Carbon’s residential property law expert Cindi Van Graan discusses some key property pitfalls to avoid when you are buying a new home.
Over the past 11 years, I have successfully dealt with a range of residential purchase transactions. During my experience, I have seen many pitfalls and problems that can arise. These are often last minute and can derail a property transaction. Many of these pitfalls can be spotted in advance and the effect can be removed or minimised by taking the rights steps.
This blog has been written to help you start thinking about some of the issues, and to help you avoid them before they happen.
These are the top 6 that happen most often.
1. Not investigating the local area for planned or potential developments
When a local authority search is carried out, it is specific. No information is carried out on neighbouring properties, planned developments, or the potential for developments. In a few years’ time, the property you purchase may turn from your dream home to a nightmare. That stunning vista onto the open field outside your window could become a housing estate. Or your dream home could end up on the Crossrail route.
It is important for your solicitor to listen to your plans for the property, and what external factors attracted you to it. This information will then dictate if any specialist searches are required. Your solicitor then needs to distil the answers and discuss these with you at the report meeting.
A client story to highlight this very point.
One of my clients wanted to buy a particular house in Manchester. He withdrew from the transaction when he discovered that a £28.5m cancer research and treatment centre was about to be developed. It was going to be developed right opposite the house he wanted to buy. We then carried out further enquiries with the planning department. It became clear that the seller had lied about receiving (or not as the case may be) planning notification for the hospital’s construction. A year later the sellers still hadn’t sold the house. There is also the chance that they may have had to hold onto the property until after the hospital construction was completed.
2. Being oblivious of the potential tax consequences of a transaction
A solicitor is not a tax expert. However, your appointed solicitor should be aware of some of the potential tax consequences of a transaction. They should also be able to point you in the right direction of a suitable advisor. Capital Gains and Inheritance Tax are the most common taxes affecting property purchases.
Although no money is changing hands, if you gift a property to someone other than your spouse, you will have to pay capital gains tax. You will be required to file annual returns if the purchase price is over £500,000 and bought through a company. This is known as Annual Tax on Enveloped Dwellings.
It is key to engage an experienced solicitor so they can direct you to qualified tax and financial advisors. You will then ensure you do not pay penalties, fines or have an unwanted tax bill from the revenue.
3. A lack of planning and building regulations approvals
Missing permissions for planning and building regulation approvals could mean they are unauthorised and unsafe. Purchasing a house with missing permissions may result in loss of value. It could also mean that you may have to pay to reverse the works and bring them up to current building regulation standards.
Your solicitor needs to make enquiries to ensure this does not happen. If you do not make these checks you may find re-selling the house will prove difficult.
An indemnity policy could be a solution, but it does not confirm the quality of the work or safety of the work. For example, you rely on an indemnity policy for the removal of a wall but do not know whether adequate support, such as a rolled steel joist, was installed. This could mean the works are structurally unsafe. No indemnity policy will provide you with peace of mind…
Listed buildings bring other problems. When the building is listed there is no time limit for enforcing planning breaches. A planning breach could lead to a criminal prosecution.
The right solicitor will help you to identify if there is a problem of a missing permission. They will then assess what the solution is so you can move forward in the best way.
A client of mine wanted to purchase a beautiful home that had undergone a loft conversion 5 years previously. The property was marketed as a 4 bedroom property, and this included the loft conversion. They approached me as they wanted complete peace of mind. Upon inspection, I discovered that the loft conversion, although carried out to a high standard with a rolled steel joist support installed, was unauthorised. The unauthorised loft meant that the property was actually a 3 bedroom house with a loft storage area. Legally the loft could not be used or marketed as a bedroom. This enabled me to assist the client to negotiate a price reduction, and also put in place steps to satisfy the lender.
4. Hidden restrictions affecting your planned alterations to the property
Your solicitor should seek to understand what your future plans are for the property and whether you have any intentions for works.
Imagine you are buying a property with plans to change the appearance. Now imagine that those plans don’t go ahead because there are restrictions you were unaware of. Even some non-structural work could be prohibited.
It is important to know that this is not just limited to leasehold properties. Even if you are purchasing a freehold property, entries vary from register to register. Often there are very old Transfers and Conveyances, and restrictions may still have an impact on the use and enjoyment of your property.
These entries can be complicated and full of legislation. They need to be distilled and explained in simple language to clients. For example – there can be a requirement to make an application to a third party for consent to planned alteration works. Another example could be a prohibition on extending the property upwards. Both of these examples are not uncommon.
5. Not asking your seller to assign their statutory entitlement to extend the lease term
If the lease term is close to 80 years you should ask your seller to exercise their statutory entitlement. This should be an extension of a further 90 years. The lower the lease term the more the value of your property will fall. If this happens the investment for extending the lease will rise. A solicitor will help you with the qualifying criteria, and assigning the new extended lease term. There are a number of steps that need to be followed in order to avoid the assignment being void.
It is important to note that you will have to wait at least 2 years if this happens. This time period could result in a massive increase in the premium payable to the landlord.
The knock on effect with your lender: Lenders now dictate which lease terms they will accept. You may find you fall foul of lender requirements and are unable to sell the property in the future. Some lenders now even require a minimum unexpired lease term of 95 years (Allied Irish Bank want 70 years unexpired at the end of a 25 year mortgage term). Each lender has a different requirement. Just because your current lender is happy with the level, your future buyer’s lender may not be happy with the unexpired level of the lease term.
6. Surprise service charge demands for major works
Investing in a property purchase can be very significant. You could be left at breaking point if you then find out that you are required to make a huge service charge payment for major works.
Example of major works could include roof replacement or extensive external refurbishment works that could run into thousands of pounds. This extra investment will be on top of your usual annual service charge. It is important that your solicitor carefully investigates if any major/extraordinary works are planned in the coming two-three years. You could find that you need to withdraw from the purchase altogether. It can also be a factor for renegotiating the price or even agreeing that the seller’s solicitor holds a retention for a period of time to cover those anticipated future works.
Complexities can arise in transactions that may at first appear very straight forward; the above are only a few of the pitfalls to avoid. A decisive and adept conveyancing solicitor will navigate you through your transaction so that you avoid these.
Are you buying a property right now and worried about any of the above?
If you are considering buying a property, Cindi runs free 15 minute Avoid Property Pitfalls sessions to find out about the property you want to purchase, identify the pitfalls and recommend next steps to avoid them. Email firstname.lastname@example.org to schedule in a time.