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Tips for leasehold property purchases

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When purchasing a property, it is important to understand that buying leasehold property over freehold property is more complicated as it can involve other parties such as a freehold owner/landlord or management company. 

Leasehold vs Freehold

The first step is to distinguish the difference between the main ways to own a property in England. A freehold property is owned outright and includes the land which it is built on. This means that if you own the freehold to a property you will be responsible for maintaining the property and so should account for these costs. On the other hand, a leasehold property means that you will own the property for a fixed period of time subject to the terms of the lease. A lease is a legal document which is an agreement with the freehold owner. Typically, when the lease ends, the ownership then returns to the freehold owner unless the lease is extended. Leasehold properties generally refer to flats and maisonettes. A lease may contained shared facilities such as communal gardens, lift/access facilities or walkways but leasehold ownership can also apply to houses too. In this case, you would own the property, but not the land that the property sits on.  

Tip 1: Read the lease carefully       

As basic as this sounds, it really is crucial to read the lease in detail because it sets out the detailed terms upon which you occupy the property. This lease will confirm what is included within your property demise as well as your rights and responsibilities.

For example, it should cover (amongst many other things) who is responsible for the windows should these require maintenance/replacement or how often you are required to decorate the internal parts of your property. If you were purchasing a property which prevented animals from being in occupation and you had a pet then would that prevent you from proceeding or could the lease be varied by the landlord/freeholder?

If there are any clauses that you are unsure of their meaning or which are not actually covered by the lease or that you do not agree with then you should raise these with your conveyancer and certainly before instructing them to exchange contracts. 

Once you are the leaseholder you are bound by the covenants within the lease, so you and your conveyancer should go through them carefully to ensure you fully understand them and that the terms are not onerous so as to deter any future buyer or make the property unmortgageable.

Tip 2: How long is the lease?

The length of the lease (known as "the term") is important and especially so if you are purchasing with a mortgage.  Generally you should consider that a lease with a term shorter than 99 years may need to be extended.

A lease extension is particularly important if the term has 80 years or less as it is likely to be much more expensive to extend it. This is because when a term falls below 80 years a "marriage value" becomes payable and therefore the cost increases. The term "marriage value" means the increase in value of the property arising from the grant of the new lease and specialist surveyors can calculate this.

If you are purchasing with the aid of a mortgage then it is important to note that each lender will have their own specific requirements as to minimum term that they will accept so this is one to check at the onset to avoid potential delays throughout the rest of the conveyancing process.

As a tenant, you will have a statutory legal right to a lease extension once you have owned the property for two years and this is done by serving a specific notice on your landlord. However, a more pro-active approach may be to ask the seller to get the lease extended before you buy or at least ask your seller to begin the process.

Tip 3: What does the lease say about alterations?

If purchasing a leasehold property it is important to know what the lease says about alterations and furthermore to understand whether any changes to the property have been carried out by your seller or indeed their predecessor. If there have been unauthorised works then (subject to the terms of the lease) you may need to seek retrospective consent from the freeholder/landlord to those works and pay the associated costs in doing so.  This could include (but may not be limited to) both parties legal fees, surveyors fees, costs to remedy any alterations if not carried out in accordance with relevant building/planning requirements and also  to obtain appropriate indemnity insurance policy.  By checking the plan before contracts are exchanged means that the negotiating and liaising with the landlord aspect with trying to resolve the potential breach of the lease is likely to fall with the seller or their solicitor so it is important to check this early on. 

Whilst having an indemnity policy will cover you (and usually any successors in title) against enforcement action if the local authority pursues the potential breach of planning or building regulations, it does not actually cover inadequate work. One way to check this is by looking at the original lease plan and comparing this with the current layout of the property. If there have been changes then there should be a clause within the lease which explains what the landlord will require. For example, some leases will allow the tenant to make internal alterations so long as the landlord provides their consent whereas other leases may have a blanket ban expressly prohibiting any alterations from being made.

Another way to check will be within the initial draft contract paperwork supplied by the seller's solicitor. This should contain two forms known as the "Property Information Form", "Leasehold Information Form" and will have been completed by the seller along with the management pack obtained by the seller from the landlord or management company.  This should disclose whether works have been carried out and if consent has been obtained or not.

Tip 4: What is the service charge?

Leasehold owners are usually required to pay what is known as a "Service Charge" or "Maintenance Charge".  This will cover a percentage share towards the costs of numerous things but more generally to include what the seller (or "tenant" as is typically referred to known by a lease) is to pay for their share of the cost of managing, maintaining, repairing and insuring the building. These charges provide the landlord with a mechanism to collect and recover the costs of providing these services under the lease.  The lease will indicate the services that are covered by the charges and it is important to understand what the likely costs are going to be to be able to budget accordingly. 

If the current years' accounts have not yet been finalised then it is worthwhile considering whether a retention is appropriate to cover any potential shortfall for the sellers' period of ownership. The landlord/managing agents should be able to indicate what a reasonable retention sum might be.

Tip 5: Are there any major works planned?

Typically management packs provided by the landlord at the beginning of the transaction will indicate what the last three years' worth of costs have been, whether there have been any major works carried out or if there are any proposed in the future. This is particularly important because there may be high service charges anticipated in the future which have driven the seller to sell then these costs would be passed on to you. Often a management pack should indicate whether the landlord or management company have served any notices to the seller/tenant for upcoming major works (commonly known as "section 20 notices") so it is crucial to have a grasp on this to understand if excessively high demands in the future will need to be accounted for.  Some leases have a "reserve fund" or "sinking fund" and therefore some major works may already be covered by the amounts previously held.

Tip 6: Check the Ground Rent

As part of the Leasehold Reform (Ground Rent) Act 2022 which came into force on 30th June 2022, ground rent (which is an annual charge payable to the landlord for the long lease) has been abolished on all new long leases so that only a peppercorn rent can be paid under new leases.  If the lease is extended then the ground rent still will need to be paid under the provisions of the previous lease until the end of the original term. 

For those leases that were granted prior to 30th June 2022 the Government very recently on 9th November 2023 opened a consultation portal to canvas views on capping ground rents for existing leases. The consultation will end on 21st December 2023 and proposes different options including capping ground rents at a peppercorn, setting maximum financial values for ground rents, capping ground rents at a percentage of the property value, limiting the ground rent to the original value when the lease was granted and freezing ground rent at current levels. Once the outcome of the consultation has been concluded the Government will aim to introduce reforms in due course through the Leasehold and Freehold Reform Bill. This area is changing of law is changing and therefore it is important to understand what the law is at the time.

Higher ground rents can be problematic, so advice should be obtained if the ground rent is over £1000 in Greater London or £250 elsewhere as the landlord will have the statutory right to possession if the rent remains in arrears which lenders will not accept either.


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This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.