Buying a new leasehold flat v doing the lotto

London54

Not sure if I am just getting last minute nerves before exchanging contracts or if I am just being sensible ... would massively appreciate input on this ...


I feel like a very naïve first time buyer. When I started the process of buying an apartment I was looking forward to my own place that I could pay off the mortgage on and own .... I been following up with the Developer to reserve the apartment I want for months and got it!


.... after reading and researching the lease I am now wondering why anyone would think about buying a leasehold apartment. If I were to summarise the lease (which apparently is standard according to my solicitor and the development company is one of the better ones) it says that the tenants are responsible for all costs going forward, big and small including all legal costs of the Developer or Maintenance company if anyone takes them to court at any point. In addition to that the Developer can sell the freehold and the landlord covenants in the contract no longer apply after they sell. The ground rent is also set to increase every 10 years in line with the RPI index. If you want the landlord to enforce the covenants of the contract on another tenant you will have to pay their costs. If you want to remortgage you will have to pay them a fee. Structural defect ...tenants must pay. Insurance doesn't cover the full replace or repair cost ... tenants must pay.


I was looking to invest in property that I could live in my old age without having to worry about paying rent. Now I'm thinking that if I were to buy a leasehold I still probably wouldn't be able to afford it in old age with the ground rent, maintenance charges and the liability to cover any large expenditures (e.g. heating distribution system repair and renewal, lifts, garbage system, gym,solar panels ...) Is this new apartment just fools gold that will become impossible to sell after 10 years with looming capital expenditures that the tenants will have to cover. To me it seems that the liability of the tenants is WIDE OPEN. I thought that the Developer and Solicitor would tell me that there was insurance and plans in place for all eventualities and only a rare event should be troubling. That's not the case. To me it's not a matter of IF, it's a matter of WHEN large costs will need to be covered, how will they be funded.


I called the lease advisory service to get their view and I didn't get any sense of comfort that I was being over-dramatic. In fact, they pointed out that if any large expenditure exhausted the sinking fund and there was another issue shortly afterwards without time to rebuild the reserve that the tenants would have to cover that as well. They also pointed out that I should think carefully about my ground rent as inflation could increase significantly at some stage in the future and it would increase in line with that.


When I question others about it the common response is that hopefully nothing goes wrong and it will be fine. The same applies for all apartments in London so you are not the only one.


As much as I prepare to cover future costs, if one or more tenants can't then the whole estate potentially suffers.


Hoping someone will point out something I am not understanding about the benefits of buying leasehold and the protection their to cover tenants in the above scenarios I described.


Thanks

anselld

Yes the leaseholders are responsible for all costs since they all share the benefits of living there. That is inevitable.

However, compare it to freehold purchase. You would still be responsible for all repairs and maintenance and you could still get a large capital expenditure (boiler break, roof, windows, etc).

There are pros and cons of leasehold. You have an additional admin overhead of a management company, on the other hand there are economies of scale in sharing a single building structure.

Presumably you have opted for leasehold because that is what you can afford. There is no reason to assume it will become less affordable over time.

victoriavictorious

Yes, whilst it's true that freeholders are also responsible for their own repairs/ maintenance, they do have several major advantages over leaseholders.
1) A freeholder can decide when to get the repairs/maintenance carried out and not be under so much time (and financial) pressure as a leaseholders, whose management company will dictate the terms, costs and timescales of any work - for which they have to cough up.
2) The management company/landlord - and by that I mean the person who owns the land - is in full control over who carries out work.
A freeholder can shop around for the best deal. A leaseholder is at the mercy of the management company's choice of builder, which anecdotally is usually expensive. This can cancel out any theoretical savings through economy of scale.
3) A freeholder has no ground rent to pay and no commitment towards a myriad of further, unforseen expenses and circumstances, over which they have no control.
4) A freeholder does not need to be concerned about owning a possibly diminishing asset whose ongoing (increased) costs may make the property more difficult to sell in future.

eddddy

What you describe are really responsibilities of owning a property - whether it's a freehold house or leasehold flat.

