Why Not To Buy A Leasehold?

Nikka Sulton

Why Not To Buy A Leasehold?

When you buy a property freehold, you own the building and the land it’s on outright. This ownership lasts indefinitely, giving you complete control over the property until you decide to sell it. Freehold properties often come with fewer restrictions, allowing owners to make modifications or improvements without needing permission from a landlord.

If you buy a property leasehold, you own only the building for a set number of years, as specified in the lease agreement. The land it’s on remains under the ownership of the freeholder or landlord. As a leaseholder, your rights to the property are limited to the lease duration. Commonly, leases can range from 99 to 999 years.

When the lease term expires, ownership of the property reverts to the landowner unless you can extend the lease. Extending a lease can involve significant costs and legal processes, and if the lease term falls below a certain number of years, it can also affect the property’s value and mortgageability.

Understanding the differences between freehold and leasehold properties is crucial when buying a home. With freehold, you have complete and indefinite ownership, while leasehold involves limited ownership and potential future costs. Make sure to consider these factors carefully and seek professional advice if you plan to buy a leasehold property.

What does leasehold mean?

When purchasing a leasehold property, you acquire ownership rights for a predetermined duration as stipulated in the lease agreement. This means that you have the right to occupy and utilize the property within the specified lease term.

However, once the lease term reaches its expiration date, ownership of the property reverts to the individual or entity that owns the land, commonly referred to as the freeholder. Consequently, as the lease term dwindles closer to its end, the perceived value of the lease diminishes. This decrease in value can make it increasingly challenging to find a buyer willing to pay a favorable price when selling the leasehold property.

To mitigate the risk of devaluation and ensure a more favorable selling outcome, it is advisable to consider extending the lease before listing the property for sale. By extending the lease term, you not only enhance the attractiveness of the property to potential buyers but also potentially increase its market value. This proactive approach can result in a more lucrative sale and provide you with a better return on your investment in the property.

How long can a lease be?

Lease durations for newly-created properties can range from 99 or 125 years to as extensive as 999 years, providing a wide spectrum of ownership terms.

A 999-year lease, often regarded as tantamount to freehold ownership, offers considerable advantages. In certain scenarios, owning properties under a 999-year lease may even prove more advantageous than freehold ownership.

Conversely, leases with shorter durations can pose challenges sooner than anticipated. When a lease has less than 80 years remaining, it can significantly impact the property’s marketability. Potential buyers may be deterred, and securing remortgage options can become problematic. This decline in lease length not only affects the property’s value but also its potential for long-term investment returns.

Hence, it’s essential for property buyers and owners to carefully consider the lease duration and its implications. Understanding the potential limitations and advantages of different lease lengths is crucial for making informed decisions and safeguarding one’s investment in the property market.

What else is different about a leasehold property?

Most flats are leaseholds, though houses can also be leaseholds, especially those within certain developments.

With a leasehold, you don’t own the land the property stands on. For flats, communal areas like stairs and halls, as well as the building’s structure, are not owned by individual leaseholders.

Traditionally, leaseholders pay fees to the freeholder. However, upcoming government legislation will ban ground rent charges on most new residential leases, curbing annual increases.

Many freeholders have already transitioned ground rents to zero in anticipation of the changes, making day-to-day expenses more manageable for prospective buyers. The legislation will extend to retirement properties in 2023.

Lease agreements often come with restrictions, such as pet ownership or alterations to the property, which require permission. Violating these conditions may lead to legal action and potential lease forfeiture.

Typically, the freeholder is responsible for buildings insurance, though contents insurance is the leaseholder’s responsibility. Freeholders should consult leaseholders on certain maintenance costs, and leaseholders have the right to challenge charges they disagree with.

What does freehold mean?

When you purchase a property freehold, it signifies that you have full ownership rights over both the property itself and the land on which it stands. This comprehensive ownership, legally termed ‘title absolute’ or colloquially referred to as ‘fee simple’, grants you complete control and autonomy over the property.

Under a freehold arrangement, you bear sole responsibility for all associated costs and obligations related to the property. This includes maintenance expenses, repairs, and securing buildings insurance to protect your asset. Unlike leasehold properties, freehold properties typically do not entail ongoing maintenance charges, unless there are shared amenities or services, such as communal gardens or driveways, that require joint upkeep with neighbouring property owners.

It’s worth noting that while the majority of houses are typically sold as freehold properties, it’s prudent to verify the ownership status of any property before purchase. Occasionally, certain flats or apartment buildings may also be sold as freehold properties, particularly in cases where residents collectively share ownership of the building and its common areas through a management company arrangement.

In such instances, residents may have the opportunity to participate in the management and decision-making processes concerning the upkeep and maintenance of shared facilities. This shared ownership model can offer residents greater control over their living environment and foster a sense of community within the property.

What are the pros and cons of leasehold properties?

Leasehold properties often present numerous disadvantages, overshadowing the potential benefits they may offer. Let’s explore these drawbacks in detail before considering any potential upsides.

