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Buying a Flat in London

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Nearly half of all new homes built in the UK are flats (also called apartments, which is just a posh name for a flat) or maisonettes, compared with less than a quarter five years ago, while in London over 90 per cent of planning permissions in the pipeline are for flats. If you’re planning to buy a property in Central London – where houses are prohibitively expensive for most people – the chances are that you will be buying a flat rather than a house. Flats are generally a good investment in London and have excellent letting potential (always assuming that the rental market isn’t saturated) – those with two bedrooms and good views are the most popular.

Flat Ownership

Most property in the UK is owned freehold, where the owner acquires complete legal ownership of the property and land and his rights over the property. This includes most houses, whether detached, semi-detached, terraced or townhouses, with their own plot of land. However, most flats in England and Wales are sold leasehold, which includes some 3 million homes in the UK. However, it’s possible for leaseholders to buy the freehold, manage their own flats and even own flats under a system of commonhold (which is similar to the system in most other countries), all of which are explained below.

Leasehold

Under leasehold property ‘ownership’, the freeholder owns the site and charges the leaseholder an annual ground rent; the leaseholder must also pay an annual service charge to the freeholder to cover the maintenance and repairs of the building and its common parts. Ownership is limited to the life of the lease, for example, 80 to 100 years for an old building and up to 999 years for a new building, after which ownership reverts to the freeholder.

It’s a medieval form of ‘ownership’ (‘property serfdom’), whereby you agree to rent a property for at least 100 years, most of which is paid in advance, and you must pay service fees and all maintenance costs which are decided by your landlord (who decides what work needs doing, when and by whom). Leasehold law means that you can pay a fortune for a property and technically still not be able to call it your own. At best, leaseholders pay only ground rent on their homes, but there can be restrictive rules whereby they can be prohibited from changing their curtains, wallpaper or even keeping pets. Abuse by landlords such as charging high ‘administration’ costs, presenting leaseholders with bogus bills and harassment is widespread.

A property can change hands many times during the life of a lease and when the lease expires the property reverts to the original owner (the freeholder). However, a leaseholder with a long lease doesn’t automatically lose all rights to possession upon the expiry of the lease, but instead becomes entitled to an assured tenancy paying a rent to be agreed between the parties or, in default of such an agreement, a rent determined by the Leasehold Valuation Tribunal. However, if the annual rent is more than £25,000 (quite likely in affluent areas of London), then the tenancy isn’t an assured tenancy (which has security of tenure) but merely a contractual one and the landlord can serve notice and regain possession.

When buying a leasehold flat, the most important consideration is the length of the lease, particularly if it has less than 50 years to run, in which case you will have difficulty obtaining a mortgage. Most experts consider 75 years to be the minimum lease you should consider. It is, of course, possible to extend a lease and some speculators buy a flat with a relatively small number of years left on the lease in expectation of being able to extend it, after which the property is worth much more. Bear in mind that the cost of extending a lease (or buying the freehold) can run into hundreds of thousands of pounds, although this is usually more than reflected in the property’s increased market value.

For advice or information about leases, contact the Leasehold Advisory Service (020-7490 9580, www.lease-advice.org), who can also provide an application form for a Leasehold Valuation Tribunal. There are numerous other websites offering advice for leaseholders, including www.leaseholdadvicecentre.co.uk.

Buying the Freehold

Since 1993, when the Leasehold Reform, Housing and Urban Development Act became law, leaseholders have had the right to buy the freehold between them, called a joint freehold. At least half the qualifying leaseholders in a building must want to buy the freehold and there’s no longer a residency test (previously leaseholders had to have lived in their home for at least one year). Many flats are now sold not with a lease, but with a share of the freehold. In 2005, a ruling by the Lands Tribunal changed the way the value of the freehold is calculated, which means that in future leaseholders may have to pay more to buy a property’s freehold. When landlords and leaseholders cannot agree on the value, the case is decided by a leasehold valuation tribunal.

