not regulated, meaning they can charge leaseholders exorbitant fees with little to no recourse. Lease extensions, requests for alterations, or even permission to keep pets come with hefty charges. It's essential to do your due diligence before purchasing a leasehold property to avoid undue stress and financial strain in the future.

Higher Conveyancing Fees

The process of buying or selling a leasehold property is more complex and time-consuming than a standard house sale, leading to higher conveyancing fees. Some conveyancers may even refuse to work with leasehold properties due to their complexity.

Expect that the additional standard checks on your leasehold property purchase would require a further £100-£250. 

Noise and Disturbance from Neighbours

Living in a block of flats can come with its own set of challenges. Unless you're on the top floor, you'll likely have neighbours living above you. This can lead to noise disturbances, especially if the flooring isn't adequately insulated. However, there's an easy solution to this, and that would be to get a sleep headphone mask.

You'll never be kept up by noise again.

Restrictions imposed

You are bound to face some restrictions when owning a leasehold property. For example, if you wanted to add an air conditioning unit to the outer property walls, you will likely find this is not allowed. As is the case with having BBQ's, of course, they are a fire hazard on balconies, but if you are a ground floor property banning them seems like a crime against humanity.

Less flexibility if you need to let the property

As you have increased costs due to ground rent and service charge, it is unlikely that a buy to let leasehold property will return a profit. Therefore, it means less flexibility if you must let the property as an emergency landlord. If you use a shared-ownership scheme, it is normally a condition of the mortgage that it cannot be let at all.

Leasehold Rules From Country to Country

It's essential to understand that leasehold terms and conditions can vary significantly from country to country. For instance, leasehold properties in Bail are common, and the terms of these leases might differ considerably from those in other parts of the world.

Questions to Ask Before Purchasing a Leasehold Property

Given the above disadvantages of buying leasehold property, it's crucial to ask the right questions before making a decision:

1. How many unexpired years are left on the lease?
2. What is the expected/current annual service charge?
3. How much is the ground rent and what calculation is used for future increases?
4. Who is the current managing agent?

Understanding these aspects will provide a clearer picture of the potential challenges of owning a leasehold property.

Is it a Bad Idea To Buy a Leasehold Property?

It largely depends on your individual circumstances and the circumstances of the property. Owning a leasehold property can come with many restrictions and financial obligations. However, with careful planning and thorough understanding, you can avoid potential pitfalls and make an informed decision.

Now you've considered the disadvantages of buying leasehold property, consider the disadvantages of buying freehold property, always seek professional advice to ensure you're making the best decision for your financial future.

FAQs

How do the disadvantages of purchasing a leasehold property, such as fire safety checks, ground rent, and service charges, vary in severity and impact on the property owner's financial stability?

The severity of leasehold property disadvantages varies; for instance, fire safety checks and costs can be burdensome financially and timewise, while ground rent and service charges can steadily increase over time, impacting long-term affordability and investment returns.

What steps can potential buyers take to mitigate the risks associated with leasehold properties, such as conducting thorough due diligence on lease terms, service charges, and ground rent calculations?

Potential buyers can mitigate risks by thoroughly examining lease terms, understanding service charge structures, ground rent calculations, and the financial stability of the managing agent or freeholder before purchasing a leasehold property.

How do the disadvantages of owning a leasehold property compare to those of owning a freehold property, and what factors should individuals consider when deciding between the two options?

Comparing leasehold and freehold property disadvantages involves assessing factors like restrictions, financial obligations, and flexibility. Buyers should weigh these considerations against their individual needs and circumstances to determine which type of property ownership aligns best with their preferences and financial goals.