One major drawback of leasehold properties is the limited ownership tenure they entail. Unlike freehold properties, where the owner has absolute ownership of both the building and the land it stands on, leasehold properties grant ownership rights for only a fixed period, as stipulated in the lease agreement. Once the lease term expires, ownership of the property reverts to the freeholder, leaving the leaseholder with no claim to the property.

Moreover, leasehold properties are subject to various restrictions and conditions outlined in the lease agreement. These restrictions can range from limitations on alterations or renovations to restrictions on pet ownership or subletting. Violating these terms can result in legal consequences and jeopardize the leaseholder’s rights to the property.

Another significant disadvantage of leasehold properties is the obligation to pay ground rent and service charges to the freeholder. Ground rent is a recurring payment made by the leaseholder to the freeholder for the use of the land on which the property is built. Service charges cover the costs associated with maintaining and managing communal areas and facilities within the property, such as gardens, corridors, or elevators. These ongoing financial obligations can significantly impact the affordability and long-term financial viability of leasehold properties.

Additionally, leasehold properties may be subject to escalating ground rents and service charges over time, further exacerbating the financial burden on leaseholders. In some cases, leaseholders may also face unexpected or excessive charges for major works or repairs carried out on the property by the freeholder.

Furthermore, leasehold properties often face challenges when it comes to selling or remortgaging. Properties with shorter lease terms remaining may struggle to attract buyers or secure financing, as lenders may be reluctant to offer mortgages on properties with limited leasehold tenure.

In light of these significant disadvantages, potential buyers should carefully weigh the pros and cons of leasehold properties and consider seeking professional advice before making any commitments. While there may be certain advantages to leasehold ownership, such as access to shared amenities or communal facilities, it’s essential to fully understand the implications and responsibilities associated with leasehold tenure.

What are the disadvantages of a leasehold property?

In a leasehold arrangement, you are required to pay service charges and ground rent to the freeholder. Any alterations or modifications to the property necessitate written permission from the freeholder, often accompanied by substantial fees. Additionally, leasehold agreements commonly prohibit pet ownership and subletting.

Properties with fewer remaining years on the lease may encounter difficulty in the resale market, potentially limiting the benefits of property appreciation. Moreover, conveyancing fees are typically higher when purchasing leasehold properties compared to freehold properties.

Essentially, leasehold ownership can feel akin to renting, with leaseholders subject to the decisions and policies of the freeholder.

What are the advantages of a leasehold property?

In shared blocks of flats, leasehold properties offer several advantages:

Cost: Leasehold properties typically come at a lower price due to associated risks.
Maintenance: The freeholder is usually responsible for maintaining communal areas and the building’s structure.
Insurance: The freeholder arranges building insurance, relieving individual owners of this responsibility.

Additionally, there are specific benefits for flat owners who choose to retain their properties under a leasehold structure. For instance, flat owners can collectively purchase the freehold for their block and grant themselves 999-year leases. This arrangement provides the same security as freehold ownership while outlining residents’ rights and responsibilities, such as funding building maintenance and setting rules to deter antisocial behavior.

This approach combines the advantages of freehold ownership with certain perks of leasehold.

How can I find out how many years are left on the lease?

When contemplating the purchase of a leasehold property, your initial step should involve verifying the remaining duration of the lease.

The lease document typically contains this crucial information within its first few pages, detailing the lease’s commencement date, its duration, and the date it commenced. If you don’t possess a copy of your lease, you can obtain one from your solicitor, mortgage lender, or by requesting it from the Land Registry through postal or online channels.

Can I extend or renew my lease?

If you’ve owned a property for over two years and its lease has less than 80 years remaining, you have the right to extend the lease.

Extending the lease sooner rather than later is advisable, as the shorter the remaining lease, the higher the cost of extension. Typically, lease extensions add 90 years to the existing lease term. For instance, if you have 70 years left on your lease and extend it, the new term becomes 160 years.

The cost of extending a lease generally amounts to 50% of the property’s “marriage value,” which represents the increase in property value resulting from a longer lease term. Essentially, you’ll be paying approximately half the additional resale value you would gain upon selling.

Additional factors influencing the cost of extension include any property improvements made and the current ground rent payments. Other expenses involved in lease extension comprise legal fees, property valuation, Land Registry update fees, and Stamp Duty (if the extension costs exceed £125,000).

Can I buy the freehold on my property?

If you’ve owned your leasehold property for at least two years, you have the right to purchase the freehold.

It’s advisable to undertake this process formally with legal assistance, typically through a First-Tier Tribunal (or a Leasehold Valuation Tribunal in Wales).

If negotiations with the freeholder prove unsuccessful, the Tribunal will determine the purchase price and terms.

Acquiring the freehold is more straightforward for houses, as there’s only one owner. However, for flats within a block, ownership of the freehold requires joint purchase by all residents. While this can be more challenging to coordinate, it’s often worth pursuing.

Can leasehold rights be transferred?

As a leaseholder, you possess the right to request the transfer of lease management from the freeholder to a “right to manage” company formed by you and fellow leaseholders.

Taking control of lease management can potentially lead to significant cost reductions, such as insurance expenses. However, it’s important to note that this action does not extend the lease term.