Owners of a joint freehold can choose to manage the building themselves or appoint a managing agent, which is generally preferable as it avoids the disagreements that inevitably arise when owners manage a building themselves (and ensures that it’s done properly). The 1993 act also made it possible for some leaseholders to extend their lease by 90 years, and if the freeholder decides to sell the freehold he must give the present tenant the right of first refusal to buy it. Under a new ‘commonhold’ form of ownership of flats introduced in 2004, leaseholders have the right to buy the freehold and establish a commonhold association to manage the common parts of a property.

For information contact the Leasehold Advisory Service (020-7490 9580, www.lease-advice.org), which provides free advice and maintains lists of valuers and solicitors who specialise in leasehold properties. If you sell a lease that was drawn up before 1996, you must ensure that your solicitor includes an indemnity in the contract that allows you to pass liability for any debts on to the new leaseholder, otherwise you could be held liable. This anomaly was abolished in the Landlord and Tenants (Covenants) Act of 1995.

Right To Manage

There’s another option for leaseholders who don’t want to buy the freehold, which is ‘right to manage’ (RTM). This allows leaseholders who are dissatisfied with the way their flats are managed to set up an RTM company and take over the management of their building. The building must meet certain conditions and a minimum number of leaseholders is required to take part. For example, qualifying buildings must include at least two flats and at least two-thirds must be let to ‘qualifying tenants’ whose lease was originally granted for a term of more than 21 years. The number of qualifying tenants must be equal to at least half the number of flats in a building.

For more information see www.righttomanage.co.uk or www.lease-advice.org/rtmframe.htm.

Commonhold

Under the Commonhold and Leasehold Act 2002, a new kind of property ownership was established (the first since 1925), called commonhold. This is similar to strata title in Australia – a type of home ownership which has existed there for over 50 years – and the condominium in the USA (and the system employed throughout Europe). Commonhold allows freehold ownership of individual flats, houses and non-resident units (such as shops) within a building or an estate, and is an alternative to the leasehold system.

Under commonhold, there’s no landlord and every resident or ‘unit holder’ in a multi-unit property has equal rights, with each owner owning their own flat as a freehold and a share in the common structure. All unit-holders take joint responsibility for the maintenance and repair of the commonly-owned areas and their obligations are formally laid down. The common parts are owned and managed by a limited company, know as a Commonhold Association (CA).

It was hoped that commonhold would be adopted in new developments, although most developers prefer to stick with leasehold which is more profitable. A group of flat owners cannot force the landlord of an existing leasehold building to convert to commonhold, although they can buy the freehold. Once leaseholders have the freehold they can apply to convert it into a commonhold, provided the necessary requirements are met which includes the unanimous consent of all parties concerned.

Property investors can decide whether to make a new development either commonhold or leasehold, and those who are currently leaseholders will also be able to switch to the commonhold system. However, developers can decide to stick with the freehold/leasehold system until they’re confident that commonhold properties will hold their value, and leaseholders may be deterred by the complexity of the process.

Types of Flats

Flats are common in Central London and in new developments in East London, but rarer elsewhere, particularly in towns in the outer boroughs. In Central London they generally consist of purpose-built Victorian and Edwardian mansion blocks of luxury flats (with porters) and conversions of large period houses, although there are also modern high-rise apartment blocks. In the last few decades a wealth of old industrial sites and buildings have been transformed into chic urban flats and loft penthouses, with stainless-steel kitchens and designer bathrooms. In recent years, stately homes, hospitals, schools, warehouses, mills, offices and factories have all been redeveloped as flats.

So called ‘mega-apartments’, i.e. huge open plan flats, and loft apartments with double or triple height ‘cathedral’ ceilings are popular in London, as are penthouses, some of which sell for £5 million or more (or over £1,000 per square foot). They’re often an emotive purchase, where you pay dearly for the panoramic views. You can also buy a ‘shell’ flat – which is literally a shell with no internal walls or fixtures and fittings – which needs to be fitted out. With this type of flat you can usually obtain a maximum 75 per cent mortgage and, if necessary, you’ll need to take out another loan to fit it out. Fitting out costs between £25,000 and £50,000 for a 1,000ft2 (92.9m2) flat, depending on the number of rooms and the quality of fixtures and fittings required.

