Leasehold properties are common in the UK, especially when purchasing flats, maisonettes, and other types of residential properties that share land and communal facilities. If you’re considering buying a leasehold property, you may have some questions. This article outlines some of the key things you need to know about this type of property purchase.
- What is the difference between leasehold and freehold?
- What is a lease?
- Does the length of the lease matter?
- What happens if the lease runs out?
- Can I extend the length of the lease?
- What is ground rent?
- What are service or maintenance charges?
- Does the lease include any restrictions?
- What are my responsibilities as a leaseholder?
- What are my rights as a leaseholder?
- What is share of the freehold?
- Can I purchase the freehold?
- Are fees more expensive for leasehold purchases?
- Which is more expensive, leasehold or freehold?
- Are leasehold properties harder to sell?
What is the difference between leasehold and freehold?
Leasehold and freehold are the two core types of residential property you can purchase in the UK. In simple terms, with a freehold property, you own both the physical building and the land upon which it sits.
With leasehold, you own the rights to the property (usually a flat) for a fixed amount of time (typically eighty-plus years). However, you do not own the land, common areas and usually the roof. A separate freeholder owns these. When purchasing a leasehold property, you will agree to be bound by the lease terms. These terms can vary, and more information is set out below.
What is a lease?
The lease is the contract between the owner of the freehold (the landlord) and the person purchasing the leasehold. The lease will set out each party’s rights and obligations when it comes to the property.
For example, landlords are usually responsible for organising the maintenance and repairs for common areas such as stairwells, shared gardens, or the roof. In turn, leaseholders are typically accountable for paying a service charge towards this, keeping their property in good order, and may have to agree to certain conditions such as no pets or sub-letting.
Does the length of the lease matter?
Most leasehold properties are sold with a long lease, up to 999 years. This means that the person buying the leasehold is purchasing the right to live in the property for that number of years. However, some properties are sold with shorter leases.
In short, the length of the lease is essential when considering a property purchase. Your mortgage lender may be unwilling to lend on a property with a shorter lease (usually 80 years or less). Furthermore, extending the lease becomes far more expensive when fewer years are left.
It is typically recommended that you look for properties with at least 85 years left on the lease. This means you will have enough time to live in the property for two years and thus be eligible to extend the leasehold before it gets below 80 years. You should also be prepared to pay to potentially extend the lease when you sell to make the property a more attractive purchase for buyers.
What happens if the lease runs out?
If the lease is allowed to expire (i.e. get to 0 years), then the property ownership automatically reverts to the freeholder. If the lease is allowed to expire, there is nothing you will be able to do about this. That’s why it’s important to ensure that your lease has sufficient time left on it when purchasing the property and that you take steps to extend it long before it can run out.
Can I extend the length of the lease?
Yes, it is possible to extend the lease to prevent it from running out and the property reverting to the freeholder.
If you own a leasehold flat, you have the right to extend the lease by 90 years, provided you have held the lease for two years or more. If you own a leasehold flat, you have the right to extend the lease by 50 years, subject to the same conditions.
You do have to pay to extend the lease. The fewer years left, the more expensive it is to extend. So, it is recommended that you extend it as soon as possible if you have less than 90 years remaining. It can also be challenging to sell a property with fewer years left, so most people extend the lease before they sell.
You cannot extend a property lease that you have not purchased. To avoid the high cost of extending shorter leases, purchasing properties with 80+ years left on the lease is typically recommended.
What is ground rent?
Ground rent is a fee that the leaseholder must pay to the freeholder of the land upon which their property stands. The amount of ground rent you must pay will be set out in the lease terms. It can vary hugely, from a ‘peppercorn’ rent (which equates to virtually no charge), to thousands of pounds per year. There may also be terms in the lease detailing when and how much the ground rent can increase. So, it is vital to thoroughly check the lease terms before you go ahead with your purchase of a leasehold property.
What are service or maintenance charges?
Service or maintenance charges are different from ground rent, though they are another charge payable by the leaseholder to the freeholder. These charges cover the leaseholder’s portion of maintaining the shared areas of the property and land. This could include, for example, stairwells, shared gardens, corridors, shared storage, and so on.
Does the lease include any restrictions?
Every lease is different and, as such, will include various restrictions. However, some common ones include:
- No pets
- No subletting of the property
- Not to carry out any structural alterations to the property
- To keep the property in good decorative order and condition
As a leaseholder, you must comply with the restrictions set out in the lease. If you don’t, the freeholder is within their rights to take action against you. So, it is crucial to carefully consider the terms of any lease, including restrictions, before you purchase any leasehold property.
What are my responsibilities as a leaseholder?
Any responsibilities you hold as the leaseholder of a property will be set out in your lease. You must uphold all obligations set out in your lease, or your freeholder landlord may be able to take legal action against you. Your responsibilities as a leaseholder will vary depending on your lease but usually encompass things such as:
- Charges to pay for the service and maintenance of any common areas
- Whether you are permitted to make alterations to the property and if you must seek permission to do so
- Whether it is you or your landlord who holds responsibility for dealing with certain things, such as repairs to the property
What are my rights as a leaseholder?
As a leaseholder, you do have certain rights. These include:
- The right to know the name and address of the freeholder
- The right to information about insurance and service charges
- The right to be consulted about certain chargees
- The right to challenge some charges (under specific circumstances)
What is share of the freehold?
An alternative option for the purchase of a flat is sometimes available. This is a ‘share of the freehold’. This means that you own both the property you live in and a share of the land and other communal areas, along with the other flat owners.
Up to four flat owners can own a share of the freehold in their own names. Another option, which can work when more than four flat owners want to own a share, is that a company owns the freehold and each flat owner holds a stake in that company.
Can I purchase the freehold?
If you live in a leasehold property, you may wish to purchase a share of the freehold after moving in. This is usually possible as long as at least half of the leaseholders are willing to purchase the freehold.
Are fees more expensive for leasehold purchases?
Every property purchase will incur solicitor’s fees. For leasehold properties, solicitor’s fees tend to be higher as these are usually more complex transactions that take more time than a straightforward freehold purchase.
Costs such as Stamp Duty Land Tax and individual searches will cost the same, whether the purchase is leasehold or freehold.
Which is more expensive, leasehold or freehold?
Leasehold properties do tend to be cheaper than freehold when directly compared. However, this is usually because leasehold properties tend to be flats, which have a lower value anyway, and freehold properties tend to be houses.
Are leasehold properties harder to sell?
In general, leasehold properties do not tend to be harder to sell than freehold properties. This is because most flats are leasehold. So, anybody looking to purchase a flat will be aware that leasehold is likely to be the only option.
However, properties with a short lease (80 or fewer years left) can be challenging to sell. Some mortgage lenders won’t lend on them, and potential owners may not want the additional costs of extending the leasehold. So, this is just one of several reasons you should consider extending the lease before you sell your leasehold property, especially if there is close to 80 years remaining.