Put simply...

• If you buy the whole of a freehold house you are responsible for the costs of repairs and maintenance of the whole building.

• If you buy one leasehold flat in a block of, say, 10 flats, you will be responsible for 1/10th of the costs of repairs and maintenance of the whole building

London54 wrote: »

In addition to that the Developer can sell the freehold and the landlord covenants in the contract no longer apply after they sell.

No - the landlord's covenants in the lease continue unchanged, if the freehold is sold.

London54 wrote: »

The ground rent is also set to increase every 10 years in line with the RPI index.

Yes - that's not unusual, and most buyers don't see that as a problem.

London54 wrote: »

If you want the landlord to enforce the covenants of the contract on another tenant you will have to pay their costs.

So if your neighbour is doing something that annoys you (and breaches the terms of their lease) you might have to pay the cost of any enforcement action.

But if you lived in a freehold house and a neighbour that did something to annoy you - you would also have to pay the cost of any enforcement action.

London54 wrote: »

If you want to remortgage you will have to pay them a fee.

Yes - but at least you have the protection of the law, which says the fee must be reasonable.

London54 wrote: »

Structural defect ...tenants must pay. Insurance doesn't cover the full replace or repair cost ... tenants must pay.

Just like if you owned a freehold house - you would have to pay as well.

London54 wrote: »

Is this new apartment just fools gold that will become impossible to sell after 10 years with looming capital expenditures that the tenants will have to cover.

Again, exactly the same as if you owned a freehold house.

London54 wrote: »

In fact, they pointed out that if any large expenditure exhausted the sinking fund and there was another issue shortly afterwards without time to rebuild the reserve that the tenants would have to cover that as well.

A sinking fund is like a savings account. You put money into it to save up for repairs and maintenance.

If lots of repairs/maintenance come at once - e.g. roof repairs, repainting windows, drain repairs - you may not have enough in the sinking fund to pay for it all.

The same if you own a freehold house and put 'repair/maintenance money' into a savings account. If lots of repairs are needed at once (roof /windows /drains) you may not have enough in your special savings account to cover it.

London54 wrote: »

As much as I prepare to cover future costs, if one or more tenants can't then the whole estate potentially suffers.

Possibly for a while - while the freeholder takes legal action against the non-paying leaseholder, or ultimately re-possesses their flat.


Edit to add...

There are certainly some issues with leasehold - victoriavictorious mentions some of them above - but they are rather more subtle than the ones you mention.

davidmcn

OP, you're conflating several different issues - some "problems" you've listed are simply risks which go with owning property and would apply even if you had a freehold detached house in the middle of nowhere, others are ones which will inevitably apply to any development with communally-owned parts, no matter what the tenure is or how it's managed.

Sift out the ones which actually are a feature of leasehold (and in particular, leasehold developments where the freeholder is a third party unrelated to the leaseholders) and you might still have a point.

hazyjo

You're probably young. You will probably buy again several times, maybe with a partner's salary too. I've moved 8 times (now I'm my late 40s) and my first two properties were leasehold.

Try not to think TODAY is the rest of your life. It's how many of us start out, but I doubt very much you'll still be there in ten years' time. That doesn't mean don't buy it now. What we start out in isn't often what we end up in (unless you're my sister who bought a 3 (now 4) bed house with her OH over 20 years ago and has never moved since).

NeilCr

I've lived in all three

a) freehold house

b) leasehold flat

c) freehold house on a communal estate where I pay some service charges.

First thing to say is that if you are in London (not sure where you live) a leasehold flat may well be your only viable option, if you want to own. It was mine when my wife and I split quite a while back.

The next thing is that there is a whole lot of mights, maybes, possibilities with all three. On balance, but that may be down to personal circumstances, I prefer c) which is where I am now.

Victoriavictorious, rightly, points out some of the downs of being a leaseholder. However, the counter to that is if you have a good management company and managing agent who plan ahead and budget properly then it's not that bad. In both of my non freehold situations we have purchased the freehold and ran/run the estate. Which means we can ensure that things are done properly, we have control of what happens and the budget. And we employ the managing agent.