Modern Flats

New flats are invariably lavishly appointed, which is essential if they’re to sell well. Flats in London are increasingly being bought by middle-aged buyers and retirees, who want an ultra-modern contemporary look: sleek lines, wooden floors and lots of glass. The best flats are beautifully designed and finished, with developers vying with each other to design the most alluring interiors. These include designer kitchens complete with top quality appliances, but bear in mind that although kitchens full of gleaming stainless steel and gadgets may look great, they aren’t always practical, well-designed or good for cooking. Other features may include balconies, en suite bathrooms to all bedrooms with separate showers and designer fittings; built-in wardrobes; under-floor heating, telephone and TV points (including cable) in all rooms; fitted carpets; and ceramic floors in kitchens and bathrooms.

Luxury flats usually come with a menu of high-tech options, including discrete, multi-room audio systems; home cinemas; ducted air-conditioning/heating; state-of-the-art security; and broadband connections in all rooms. They may also have air-conditioning or what may be termed comfort cooling, air-cooling or a climate-controlled, refrigerated-air system. Security is a key feature of most developments, which may have a 24-hour caretaker/concierge, CCTV surveillance and a security entry system with entry phones – some even have a video entry system that takes a picture of callers who press your flat button when you aren’t at home.

Some developments – so-called ‘lifestyle’ flats – may have a leisure complex with a swimming pool and gymnasium, sauna, Jacuzzi and tennis courts, plus secure parking and landscaped courtyards or gardens. Sports facilities are often the sale clincher in an inner-city development. Some developments also have other amenities such as an in-house medical centre, business centre, private meeting rooms for residents’ exclusive use, and a restaurant, café or bar.

Size

The size of flats varies considerably, although new flats are getting smaller, particularly in London. It isn’t uncommon to find purpose-built student studios (or micro-flats) of less the 250ft2 (23m2) and one-bedroom flats of 425ft2 (40m2). When comparing the price of flats, always take into account their size (in square feet or square meters) which is a huge factor. Most experts recommend that you avoid studios, which are invariably tiny, cramped and difficult to sell – for a bit more money you can buy a one-bedroom flat (most people want a separate bedroom). However, studios and small one-bedroom flats are becoming more popular among commuters who stay in London during the week and return to their country homes at the weekend. They’re more comfortable and cheaper than staying in a hotel and you also save money and time on travelling. Your flat will also be a good capital investment.

Research

Before buying a resale flat (rather than a new flat off plan) it’s advisable to thoroughly investigate the market and particular developments. For example, is a development popular and do people like living there, what are the charges and restrictions, how noisy are other residents, are the recreational facilities easy to access, and, most importantly, is the development well managed? Some small apartment blocks are run by resident ‘dictators’, while larger developments may be managed by developers who increase the service charges at the drop of a hat – needless to say, both are best avoided. You may also wish to check on your prospective neighbours. A flat that has others above and below it is generally more noisy than a ground or top floor flat. If you’re planning to buy a flat above the ground floor, ensure that the building has a lift (unless you enjoy lugging shopping and everything else up the stairs).

Cost

The cost of a flat varies considerably from £100,000 for a studio or one-bedroom flat in an outer borough to over £300,000 for a one-bedroom flat in Central London. Many flats in London are purchased by investors and prices have risen considerably in recent years, and in early 2006 were £500 to £750 per ft2 (£4,600 to £7000 per m2) in Central London, where the most expensive properties cost £1,000 or more per ft2 (almost £9,500 per m2). Cheaper flats are available in Docklands and south of the River Thames, although even here new flats cost from around £450 per ft2 (£4,200 per m2). Note that the cost per ft2 of small flats is usually much higher than the cost per ft2 of spacious flats. The price may include a year’s free membership of a health club or gymnasium, but bear in mind that amenities such as this don’t come cheap.

