What is leasehold? Everything you should know before you buy

Understanding what leasehold is and what it means for you as a homebuyer is crucial before you commit to buying a leasehold property
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  • Most flats in England and Wales are sold on a leasehold basis. It’s important to understand how this differs from buying a freehold property.

    Whatever type of property you’re buying, it’s crucial to understand how the building itself and the land it stands on are owned. Different forms of ownership come with different rights and responsibilities.

    Leasehold has been in the news for all the wrong reasons lately, with issues surrounding both leasehold houses and the maintenance of tower blocks since the Grenfell Tower fire. However, the government is working on legislation that aims to improve things for leaseholders.

    If you’re thinking of buying a leasehold property, make sure you take expert advice relating to the property in question. To get you started, we have explained some of the facts about leasehold below.

    What is a leasehold?

    ‘Leasehold is a different legal status to freehold. Rather than owning the property forever, a lease gives you the ‘right to occupy’ a property for a stipulated amount of time (usually between 99 and 999 years).

    You won’t need to remain living in the property for the full length of the lease – leasehold properties are frequently bought and sold.

    Emma Power, CEO of Warwick Estates, says: ‘When buying a flat, your leasehold is essentially the set length of time that you own the lease of the property for. Once this expires, ownership transfers to the person, entity, or company that owns the land, otherwise known as the freeholder. It’s also important to note that as a leasehold, you don’t own any communal assets such as stairways, hallways or outdoor areas.’

    Flats are normally sold as leasehold in order to have a structure for ownership of the building as a whole and a mechanism for repairs and maintenance to be carried out.

    The ‘purchase price’ for a new flat is, in fact, in law a ‘premium’ payable to the landlord for the right to occupy the property. On top of this, you’ll normally need to pay ground rent and service charges.

    ‘As a leasehold flat owner, you will likely pay service charges on the property and these cover aspects such as building insurance, management costs, caretakers or concierge costs, as well as the general upkeep and maintenance of the property,’ says Emma. ‘These are often based on a fair share of everything split between each leaseholder in the building, even if you don’t personally utilise all aspects of the property itself. These should be fully explained within your lease and you should not need to pay for anything that isn’t stipulated within it.’

    Although this setup might sound straightforward, it’s these charges that form the basis of most leasehold disputes. The trouble is, there’s no obligation for a freeholder to keep costs to a minimum, so leaseholders routinely complain that they are overcharged for basic services.

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    Image credit: Future/ Richard Gadsby

    What does it mean to buy a leasehold property?

    Some experts describe buying a leasehold property as more akin to a long-term rental option, with the rent paid up front. You buy, and own the property itself, but you don’t own the land it sits on. In the case of a leasehold flat, for example, you also won’t have any ownership over communal areas or the building itself, just your flat.

    The freeholder owns the land the building sits on and the communal areas of the building (‘the freehold’). Building maintenance is organised by the freeholder or their managing agent but costs are split between leaseholders.

    The term of the lease indicates when it expires and ownership transfers back to the freeholder. Some leases are initially 999 years but others are much shorter and begin at 99 years.

    However, in reality, most leases are extended long before they expire. You should aim to extend your lease before it drops below 80 years – after that, it becomes much more expensive and you may have trouble getting a mortgage.

    What are ground rent and service charges?

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    Image credit: Future

    Ground rent is an annual payment from the leaseholder to the freeholder for the ground the property sits on.

    This can be anything from £10 up to hundreds of pounds a year. Some leases allow for the ground rent to increase at certain intervals. The freeholder will also levy service charges to pay for maintenance to the outside and communal parts of the building. They can also arrange ‘major works’ at certain intervals when large-scale maintenance needs to be done. Leaseholders will be billed for this.

    If you think you have been charged excessive service charges you can take your case to the First-tier Tribunal (Property Chamber). But this process can be time-consuming and expensive.

    What are the disadvantages of buying a leasehold property?

    Sebastian O’Kelly of the Leasehold Knowledge Partnership is a fierce critic of the leasehold system, having dealt with thousands of issues of unscrupulous freeholders.

    ‘Perhaps estate agents should try this on the market: anyone interested in buying a long-term tenancy that will pay out an annual income via ground rent to an anonymous and often offshore investor who, as the freeholders, will make all decisions on the expenditure of your block to his own commercial advantage?’ he says. ‘If you don’t like the arrangements, you will be treated in law like a tenant and the legal cost regime in the courts will mean that you will never get your legal costs off the landlord (although he will get them off you under the lease).’

    ‘Consumers in no other jurisdictions other than England and Wales faced the absurdity of leasehold, even those based on English law. Selling flats as long leases is a racket that has enriched unscrupulous operators in the property sector.’

    Leasehold homes come with restrictions because you don’t own the freehold. These can include things such as needing permission from the freeholder to make any alternations to your home. In some cases, you won’t be allowed to sub-let your property, use it as a base to run your business, or own a pet.

    ‘You cannot make physical changes to a property you do not own; as a leaseholder you rent, albeit for a long duration,’ explains Sebastian. ‘Eye-watering sums have been demanded by freeholders of leaseholders who have either made alterations – in some cases, have bought properties where alterations were made by previous leaseholders – in order to give the consent to the works. Without consent, you are in breach of lease, you could be taken to court, and certainly won’t be able to sell the property.’