I understand other estates are run badly but I think it is important to provide some contrast.

My little house is where, like you, I wanted to retire to. Ten years on and retired and I am very happy here. I am a director and we have a nice little community where people keep an eye out for each other without being intrusive.

I think it's natural to feel like you do in the brink of taking a massive step. But, try not to get too caught up in the negatives and take a step back.

I hope it works out well for you

MrWB

eddddy wrote: »

What you describe are really responsibilities of owning a property - whether it's a freehold house or leasehold flat.

That's only part of the picture, I think the OP makes some good points that are nuanced with regards to leasehold ownership. I've known quite a few friends get caught up with leaseholds - some where management companies get replaced and costs shoot through the roof as "repairs" need doing, others where management companies don't do the repairs and maintenane needed, but the owner of the freehold happens to be the director of the management company and charges big fat service charges in order to draw a big fat salary for doing effectively nothing.... Etc, etc...

eddddy wrote: »

• If you buy the whole of a freehold house you are responsible for the costs of repairs and maintenance of the whole building.

• If you buy one leasehold flat in a block of, say, 10 flats, you will be responsible for 1/10th of the costs of repairs and maintenance of the whole building

But the communal areas and shared services often cover a larger area. For a building that has 10 flats, the hallways and stairs may be ten times the size, for example. The roof may not be 10 times the size, but it may be 5 times the size, and a lot more complext than a freehold house roof.

If a neighbour doesn't pay up when they're supposed to, that could lead to a hole in the finances, which whilst it may get sorted in the long run could involve enforcement action and drag on for months or years. In the interim, the other neighbours have to fund the short gap or live without maintenance works that are needed taking place (which could lead to the repairs getting costlier and more dangerous, too).

eddddy wrote: »

No - the landlord's covenants in the lease continue unchanged, if the freehold is sold.

Depends what's on the lease surely? IANAL but if the OP has been advised by someone that's seen the details, and possibly someone with legal experience, they should probably take their advice over mine or yours on this matter?

eddddy wrote: »

So if your neighbour is doing something that annoys you (and breaches the terms of their lease) you might have to pay the cost of any enforcement action.

But if you lived in a freehold house and a neighbour that did something to annoy you - you would also have to pay the cost of any enforcement action.

The difference is that you're in control with a freehold property. You might have to pay for a solicitor that you choose and instruct. With a leasehold property, you might end up paying for time involved by the management company, plus a solicitor they choose who could have drastically higher costs than you'd like.

Additionally, depending on the property, you could have more adjoining walls/floors/ceilings to other properties than a freehold house, and you will be sharing your communal areas with your neighbours. This gives more opportunity for issues to arise. There may never be any issues, ever, though - but higher oppurtunity does increase the risk. If you need the management company involved, and want them to enforce, then they're in the driving seat with regards to potential costs.

eddddy wrote: »

A sinking fund is like a savings account. You put money into it to save up for repairs and maintenance.

If lots of repairs/maintenance come at once - e.g. roof repairs, repainting windows, drain repairs - you may not have enough in the sinking fund to pay for it all.

The same if you own a freehold house and put 'repair/maintenance money' into a savings account. If lots of repairs are needed at once (roof /windows /drains) you may not have enough in your special savings account to cover it.

The key difference is who is in control, and the risks involved. With a freehold house, it is up to you when you do the repairs, how you do them, how you save for them and how you use those savings - and what you do if you run out of savings.

With a leashold flat, it is up to the freeholder and management company, and if you run out of money you could get a huge bill. If you've had life incidents that mean you can't meet the obligations of that bill, you could end up with neighbours having to fund the short-gap temporarily or not having the work done (and that could lead to them having an issue with you), or ultimately action being taken against you and you losing your lease/home if they have to take recovery action.