Note that in popular developments, you must usually buy off plan long before a development is completed.

The price you pay for a flat is also influenced by the state of the property market and the vendor’s personal circumstances. In 2005, there was a glut of new-build flats on the market (exacerbated by the slow down in buy-to-let purchases), most of which were small with one or two bedrooms. Some developers offer discounts of 10 to 20 per cent (although they may not advertise them), although this depends on the actual development and the price of the flat – the highest discounts are offered on slow-selling expensive flats. Discounts may be in the form of the deposit or stamp duty paid by the developer, rather than a straight reduction in the price. Bear in mind that the market for flats is more buoyant in London than in other parts of the UK, and you may not get any reduction at all on a flat in a popular development that’s selling well off plan.

Buying from a broker can also save you 10 to 20 per cent depending on the cost of the flat – the broker buys flats in bulk, e.g. ten or more, and sells them to individual buyers for a premium of say £10,000 plus a £5,000 fee. The broker may have bought them for a 20 per cent discount, 10 to 15 per cent of which he passes on to buyers.

In an older development, you should check whether access to private grounds and a parking space are included in the cost. In new developments you must usually pay extra for a garage or a space in an underground car park. If you’re buying a resale property, check the price paid for similar properties in the same area or development in recent months, but bear in mind that the price you pay may have more to do with the seller’s circumstances than the price fetched by other properties. Find out how many properties are for sale in a development; if there are many on offer you should investigate why, as there could be management or structural problems. If you’re still keen to buy, you can use any negative aspects to drive a hard bargain.

Buying Off Plan

When buying a new property in a development, you’re usually obliged to buy it ‘off plan’, i.e. before it’s built. In fact, if a development is finished and largely unsold, particularly in a popular area, you should be wary as it may mean that there’s something wrong with it. In recent years people have queued overnight to buy properties in many new developments. In a rising market it’s possible to make a profit buying off plan, between the period when you pay the deposit and when the property is completed a year or two later, and selling it without completing (a practice known as ‘flipping’).

However, in a stagnant or falling market, some analysts advise buyers against buying off plan. It may be better to wait until a property is almost complete before buying, or you could end up paying more than a property is worth or the developer could even go bust. You must pay a deposit of at least 10 per cent of the price and over £500 in legal fees to exchange contracts, which legally obliges you to go through with the purchase. If the developer goes bust, you may have to wait years for a property to be completed and there’s no guarantee that it will be finished to the original specifications. Added to which you could lose your home loan if bad publicity has an adverse effect on the market value of the property.

In the last few years buyers have pulled out of off plan purchases (and lost their deposits), amid fears that the property wouldn’t be worth what they had agreed to pay and that the rent (assuming they could find a tenant) wouldn’t cover their mortgage payments. When buying off plan, choose a large developer or one who’s selling different types of property in different areas, as he’s better placed to weather a downturn.

Service Charges

Flat owners pay service charges for the upkeep of communal areas and for shared services, with charges calculated according to each owner’s share of the development. A proportion of the common elements is usually assigned to each flat owner depending on the number and size of flats in a development. Service charges may include the following:

? Garden maintenance;

? Cleaning (including roads and pathways), decoration and maintenance of communal areas and buildings;

? Caretaker, concierge or porter;

? Lift maintenance, entry phone and security;

? Lighting in communal areas and grounds;

? Water supply (e.g. for gardens);

? Pest control;

? Buildings insurance;

? Administration;

? General maintenance;

? Membership and upkeep of communal facilities such as a health club, gymnasium or swimming pool;

? Sink fund for major repairs.

Buildings insurance is provided by the freeholder, but you’re usually required to have third party insurance to cover damage you may cause to other flats (e.g. due to a flood or fire).

Fees are usually billed monthly or biannually and adjusted at the end of the year (which can be a nasty shock), when the actual expenditure is known and the annual accounts have been finalised. If you’re buying a flat from a previous owner, ask to see a copy of the service charges for previous years, as owners may be ‘economical with the truth’ when stating service charges, particularly if they’re high.

