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What is leasehold?

Looking to buy a property, but not sure about leasehold, and whether it's right for you?

What is leasehold?


What is leasehold?

When buying a leasehold property, you are buying the right to live on the land for a specified amount of time, but not the land itself (freehold). Buying a leasehold property means that when the lease ends, you either need to apply to renew the lease, or it reverts back to the ownership of the freeholder.

This practice comes from the feudal system of property ownership in the UK, where lords would own the land, but allow people to lease the right to live on them. For some, this is still the case, with the freehold of properties being owned by one person. In other situations, someone may have bought a house (the freehold) and converted it into flat, then selling them on as leasehold.

When buying a leasehold property, it is important to check the rates, ground rent or any other payment you may make to the freeholder for the upkeep of the building or grounds.

Advantages of leasehold

Leasehold properties are often cheaper, and are usually flats or apartments. This makes sense, because you own one portion, when there are multiple properties on one piece of land.

Buying a property with a short lease is often much cheaper, as they devalue the closer they get to the renewal date. Of course, there is a significant payment to renew the lease, which is not always guaranteed, but those who are savvy and have done their research may find they can get a great deal on a property with a short lease.

If you like the advantage of living in a block that has communal areas that are cared for, like a gym, workspace, garden or seating area, it is likely to be a leasehold property. Each leaseholder will pay a fee to the freeholder which will cover the costs of cleaning, upkeep and repairs of these communal areas.

Disadvantages of leasehold

As mentioned, being a leaseholder often means paying for the extras towards the building or land. This means that new buyers are faced with not only mortgage payments, but ground rents and service charges. They may also have to pay into a reserve fund for any works that need to be done, or may be called upon to pay towards a communal part of the building that needs fixing – like the roof. Knowing these costs in advance will help you make a decision about whether the property is right for you, and is affordable.

A lease is for a certain number of years, and the lower the lease, the closer it is to being renewed. Renewing a lease can be expensive, with leaseholders sometimes paying up to 20% of their property value for the renewal. A case to lower the cost of renewing a lease was taken to court in 2018, but there is yet to be any official change.
Bear in mind that leases do not renew simply by changing ownership - you would need a property lawyer to negotiate with the freeholder about renewal. If you are buying a property with a 150 year lease, and the current owners have lived there for 20 years, you are purchasing a lease of 130 years.

Leaseholds on new builds

The leaseholds on new builds have been in the news quite a bit, as some buyers have assumed they were buying the freehold, when they were in fact, buying leasehold. They were then hit with some surprisingly large service charges and ground rents. One of the worst elements of this is that developers can then sell on the freehold to other companies, so whilst you may have bought a property and had clearly listed charges, at any point the freehold could be sold on to another company who can charge whatever they like.

When buying a new build, be aware of whether you’re buying the leasehold or freehold, who owns the freehold and whether or not that can be sold on. Whilst the government are attempting to make sure this practice stops, always make sure you check these details when purchasing a new build.

Leasehold with share of freehold (commonhold)

In some cases, you may buy a property with a share of the freehold. This means you will still own the lease, but will own a portion of the property. Depending on the rest of the land, it may be that this is commonhold, where all the leaseholders own a portion of the freehold (say there are three flats in a building, all three leaseholders are freeholders). This would mean you work with the other leaseholders to agree on repairs, splitting costs of maintenance and anything else. If the freehold is split unevenly, it can be more complicated, but ultimately having a portion of the freehold means more responsibility, but also more freedom over your property.

Buying a leasehold property

Buying a leasehold property can have more elements to consider – if your lease is particularly short, it’s important to consider the cost and likelihood of renewal. You’ll also have to consider whether the resale value may be affected by the length of the lease left. It’s very important to ask about the extra costs when buying a leasehold, so you can adjust your expectations of monthly costs. Getting a great deal for a low monthly mortgage repayment may be scuppered by high ground rent, charges or fees. If you are buying a new build, be sure to find out whether your freehold can be sold onto a third party, and if there is a cap on the fees that can be charged. Sometimes you are given the option to buy your freehold for a new build house, and comparatively, the difference in price is not very high, so it is always worth asking if that is an option.
 

Published February 2018
 

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