On the flip side, it could be one of your neighbours that doesn't pay (into the sinking fund / annual charges / pay a big bill when it comes) when they're supposed to and you ending up with needing to fund the short gap or wait for recovery action.

eddddy wrote: »

Possibly for a while - while the freeholder takes legal action against the non-paying leaseholder, or ultimately re-possesses their flat.

But that could lead to more leaseholders having problems.

I agree with some of your points, but disagree with the one's above and am on the OP's side with regards to them.

Leasehold has its place for sure, but I think it's past its best and needs major modernisation (maybe like Scotland has done). Of course, where you have shared buildings and shared benefits and responsibilities, some of these issues are always going to exist and (generally) flats and appartments are going to be cheaper to own than houses in the same area so it's a weigh-up and personal choice with regards to attitude towards risks, attitude towards how you want to live and what you can afford.

People buy leaseholds quite often because of the cost difference (not the only reason, but one of the main reasons), and for that reason there will always be a market for leasehold flats/appartments.

OP - I think you're right to think deeply about this as it's a big choice. I think you have come to a negative conclusion for you and your own circumstancs. Not everyone would draw the same conclusion.

As an alternative, if you're looking in London, why do you want to be in London? Do you need to live there, or can you travel in / out? What about places outside the M25 on train routes that take half an hour (give or take) to get into a central mainline station? You may be able to afford more for your money and a freehold house if that works for you?

davidmcn

MrWB wrote: »

But the communal areas and shared services often cover a larger area. For a building that has 10 flats, the hallways and stairs may be ten times the size, for example. The roof may not be 10 times the size, but it may be 5 times the size, and a lot more complext than a freehold house roof.

If a neighbour doesn't pay up when they're supposed to, that could lead to a hole in the finances, which whilst it may get sorted in the long run could involve enforcement action and drag on for months or years. In the interim, the other neighbours have to fund the short gap or live without maintenance works that are needed taking place (which could lead to the repairs getting costlier and more dangerous, too).

The difference is that you're in control with a freehold property. You might have to pay for a solicitor that you choose and instruct. With a leasehold property, you might end up paying for time involved by the management company, plus a solicitor they choose who could have drastically higher costs than you'd like.

Additionally, depending on the property, you could have more adjoining walls/floors/ceilings to other properties than a freehold house, and you will be sharing your communal areas with your neighbours. This gives more opportunity for issues to arise.

On the flip side, it could be one of your neighbours that doesn't pay (into the sinking fund / annual charges / pay a big bill when it comes) when they're supposed to and you ending up with needing to fund the short gap or wait for recovery action.

Of course, where you have shared buildings and shared benefits and responsibilities, some of these issues are always going to exist

...and I've quoted above the bits which would apply even if flats were freehold (as in Scotland). Not that much of it is because of leasehold tenure (though undoubtedly it adds to the problems).

[Deleted User]

Personally I'd avoid anything where the price of a family car can be demanded of you at any time without notice and if you can't pay the possibility of losing your home.


So much is reliant on Freeholder and Managing Agents and these people are not in property for the good oh their health, it s a huge money spinner. Freeholds get sold and Managing Agents change and ok ones now may not be ok ones in the future.


The only way I'd buy a flat is via a share of the Freehold. I'd want control over my finances and when works are to be done.

eddddy

I'll leave others to further debate the pros and cons of leasehold, and the pros and cons of shared ownership of a property...

Except, this very fundamental point...

eddddy wrote: »

No - the landlord's covenants in the lease continue unchanged, if the freehold is sold.

MrWB wrote: »

Depends what's on the lease surely? IANAL but if the OP has been advised by someone that's seen the details, and possibly someone with legal experience, they should probably take their advice over mine or yours on this matter?

Covenants are clauses in the lease. Neither the freeholder nor leaseholder can change any clauses in the lease (including covenants), unless both parties agree.

That applies even if a freehold or leasehold is sold.

(The only exceptions are that in very limited circumstances a tribunal [court] can rule that a lease must be changed because it is defective, or to allow a statutory lease extension.)

I guess the OP must have misunderstood something. Hopefully this will prompt the OP to go back and check with their source.