Service charges vary considerably and can run into thousands of pounds (£10,000 or more a year) in luxury developments with a high level of amenities such as a gymnasium, fitness room and spa. Charges may include hot water and heating, but not extraordinary repairs (although they may be covered by the sink fund). Service charges in Docklands are typically £3,000 to £4,000 per annum. An apartment block with a resident caretaker will have higher community fees than one without a caretaker, although it’s preferable to buy in a block with one.

If a management company is employed to manage and maintain an apartment block, the service fees are usually higher, but the building is also likely to be better managed. High fees aren’t necessarily a negative point (assuming you can afford them), provided you receive value for money and the development is well managed and maintained. The value of a flat depends to a large extent on how well the development is maintained and managed.

In the past, landlords have used threats of expensive court action to intimidate owners into paying higher fees. Many landlords have increased their service charges significantly in recent years, which often bear little or no relationship to actual costs, and many leaseholders have been hit by high charges for major repairs (see below). The 2002 Commonhold and Leasehold Act was supposed to put an end to the bitter disputes between freeholders and leaseholders. It gave leaseholders new powers to challenge excessive service charges and maintenance fees before an independent body (replacing county courts) know as a Leasehold Valuation Tribunal (LVT), with a panel comprising a solicitor, a valuer and a third experienced person.

However, according to the Campaign for the Abolition of Residential Leasehold (www.carl.org.uk), landlords are still overcharging for service charges and repairs and getting away with it. Although LVTs have made it easier to resolve disputes, it hasn’t made the outcome any fairer for leaseholders, who are often opposed by high-powered legal firms and barristers resulting in astronomical legal costs. Landlords can also still have cases transferred to the high court, in the almost certain knowledge that leaseholders won’t have the financial muscle to oppose them. Another website that may be of interest to prospective flat owners is www.service-charge.co.uk.

Maintenance & Repairs

If necessary, owners can be assessed an additional service charge to make up for any shortfall of funds for maintenance or repairs. You should check the condition of the common areas (including all amenities) in an old development and whether any major maintenance or capital expense is planned for which you could be assessed. Beware of bargain flats in buildings requiring a lot of maintenance work or refurbishment. All major developments have a sink or reserve fund to pay for one-off major repairs, which is funded from general service charges.

Ground Rent

Ground rent is a nominal rent for the land on which an apartment block is built and is usually around £100 to £200 per year. The lease should indicate whether the ground rent is fixed or can be reviewed after a certain period.

Covenants & Restrictions

Covenants are legally binding obligations of the freeholder and leaseholder to do or refrain from doing certain things. Restrictions are regulations governing how leaseholders are required to behave. They usually include such things as noise levels; the keeping of pets; renting; exterior decoration and plants (e.g. the placement of shrubs); waste disposal; the use of gymnasiums or fitness rooms and other recreational facilities; parking; business or professional use; and the hanging of laundry. Check the regulations and discuss any restrictions you’re unsure about with residents. Permanent residents should avoid buying in a development with a high proportion of rental flats, i.e. flats that aren’t owner-occupied, although you may have little choice in London.

Private Gardens

Many London squares and developments have private communal gardens for the exclusive use of residents, which can add considerably to the cost of a property. London’s shared gardens date back to the 19th century when the landed gentry came up to town for the season. Gardens often have strict rules and regulations such as no animals, ball games, barbecues, large parties or unsupervised children – their peace and tranquillity adds to their charm. Residents pay an annual fee and receive a key.

Copyright © Survival Books Limited 2006

“Buying or Renting a Home in London” 1st Edition, David Hampshire and Sue Harris.

Reproduced with the permission of Survival Books Limited.

Further information on this topic can be found in “Buying or Renting a Home in London” 1st edition, by David Hampshire and Sue Harris.

For extensive, annually updated information about buying or renting a property in London, you can purchase this book at www.survivalbooks.net