    What happens at the end of a lease?

    ‘The length of a lease essentially matters for one primary reason,’ says Emma. ‘The shorter your lease, the harder you will find it to sell and the less your property will essentially be worth.’

    Having a healthy number of years left on the lease is the only way to ensure you are in a good financial position. Failing to extend the lease will see ownership transferred back to the freeholder and in most instances, you will no longer have the right to live at the property.

    Leaseholders can extend their lease via a lease extension. The statutory process means that after two years of ownership, you have the right to extend the lease by 90 years for a flat or 50 years for a house as long as you are the ‘qualifying tenant’.

    To be the qualifying tenant you must have purchased the property with the original lease of at least 21 years, which should account for most cases.

    ‘There will be a cost associated with this and this varies depending on the property and also the length left on the lease. Generally, the longer the remaining lease is, the cheaper it will be to extend and a 90-year lease will cost you around £8,000 to extend on average, while this cost can climb in excess of £30,000 for a lease of 60 years or less,’ says Emma.

    Is it worth buying a freehold interest in my house?

    Although most houses are sold as freeholds, the past decade or two have seen several major UK homebuilders sell new build houses as leaseholds.

    This is controversial for several reasons. Firstly, in most cases there is no compelling reason for a house to be leasehold. Secondly, developers have been using ground rent payments as an extra income stream after they have sold the houses. By selling on freeholds of homes or entire estates to investors, developers can pocket some extra cash.

    Typically, buyers of new build homes were told at the point of sale that they could buy their freehold at a later date for an affordable sum, only later to discover that their freehold had been sold to an investment company demanding a much higher figure to part with the freehold.

    ‘Leading housebuilders – Taylor Wimpey, Countryside, Redrow, Barratt, Bovis and others – decided to improve their bottom line by creating and selling leasehold houses, often to taxpayer assisted buyers using the Help To Buy scheme,’ explains Sebastian. ‘Some of these companies sold the leases with aggressively increasing ground rents; so aggressive that the properties cannot now be sold on. Ten-year doubling ground rents were a particularly egregious contract, and mortgage lenders simply will not touch these toxic assets.’

    The Competition and Markets Authority has recently concluded that many leasehold houses were mis-sold and has ordered some housebuilders to re-write the leases, setting the ground rent back to the original sum on first issue.

    This process is on-going and was, until the post-Grenfell building safety crisis, the worse scandal afflicting the leasehold sector.

    Owners of leasehold houses can buy their freehold under a process set out by the Leasehold Reform Act 1967. Owning the freehold will increase the value of the property and make it easier to sell or mortgage.

    But the current process to upgrade a leasehold interest in a house to a freehold interest is complex and can be expensive. The government plans to ban the sale of houses as leasehold in most cases – although this proposed legislation is yet to become law.

    If you’re looking to buy a house, it’s best to look for one that’s freehold, not leasehold.

    What are the advantages of buying a leasehold property?

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    Image credit: Future/ Robert Sanderson

    If you’re buying a flat, you’ll have little choice other than leasehold. Leasehold properties are ideal for first-time buyers from the affordability perspective. Most of these leasehold homes will be flats, where a lease is in place because the property has been developed and divided into several dwellings – so no one person owns the freehold or the land the property resides on.

    However, there are not many perks to this type of property ownership, except that some of the maintenance will be arranged by the freeholder or their managing agent. In addition, buildings insurance is purchased for the whole block as opposed to each individual flat.

    Some flats come with ‘share of freehold’ meaning the leaseholders as a collective group own the freehold to their building and, as a result, have more control over service charges. Managed well, owning a share of the freehold can be much better than having a separate freeholder.

    Why are some leases 999 years?

    The length of a leasehold will typically be 125 years when a property is first built, but you can find 999 years on a lease. This is often in place to make a property more marketable.

    However, don’t be fooled by the phrase ‘virtual freehold’ which is often banded about by developers’ sales staff. A leasehold property with a 999-year lease is still leasehold, not freehold. However, it will be much more attractive to buyers then a shorter lease (e.g. 85 years).

    It’s possible for flat owners to group together and buy the freehold to their building via a process called ‘collective enfranchisement’. Although potentially expensive, this can be well worth doing. Another option is ‘right to manage’.

    Can you renovate a leasehold property?

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    Image credit: Future/ Chris Snook

    Yes and no. If you own a leasehold property, you will usually be free to do more minor works, including painting, decorating, and kitchen and bathroom refits. However, for more major alterations such as installing windows or making other structural changes you will need to check your lease to see if you are allowed.

    In some cases you’ll need to get permission from the freeholder to make alterations – and they’ll charge you for this permission.
    If you don’t get consent from your freeholder before undertaking any works they could potentially make you revert the property back to how it originally was, and you will be liable for all costs.

    Property alterations without the consent of the freeholder may also affect your ability to sell your property in the future as a potential purchaser will usually ask for details and copies of any consents and permissions.

    What is the ‘cladding scandal’?

    The Grenfell Tower fire prompted owners of tower blocks to carry out fire and building safety inspections. Many blocks were found to have been built with flammable cladding and other fire safety defects.

    Leaseholders across England have been billed five-figure sums to rectify these issues even though they are not to blame. The government is currently looking to make developers pay for historical defects, leaving many leaseholders living in limbo in unsafe properties they cannot sell.

     

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