Ask Ashworths about: The hidden cost of owning a leasehold property
When you make your offer for a leasehold flat most people will factor in regular costs that they have to pay to their freeholder or management company by way of service charges. Some will even remember that they need to pay an annual ground rent on top. However, there is another raft of expenses that are a hidden peril of owning a leasehold – and those are the administrative costs of selling the property.
Without exaggeration, these costs have been known to amount to over £1,000 so whilst there may not be a great deal that you can do about it, it is good to know what sort of costs you may be faced with.
The management pack
As solicitors, one of the first things that we do when instructed to sell a leasehold property is to request “the management pack” from either the freeholder or the managing agents. This pack contains all of the information that a purchaser will need about the management of the flat, including:
- Details of any service charge arrears
- Details of the current service charge budget
- A note of any forthcoming major works
- A copy of the service charge accounts themselves
- A copy of the current buildings insurance
However good a leaseholder’s record keeping, it is unlikely that they will have all of the documentation in their own possession and the process of requesting the management pack from a third party has become almost automatic.
Professional firms of managing agents earn a significant part of their income from charging for management packs. Fees of around £500 are becoming increasingly common.
Trap 1 – If the property is managed by one company and owned by another company (who collects the ground rent) you may need to pay for two separate packs.
Trap 2 – Even if you own a share in freehold, the person who deals with day-to-day administration may charge a fee for collating the information and sending it through.
Licence to assign fees
Some leases, but by no means all, contain a provision that require an outgoing tenant to obtain their freeholder’s consent to them selling their lease. This “Licence to Assign” will generally be produced by the freeholder’s solicitor who, you guessed it, will charge for producing the licence which will eventually need to be signed by the seller, the freeholder and the buyer.
Licence to assign fees can be as much as £750, and of course will be subject to VAT (which few individual purchasers can reclaim).
Because it is the seller that is obliged to obtain their freeholder’s consent, it is usually the seller that ends up paying for the cost of obtaining it.
Deed of covenant fees
Whilst rarely needed at the same time as entering into a Licence to Assign, some leases require an incoming tenant or purchaser to enter into a direct contract with the freeholder or management company to pay service charges and otherwise to observe the provisions of the lease – “a Deed of Covenant”.
Trap 3 – Very often the wording of the requisite Deed of Covenant is set out at the back of the lease, but this will rarely stop a freeholder or managing agent charging to supply the necessary document.
Who pays for a Deed of Covenant will often be the subject of negotiation between a buyer and seller.
Nearly all leases contain a provision requiring a purchaser to serve a formal notice on the freeholder after they have completed their purchase. Usually the freeholder needs to be notified of both the fact that the lease has changed hands (or, more technically, that there has been “an assignment”) as well as the fact that there is a new mortgage on the property (a “notice of charge”).
Some freeholders are very happy to accept notice of assignment and notice of charge on a single document and to charge a single, nominal fee. Other freeholders see these notices as yet another revenue stream and £100 plus VAT for each notice is not uncommon.
Notice fees will nearly always fall for the purchaser to pay.
Share transfer fee
Another cost usually picked up by the purchaser are the fees paid to the managing agent or freeholder for transferring the share certificate in the management company from the name of the seller into the name of the buyer. This can be another £100 or more.
Whilst this note has been prepared in the context of the transfer of a flat, on some larger, newer developments where an estate charge or rent charge is made a similar raft of charges might be charged by the managing agents or roads association or similar.