Pros and cons of leasehold property

Residential properties in the UK can be either freehold or leasehold (commonhold is rare). If you are looking to buy a leasehold property it is important to understand the pros and cons, before deciding if it is the best way forward for you.

What is leasehold?

Purchasing a leasehold property means that you are buying the property for a specific period of time, known as the lease term, you do not own the property or land on which the property sits this is owned by the freeholder who is the person or company who own the freehold title. Flats are commonly leasehold properties; however, houses may also be leasehold, particularly if purchased under a shared ownership scheme.

What is freehold?

Freehold ownership refers to owning the property and the land on which it sits, any physical buildings on the land and any outdoor space within the borders of the property, such as gardens.

What you should consider when buying a leasehold property

You should not let the fact that a property is offered for sale as a leasehold put you off buying it, as leasehold properties offer a very common form of ownership. There are both advantages and disadvantages to purchasing a leasehold property and these should be considered when making the decision.  Some of the factors to consider are:

Length of lease

The first question any potential leaseholder buyer should ask is how long remains on the current lease, as Lease length can vary significantly.

A new lease for a leasehold property usually ranges from between 99 to 125 years, however, they can be as long as 999 years. As time progresses the duration of the lease reduces, therefore a leasehold property may lose value and become increasingly difficult to sell over time as the remaining term of the lease diminishes.

Many mortgage providers will not provide a mortgage for properties that have, what they class as a short lease term remaining, commonly 85 years.  This could mean that anyone deciding to purchase a short-term lease property could find they experience difficultly securing a mortgage.

Leaseholders can usually increase the term of the lease; however, this can be a costly process, with costs increasing as the remaining term reduces. For example, as recent calculation we received to add 90 years to the existing 60-year lease on a £200,000 property was £28,000.00! There are lots of valuable tools you can use to look into the cost Lease extension calculator for flats – The Leasehold Advisory Service (lease-advice.org).

Leasehold service charges

Leaseholders usually pay service charges to either the freeholder (landlord) or a management company who provide maintenance and repairs for communal spaces and the building’s structure.

As well as covering the costs for maintenance and repair these services charges also cover admin fees and any associated costs for additional facilities such as an on-site gym, lifts and garden landscaping. They may also include specific contributions to a reserve fund that would be used to cover large one-off costs depending on the size of the site/development.

Ground rent

Leaseholders may also be required to pay ground rent. Ground rent is an annual or half-yearly charge paid to the freeholder as consideration for granting the lease, and does not cover the cost of any services. Ground rent is usually a token payment of between £200 – £300 a year, however, some freehold landlords have been known to charge much more.

Concerns around spiralling ground rent has resulted in the government effectively abolishing it for all new leases granted after 30 June 2022, however existing leases are unaffected by this change.  If you have any concerns in regard to this it is advisable to have a solicitor check your lease to ensure that there are no hidden clauses.

Any ground rent charged on a new lease granted on or after 1 July 2022 should only be peppercorn rent, meaning of little to no value and as such, many leaseholders may no longer be called upon to pay ground rent.

Extending a lease or buying the freehold

Extending a lease can be legally complex with the costs involved having to be negotiated between the leaseholder and the freeholder. The costs to extend will depend on:

• How much the property is worth;
• The current ground rent;
• Any improvements made by the leaseholder.

And will also include:

• Legal fees;
• Property value after extending;
• Land registry update fees;
• Stamp duty (if payable).

Subject to certain conditions leaseholders may have the statutory right to buy their properties freehold, either as part of a collective or as an individual.

It is always important to get the best legal advice and speak to a solicitor regarding such complex matters, the team at Tollers are highly experienced in advising leaseholders should they wish to extend or buy. if you are looking at selling a leasehold property, read our latest article on the topic here: Preparing To Sell A Leasehold Property

How has the law relating to Leasehold changed

A new law known as ‘The Leasehold and Freehold Reform Act‘ became law in May 2024 which should make it less expensive to extend a lease, although currently this new law has yet to come into force until additional legislation is laid, which may not happen until 2025/2026.

Once the law takes practical effect it will see some significant changes, including:

Leaseholders have the ability to extend their lease by 990 years. It is currently only possible to extend the lease on a leasehold house by 50 years (this can only be done once), while leases on flats can be only be extended by 90 years at a time.

Many leaseholders no longer have to cover their freeholder’s legal and valuation costs (which is an expense they have to cover currently if extending a lease).

New leasehold owners will no longer have to wait 2 years to extend their lease, as this requirement will be scrapped – currently, leaseholders must have their name on the property title deeds for 2 years before they can extend their lease or purchase the freehold for the property.

What are the advantages of leasehold ownership?

• It is often cheaper to purchase a leasehold property than a freehold property;
• Buildings of multiple leasehold units, such as a block of flats, may benefit from communal facilities such as a gym, concierge, underground parking or even a lift;
• The freeholder is usually responsible for maintaining and repairing the building and communal spaces, and will arrange appropriate building insurance;
• Both positive and negative covenants are more easily enforceable against future owners, whereas some covenants for freehold properties are not directly enforceable against future owners of the property.

What are the disadvantages of leasehold ownership?

• The process for purchasing a leasehold property is more complicated than purchasing a freehold property, largely due to the necessary enquiries put to the freeholder;
• The duration remaining on a lease is integral to its saleability and whether or not a mortgage can be obtained. The shorter the term remaining on a lease, the harder it is to sell and the more difficult it is to obtain a mortgage;
• The value of the property may decrease as the remaining term on the lease reduces;
• Leases can be extended, however there is usually a cost to doing so. This cost is based on the purchase price, the term left on the existing lease, the ground rent and the value of improvements made to the property, and can run to tens or hundreds of thousands of pounds. However, leaseholders who have purchased a portion of the freehold may be able to extend their lease for a minimal cost;
• Leases may place additional obligations and restrictions on the leaseholders that freehold owners do not experience, such as prohibiting the running of a business from the property, the ownership of pets or subletting the property.
• Leaseholders are usually required to pay service charges towards the maintenance of communal areas and/or ground rent.

Talk to Tollers

When considering buying a leasehold property it is important to weigh up the pros and cons of leasehold, as well as take into consideration your personal circumstances, long-term goals and financial situation.

If you are considering purchasing a leasehold property, have a question or would like to discuss the pros and cons of leasehold properties given your situation…Talk to Tollers on 01604 258558, our highly experienced residential conveyancing team are on hand to guide you through the process.