Leasehold
What does "leasehold" mean?
Leasehold is essentially a long-term tenancy where the leaseholder buys the right to live in the property for the duration of the lease, and ownership is subject to the terms of the lease. Upon the expiration of the lease, unless otherwise extended, the property reverts to the ownership of the freeholder.
Leasehold
How long is the lease typically for a leasehold property?
New leases can be granted for anywhere between 99 to 999 years, although new residential leases are commonly up to 125 years. A lease is not reset for each new owner and will continue to deplete until expiry unless extended
Leasehold
What are ground rent and service charges?
- Ground rent is the fee paid to the freeholder for renting the leasehold land from them. The freeholder does not provide any services in exchange for the ground rent. The sum due is usually fix for a set amount of years and the lease will define how it increases.
- Service charges vary according to the type of property and location, and are fees paid to the freeholder or management company for the repair and upkeep of shared spaces and services e.g., maintaining communal gardens, a lift in a block of flats, upkeep of private roads and management costs. Understanding the potential costs is vital on any leasehold purchase.
Leasehold
What happens when the lease term expires?
Upon the expiry of a lease, the ownership of the property reverts to the freeholder and the leaseholder no longer owns the property. The freeholder may allow the tenancy to continue or may seek to regain possession of the property. There may also be options for the now-expired leaseholder to extend the lease, agree a new lease with the freeholder or to purchase the freehold.
Leasehold
Can I extend the lease? What is the process for lease renewal?
- It is usually possible to extend a lease; however the process can be complex, time-consuming and costly. It is important to seek legal advice when arranging a lease extension to ensure that you are afforded the appropriate protections and do not inadvertently impact your ability to sell the property in the future.
- The process for renewing a lease includes identifying and notifying the freeholder (or serving the appropriate notice, instructing an expert to value the property, make an offer to the freeholder, pay any required deposit and negotiating an agreement.
Leasehold
What are the restrictions or limitations of owning a leasehold property?
- Leaseholders own the property for the duration of the lease, but not the land on which the property sits, meaning there are greater restrictions when compared to a freehold property, i.e. structural changes (it could affect other flats), carrying out trade/business in the property, pets and subletting the property being common ones.
- Leasehold properties are subject to leases that, over time, reduce in duration. A low duration remaining on a lease could impact the ability to sell the property in the future and make it difficult to obtain a mortgage or to re-mortgage the property.
- Leaseholders may also need to pay ground rent and/or service charges.
- Occupation of the property is subject to compliance with the lease agreement with the freeholder, meaning that breaches of the lease could result in forfeiture.
Leasehold
Are there any legal obligations or responsibilities associated with leasehold ownership?
Leaseholders must adhere to the terms of the lease agreement, and may also be responsible for the payment of ground rent and/or service charges. A lease will set out any obligations and/or responsibilities of the leaseholder, examples include maintaining the condition inside the property and obtaining permission to make alterations.
Leasehold
Can I sublet a leasehold property?
The lease will set out whether or not subletting is permitted, however leases commonly require that the leaseholder obtain permission from the freeholder in advance and there may be restrictions on this.
Leasehold
What are the rights of leaseholders regarding property management decisions?
- Subject to eligibility, some leaseholders are able to invoke the right to manage and take over management of their property without the consent of the freeholder.
- In certain circumstances leaseholders are able to apply to a tribunal to appoint a new manager where a dispute has arisen.
Leasehold
What is right to manage?
Eligible leaseholders in multi-occupancy buildings (such as a block of flats) are able to take control of some management responsibilities without having to prove the bad management of the freeholder, and can either manage the property directly or pay a managing agent to do so on their behalf. There is a process for leaseholders to follow, including eligibility requirements that leaseholders must meet.
Leasehold
What is enfranchisement?
Enfranchisement is the process of eligible leaseholders purchasing the freehold of their leasehold property. Enfranchisement usually only applies to multi-occupancy buildings, and eligibility requirements apply, i.e., the percentage of the building dedicated to non-residential floor space.
Leasehold
Are there any potential pitfalls or risks associated with buying a leasehold property?
- The duration remaining on the lease may negatively impact the saleability of the property or the ability to obtain a mortgage, i.e., if it is deemed a short lease.
- Lease extensions can be costly and time-consuming.
- The lease could contain restrictions or obligations that may impact on your enjoyment of the property that would not apply to a freehold property, i.e., some leases do not permit pets or subletting.
- Buying or selling a leasehold property may take longer than a freehold property.
- Leaseholders must pay ground rent and service charges, often with no control over the costs. These costs can spiral, i.e., existing ground rent could double every 5 to 10 years.
Leasehold
What are the steps involved in purchasing a leasehold property?
- The steps in purchasing a leasehold property are similar to purchasing a freehold property, however when purchasing a leasehold property additional steps must be taken to ensure that the freeholder is verified. The additional steps do prolong the transaction time.
- Once a conveyancer is instructed, they will review the lease and title, conduct searches, review any management pack, review the mortgage offer, submit enquiries and prepare a report once all the replies are received and are satisfactory, report any issues necessary to the mortgage lender, arrange exchange of contracts and complete on the transaction. Notices will be served on completion to the landlord/Management company.
Leasehold
Are there any upcoming changes in leasehold property laws that buyers should be aware of?
- The Leasehold and Freehold Reform Bill introduced in 2023 proposes numerous changes to the rules around leasehold properties. The bill is currently being reviewed and has not yet become law.
- Proposals within the Bill include increasing standard lease terms, requiring transparency over service charges and extending eligibility requirements for enfranchisement, among others.
Leasehold
What should I check in the lease agreement before purchasing a leasehold property?
- The term of the lease is a key factor to review before purchasing a property.
- Administration charges, ground rent and service charges will be detailed in the lease and should be reviewed before purchasing a leasehold property.
- The lease should be checked to confirm that any obligations or restrictions do not negatively impact on enjoyment of the property.
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