April 14, 2023
Your Guide to Renting Out Leasehold Properties
If you’ve purchased a leasehold property with a view to letting it out, there are various things you will need to consider and potential rules to bear in mind. Join us as we explore the subject of leasehold property renting and attempt to answer the question, “Can you rent out a leasehold property?”.
What is a leasehold property?
When you buy a leasehold property, you are effectively forming an agreement with the freeholder. This agreement is known as a lease, and lasts only for a set number of years. Most new leases last for 999 years.
Once the lease comes to an end, ownership of the property automatically reverts to the freeholder. This is why buying a leasehold property with a short lease (a lease that is less than 80 years) is considered risky, as it could make it very difficult to sell on.
The freeholder will always retain ownership of the land that the building housing the leasehold property sits on, which can sometimes mean that ground rent will be payable. A freeholder will only be able to demand ground rent if it is written into the terms of the lease.
There may also be service charges to pay in return for services provided by the freeholder or any property or estate managers. Such charges may cover, for example, upkeep of the fabric of the overall building, communal areas and any outdoor spaces.
As a leaseholder, you will usually be bound by various rules as to what you can or cannot do with the property. If you wish to make any significant changes, then you will usually need to obtain permission from the freeholder. You may also be banned from keeping pets or running a business from the property. Such rules will also apply when considering can you rent out a leasehold property.
Can you rent out a leasehold property?
If you have purchased a leasehold property with a view to renting it out, or you already live in one and are considering turning into a rental, you will need to check the terms of your lease to see if this is permitted.
Permission from the freeholder will almost always be required to let the property to tenants. If it is but you fail to obtain it, then the freeholder could take legal action to repossess the property from you.
What else do I need to know about the lease?
Aside from the length of the lease, which is a very important consideration, you should also look at whether there are any restrictive covenants in place that may limit what you can and can’t do with the property.
A covenant is an obligation, set out by a developer or freeholder, to do or not do something. Covenants can either be positive or restrictive in nature.
Positive covenants require a positive action. An example would be ensuring that a fence is maintained around the property, or making sure the structure of the building is kept in good repair or painted at regular intervals.
Restrictive covenants prevent the leaseholder from doing something. These are put in place to protect fellow leaseholders, neighbours within a housing development, or the wider community.
Examples of restrictive covenants include not removing landscaped planting or trees; parking restrictions, including a ban on parking leisure or commercial vehicles outside the property; not being allowed to erect a satellite dish; not to cause a nuisance to neighbours, and restrictions on the number or type of pets residents are allowed to keep.
How to make sure there is no breach of covenant when renting a leasehold property?
You should check the terms of your lease or freehold title very carefully for any restrictive or positive covenants, or better still, have a specialist legal professional look it over for you.
Remember that some leases will not allow subletting, so be sure to check for any restrictions in that respect too.
If there are restrictions, then you will need to ask for written consent from the freeholder in order to gain permission to sublet your property, for which you may need to pay a fee.
Seeking legal advice is vital to prevent future disputes or issues, which could prove costly. Breaching a lease could result in very serious consequences. Ultimately, the freeholder may seek an order that brings your lease to an end. This is known as lease forfeiture.
If your lease is forfeited via a court order, your investment asset will essentially be lost. You will not be able to sell it or transfer it, as the leasehold interest will have come to an end. So it is clear to see just how important it is to take the right advice, and to avoid any actions that may put you in breach of the lease.
As well as looking into covenants, you should make yourself aware of your rights as the owner of a leasehold property, and how to exercise them. This might include the right to challenge service charges, as well as the right to extend your lease.
What do I need to know about service charges?
Service charges are paid by the leaseholder to the landlord in lieu of a range of services.
These services typically include maintenance and repairs, buildings insurance, in some circumstances, the provision of estate staff, heating, lighting, lifts, porterage and cleaning of common areas. Normally the service charge will also include property management costs, which will either be provided by the landlord or a professional managing agent.
Service charges will fluctuate from one year to the next. They can go up or down without any limitations, other than that they must be considered ‘reasonable’.
Details of what can and can’t be charged by the landlord, and the proportion of the charge to be paid by the individual leaseholder, should all be detailed in the lease agreement.
All service charges must be covered by the leaseholders, with the landlord generally not making any financial contribution.
