So you’ve found your dream home, only to find that it comes with a leasehold agreement?
There is something off-putting about the word ‘lease’ since it implies that you aren’t the owner of the property, despite having paid a lot of money for it. However, when handled correctly, leaseholds are just as secure as other types of property ownership.
In this article, we’ll take a closer look at what leaseholds are and how they work so that you can go forward confidently.
For additional information, view our article on what you should know about buying or selling a leasehold property.
What does leasehold mean?
A leasehold is a legal arrangement with a freeholder (also referred to as a landlord) which outlines a fixed amount of time to occupy a property. Leaseholds are typically given out in terms of 99, 125 or 999 years. After which, the property reverts to the freeholder.
However, leaseholders can extend their lease to prolong their tenancy or buy the freehold altogether.
As you can see, long-term leaseholds are relative to owning the property for a lifetime or beyond. So, why do leaseholds exist?
Why do leaseholds exist?
Leaseholds are a relic of UK property law, dating back to the Middle Ages. Lords would lease land to ‘serfs’ for a fixed term, on the condition that the ‘serfs’ worked the land to earn profit for the Lord.
Both parties somewhat relied on each other, serfs received housing, and the Lord received financial gain. That said, powerful Lords undoubtedly had the upper hand. Serfs were frequently exploited and had the threat of eviction lingering over their heads.
While times changed and legislation has evolved to protect tenants’ rights, the leasehold system remains firmly entrenched in UK law.
Leaseholds are largely still in use because they offer a convenient way to manage the ownership of flats and multi-occupant buildings.
Leasehold vs Freehold
Houses are typically sold as freeholds because when you buy the home, you also own the land that the property sits upon.
There are more complications when it comes to apartments or blocks of flats since multiple tenants share the building. Almost all flats are sold leasehold, meaning that you own your apartment in the building, but you have no stake in the building itself. The structure and land it stands on belong to a freeholder, an individual landlord or a company.
The leasehold agreement imposes conditions on both the leaseholder and the freeholder, legally binding a certain standard of living. For example, freeholders usually maintain the building and upkeep of common areas in exchange for a service charge.
How does a leasehold work?
A lease is an agreement between the leaseholder and the freeholder; therefore, the conditions vary for each property.
The lease should indicate how long the tenant can occupy the property and outline any regulations or extra charges the tenant should expect to encounter.
As mentioned earlier in the article, leaseholds are typically given out in periods of 99, 125 or 999 years, but leaseholders have the right to extend their lease or buy the freehold. So, for example, if your original lease was longer than 21 years, you have the right to extend your lease by 90 years after two years of ownership.
Extending your lease
Your lease is a diminishing asset, meaning with every year that passes, the value of your property decreases. Therefore, extending your lease protects your current investment in your property and possibly even increases the value of your home.
It is crucial to keep the 80-year rule in mind. If your lease drops below 80 years, there are two main consequences:
- Your property will be harder to sell as mortgage lenders are wary of depleting leases.
- If you decide to extend your lease, you will have to pay an additional ‘marriage clause’ fee to your freeholder on top of any lease extension costs.
Either way, letting your lease drop to below 80 years (even by one day) leaves you out of pocket. So be savvy and keep your eye on the time left on your lease tenure.
How to extend your lease
Lease extensions exist in a complex area of law that can be laden with expensive meter running costs.
At The Lease Extension Company, we want to transform the typical lease extension experience. Therefore, our nationwide lease specialists, valuers, and solicitors will support you from instruction to completion – consistently negotiating the best outcome and ROI for your property. We offer this at a fixed-fee price which we arrange after your initial consultation.
There are two routes to extending your lease, a Statutory (legally protected) route and an informal (direct) route. If you have had your property for a minimum of 2 years, we will often recommend the statutory route due to the legal protection it gives you as the leaseholder.
Should I buy a leasehold property?
Whether a leasehold is right for you largely depends on your circumstances.
Buying a Leasehold Flat
A leasehold might be the only means of obtaining an apartment for many flats. This scenario is particularly true if you seek accommodation in a popular, in-demand area such as the city centre.
If you’re a first-time buyer, it can also be beneficial to have someone else (in this case, the freeholder) take care of the flat’s maintenance and upkeep of common areas.
The rights of leaseholders have also been protected by several pieces of legislation, including:
- The ability to extend your lease – taking the statutory route, particularly, holds your freeholder to deadlines to respond.
- Ability to buy the freehold
- A Right of First Refusal
- A Right to Manage (RTM)
- Collective enfranchisement
- The abolishment of ground rent by The Leasehold Reform (Ground Rent) Act 2022
That said, there are some drawbacks to leasehold flats, including service charges and regulations that may affect your lifestyle, such as whether you are allowed to own pets or decorate your apartment as you wish.
You will also need to take responsibility for monitoring your lease term. For example, letting your lease fall below 80 years could spell difficulties for selling your property in the future. Plus, extending your lease will be more expensive because you will need to pay your freeholder a ‘marriage clause’ fee.
Bear in mind that it’s in the freeholders’ interest that you let the lease drop below 80 years as they will financially benefit, so the responsibility rests on your shoulders.
As you can see, leasing a flat is not always a dead-end trap, especially if you’re well-informed about your rights as a leaseholder and employ professional legal support to help with any changes.
Buying a Leasehold House
The argument as to whether a leasehold house is worth purchasing is a slightly greyer area – one that may require a dedicated article in the future.
Many property experts argue that there is no valid reason for a developer to retain the freehold of a house once sold. However, new builds are increasingly being sold as leasehold properties, causing controversy about whether leasehold housing is merely a cash grab for freeholders.
Knowing that you are entering into a leasehold agreement is a great start, as many people simply assume that buying a house means owning the freehold. Stay aware of your lease expiring and any service charges or regulations.
If you are planning on embarking on any legal procedures, such as extending your lease, work with a conveyor and solicitor that has experience or is well informed about extending the leasehold on houses. The Lease Extension Company can arrange a specialist team for you.
We hope this article helps you better understand the meaning, advantages and disadvantages of leaseholds and that you have more confidence going forward with your property search.