What is a Leasehold Property?

When you start on the journey of moving house, there are many terms you will hear being referred to. Among these is the term “leasehold”, which is a form of property ownership. In this article, we delve into the details of leasehold properties, from what the term means, the difference between leasehold and freehold, what ground rent is and potential restrictions. Whether you’re a first-time buyer, a seasoned homeowner or wondering how your leasehold might affect you when you come to sell your property, understanding these key aspects will empower you when you buy your next property.

What Does Leasehold Mean?

Leasehold refers to a form of property ownership where the buyer owns the property, but only for the period of your lease. Typically leases are long term, ranging from decades to centuries, but leasehold also means you don’t own the land on which the property stands. You will have a lease from the freeholder or landlord for a number of years (this can be up to 999 years, but it can also be below 80 years, which is more of a challenge). The leaseholder pays annual ground rent to the freeholder (for older properties this is typically a small fee, known as peppercorn rent). The arrangement also comes with certain responsibilities and restrictions, often outlined in a lease agreement. This may include getting permission from the freeholder to extend the property, subletting and even ownership of pets in some cases.

Leasehold vs. Freehold

Freehold grants ownership of both the property and the land it sits on, offering greater autonomy to the homeowner. Leasehold involves having a lease agreement with the landowner, meaning you pay annual ground rent to the freeholder and bringing with it a lease agreement, outlining the responsibilities and restrictions on the lease.

What is Ground Rent?

Ground rent is a regular payment made by the leaseholder to the freeholder, serving as compensation for the use of the land. While historically a nominal amount, sometimes referred to as peppercorn rent, there have been recent issues surrounding ground rent increases and leaseholders complaining about freeholders not maintaining buildings to a sufficient standard.

Are There Leasehold Restrictions?

Leasehold properties may come with specific restrictions outlined in the lease agreement. These could range from limitations on property alterations to regulations governing subletting. The other restriction is the length of the agreement. If you have less than 80 years left on your lease, it will restrict you in being able to sell, as potential buyers will find it harder to get a mortgage on it. Understanding these restrictions is crucial for prospective buyers. 

What responsibilities does the freeholder have?

Most flats are sold as leasehold properties. In buildings with a common area, such as apartments, the freeholder usually has responsibility for common areas of the building such as entrance hallways and the roof. However, it may be written in the leasehold agreement that if any major works are completed to common areas, it the cost of the works may be shared amongst the leaseholders.

What are the problems with leasehold properties?

The main problem with leasehold properties is lease length, especially if the lease might be 80 years or below, which can affect your ability to sell or get a mortgage on the property. Extending a leasehold property’s lease or buying its freehold can cost thousands. Other common issues include high ground rent being charged on more modern properties, to the point where some leaseholders are finding themselves paying thousands of pounds each year. Leaseholders, especially those purchasing newly built properties, also face high service charges, which are paid monthly to look after the common areas of the building. Service charges are normally written into the terms of your lease and, although uncapped, should be set at a fair level by the freeholder.

Leasehold Reform 2023

Proposed leasehold reforms in 2023 aim to address issues such as escalating ground rents and unfair leasehold practices. The King’s speech on 7th November 2023, set out measures of the Leasehold and Freehold Bill, including a ban on the sale of new leasehold houses in all but exceptional circumstances and an increase in the standard lease extension from 90 years (or 50 years in flats) to 990 years. The reforms seek to empower leaseholders, providing a more transparent and equitable framework that will make it easier and cheaper for buyers of leasehold properties.

When should I worry about a leasehold property?

A lease length of under 80 years is considered to be a red flag when buying a property and can make it difficult to sell or get re-mortgage. A short lease of under 80 years also negatively affects the value of a property, sometimes by thousands of pounds. While it is possible to extend a lease on a property, it can be a difficult and expensive process. With many leasehold agreements being historical agreements, in some cases, you may also find you have an absent freeholder, which can cause problems if you want to extend your lease or buy the freehold, or if you are selling your property further down the line, especially if you want a quick sale.

Can I extend my leasehold?

Government acts have helped leaseholders to extend their lease in recent years. If you own a flat, you have the right to extend your flat’s lease by 90 years on top of the unexpired term. If you own a house you could extend the lease on your house by 50 years. In both cases, you have the right to extend the lease if you have held the lease for 2 years (set to be scrapped by the Leasehold and Freehold Reform Bill) and it was originally leased on a “long lease”, which is typically more than 21 years. If your freeholder opposes, you can challenge their decision in court. When a lease is extended, any ground rent you pay automatically reverts to zero.

Can I buy the freehold for my leasehold property?

Buying the freehold to own your property outright is called ‘enfranchisement’. It can be a costly process and you will need the help of a solicitor to navigate the process. If you live in a flat at least half of the leaseholders have to to come together to buy the freehold from the freeholder/landlord. Buying the freehold for a house is more straightforward, but you will still be required to obtain a professional valuation of the freehold (to determine the price you need to pay to buy the freehold) and once you have the valuation, serve the freeholder with a Section 13 Notice. It’s recommended to hire a surveyor with experience in leasehold enfranchisement.

Are there any alternatives to leasehold?

Commonhold is a modern form of property ownership that is an alternative to traditional leasehold and freehold arrangements. Commonhold was created by the Leasehold Reform Act of 2002 and is where each flat in a multi-occupancy owns its own freehold and the owners of the flats manage the common areas of the building jointly. Commonhold is designed to promote a sense of community and shared responsibility among property owners within a development. While commonhold has been available in the UK since 2004, it is not as widely adopted as traditional freehold or leasehold arrangements.

Conclusion

Buying a leasehold property can mean you don’t have to pay for buildings insurance and you don’t have to worry about maintenance and upkeep of common areas, but it does bring some challenges, such as the requirement to pay ground rent, high service charges and the challenge of extending a short lease. Navigating the intricacies of leasehold properties requires a comprehensive understanding of the terms, implications, and potential reforms on the horizon. The good news is that the Government’s Leasehold and Freehold Reform Bill sets out some measures that will make leasehold homeownership less of a headache.