Most leases provide for the landlord to collect estimated service charges in advance. Then, if there is any overpayment or underpayment, this will be returned or collected at the end of the year.
The Landlord and Tenant Act 1985 (as amended) provides that a service charge may only be recoverable by a landlord in so far as the costs have been reasonably incurred. It also states that charges are only recoverable if the works carried out are of a reasonable standard.
Leaseholders have the right to challenge any service charges they feel are unreasonable. This can be done via the Property Chamber of the First Tier Tribunal, which will decide whether a service charge is reasonable and therefore payable.
If you are purchasing a leasehold property, you should be sure to find out what the current and future service charges are likely to be. This is vital for your budgeting, and also so that you can calculate your potential rental yield and return on investment.
Make sure you also check for the presence of a ‘reserve fund’, and whether there are any plans for major renovation or repair works that could impact the service charge.
Also referred to as a ‘sinking fund’, a reserve fund is a feature of a lease which allows the landlord to demand a contribution towards any additional large scale works via the service charge. Such works could include repairing or replacing a roof, or energy efficiency upgrades, such as new windows. The fund is in place to prevent leaseholders having to pay a surprise sum when works become necessary. It will not usually be recoverable if the leaseholder decides to sell, and the fund has not been used, unless agreed otherwise with the landlord.
What else to consider when renting out a leasehold property?
As well as ensuring you are legally permitted to rent out a leasehold property under the terms of your lease, there are various other considerations to factor in.
Will your mortgage lender allow it?
Some mortgage lenders will consent to you renting out your leasehold property, but not all of them will.
In any case, you will need to seek their permission. If you fail to do so, you could be in breach of your mortgage terms and conditions, which could have serious implications on your ability to raise finance in the future.
Are you adequately insured?
If you do not tell your insurance provider that you’re intending to rent out your leasehold property, it could invalidate whatever buildings cover you have in place.
You will need a specialist landlord insurance policy, not just for the buildings side of things, but to cover you for other eventualities.
What are your legal responsibilities?
If you decide to go ahead and rent out your leasehold property, your new position as landlord means you will need to fulfil certain obligations to ensure the property is safe and maintained. Under Section 11 of the Landlord and Tenant Act 1985, these obligations include the communal areas of blocks of flats.
This often leads to confusion as, under the terms of your lease, the freeholder usually has a responsibility to maintain communal areas. This can put you as the leaseholder in a difficult position if the freeholder refuses to maintain or repair the communal areas.
Passing on lease obligations to your tenants
If you decide to rent out your leasehold property, be sure to pass on any conditions of your lease to your own tenants by including them in the tenancy agreement.
For example, if your tenancy agreement requires you to keep the windows clean or does not permit you to store items in communal areas, then you must pass these rules on to your tenants, or risk finding yourself in breach of the lease through their actions.
How can a guaranteed rent scheme help?
It’s clear to see there is plenty to abide by if you decide to go ahead and rent out your leasehold property. If all of this wasn’t enough, you will also have the headache of sourcing tenants, making sure rent is paid on time every month, carrying out regular property inspections to make sure the tenants are taking proper care of the property (and adhering to the lease conditions), and dealing with everyday tenant queries, maintenance and repairs.
A guaranteed rent scheme, however, will ensure that your property is fit for rental and that the legal side of the tenancy agreement is taken care of. Not only are suitable tenants sourced and referenced, but you will also receive a guaranteed rental income every month, even if your property is empty.
A guaranteed rent scheme, such as that offered by City Borough Housing, may also be backed by a professional property management service. Any maintenance or repairs are carried out at no extra cost, everyday tenant queries handled, quarterly inspections included and the property returned to you at the end of the agreement in its pre let condition, less fair wear and tear.
Can you rent out a leasehold property?
If the terms of your lease from your freeholder allow it, then yes you can rent out your leasehold property. As well as notifying your mortgage and insurance providers, you must also ensure that your property is fit for rental, and make sure you comply with any local authority regulations.
A rent guarantee scheme will take the edge off all your new responsibilities by taking over your day to day property management, and making sure you are paid on time every month, even during void periods.
You are welcome to get in touch with our expert team to learn more about the benefits of a guaranteed rent scheme, and to request your free rental valuation.