Buying a leasehold: Everything you need to know
Are you considering purchasing a leasehold property and are unsure what it actually involves? Let’s look at the differences between freehold and leasehold properties.
This guide discusses the differences between leasehold and freehold ownership, as well as the costs and procedures for extending a lease.
1. What is the difference between leasehold and freehold property?
When purchasing a property in England or Wales, there are two options: freehold or leasehold. In a nutshell, you have freehold ownership of the structure and the ground it stands on. In contrast, under leasehold, you ‘lease’ the building from the freeholder for a certain period of time.
Let’s look at the distinctions between leasehold and freehold.
- Freehold
The owner owns both the building and the land outright in a freehold situation. The majority of privately held residences in the United Kingdom are freehold.
If you own the freehold, you will be responsible for all repairs and maintenance on your house. And, with planning permission, you may tweak and adjust it to fit your needs.
- Leasehold
When you purchase a leasehold house, you do not own the land or the structure. Instead, you lease the home from the freeholder, who grants you access to it for a set number of years.
Leases often begin with a length of 99 or 999 years.
When your lease expires and there are no more years remaining on it, the freeholder reclaims ownership of the property. Even if you’ve paid off your mortgage in full, this might happen.
Typically, the shorter the lease, the lower the value of the property. If you have less than 80 years left on your lease, remortgaging your house may become more challenging.
Apartments are almost always leasehold, however homes can also be leasehold.
2. What should the length of a lease be when purchasing a flat?
The term of a lease affects the value of any leasehold residence. If the lease is very short, the flat will be less expensive to reflect the expected expense of a lease extension. If a lease has the greatest period remaining, the home is likely to get the highest price as long as it is in excellent shape.
When a lease is less than 80 years old, it becomes much more expensive to renew. Furthermore, some mortgage lenders will not finance on a residence with a lease term of less than 80 years.
When compared to other properties with longer leases, any lease of less than 70 years might begin to adversely influence the value of the property.
However, if you’re willing to go through the extension procedure and have the money to do so, finding a short-term rental house at a low cost is an alternative.
3. What is a reasonable lease length?
The longer the better. A lease be up to 999 years or more.
However, most lenders consider a lease of 90 to 120 years to be a sound investment, and you should have no trouble getting a mortgage for a house that falls within this range.
4. What is typically included in a lease?
A lease is a set of rules that both the freeholder and the leaseholder must abide by. In summary, a leaseholder must follow the regulations, and the freeholder must keep the building in good condition.
Every lease is unique, but they will all include information about charges for:
- Ground rent
- Service charges
Freeholders may have extra regulations governing what leaseholders may and cannot do in their lands. Some leases prohibit subletting or the ownership of pets. Others will not allow you to install a satellite dish or hang laundry on a balcony.
Although it is uncommon, a leaseholder’s lease might be terminated if they fail to pay ground rent or service costs or violate the conditions of their lease. That means the freeholder regains possession.
5. What are the charges for leasehold homes?
While a leasehold is an excellent choice for a property, there are a few factors to consider:
Ground Rent
The leaseholder pays the freeholder ground rent on a yearly basis. It is literally a’rent’ fee for the land on which the property is built. This might range from a little sum of £10 to hundreds of pounds every year. Some agreements enable the ground rent to be increased at predetermined intervals over the term of the lease.
Service Charge
The lease will also specify how the freeholder is responsible for building maintenance and repairs. The freeholder is in charge of upkeep, although the costs are distributed among the leaseholders. These expenses are referred to as service charges.
Maintenece Fees
‘Major works,’ such as roof repairs or door and window replacement, usually incur additional expenditures. Fees for significant works are distributed among the leaseholders and may be rather high, often ranging into thousands of pounds. If you’re buying a leasehold home, keep this in mind (and have some money set aside).
Lease extension costs
It is possible to extend a lease at any time, but the fewer the remaining years, the more expensive it will be. If you’re looking to buy a house with a short lease, ask the freeholder how much it will cost to extend it. A surveyor and a solicitor will also be required to assist you with the procedure.
6. How easy is it to extend a lease?
Depending on who owns the building, extending the lease might be a simple or difficult procedure. The cost of the addition will be negotiated with the freeholder, and you will be responsible for the solicitor and surveyor expenses.
The freeholder, leaseholder, and your respective surveyors will calculate the cost depending on:
- How many years there are left on the lease
- The property’s value
- How much the ground rent is
- The freeholder’s attitude to negotiations
- Surveying and legal costs (the leaseholder has to pay the freeholder’s costs as well as their own).
The majority of leaseholders extend their lease well before it expires.
7. What services do freeholders and managing agents provide to leaseholders?
You will have a freeholder if you own a leasehold property. Your freeholder might be an individual or a firm situated in the United Kingdom or elsewhere. The land and structure in which your house is located are theoretically owned by the freeholder. They are generally in charge of building repairs and the upkeep of communal areas of the building.
The expense of building maintenance can be passed on to leaseholders through service charges imposed by the freeholder. They will normally levy a small yearly fee known as ground rent to a leaseholder.
Most freeholders engage a management agent to look after the building and collect costs, so you’ll usually interact with the managing agent if you’re a leaseholder.
8. Can a leasehold become freehold?
The quick answer is yes, however it depends on the property and your circumstances. There are two approaches to this: official and informal.
The official route: leaseholders who own a home can legally purchase the freehold of their home if they satisfy specific conditions.
The informal route: a homeowner might inquire with the freeholder about the possibility of selling the freehold informally.
It’s more complex with apartments, where you need to own 50% of the building in order to apply for the freehold. Flat owners in the same building can also join forces to acquire a portion of the freehold (more on which, below).
Buying the freehold might sometimes be more cost-effective than extending the lease. Having said that, purchasing the freehold may be a difficult process, and the freeholder will most likely wish to negotiate the price.
Always seek the opinion of a solicitor and a surveyor.
9. What is share of freehold?
Some apartments are offered as a ‘share of freehold.’ This means that the leaseholders possess the freehold as a group. There is still a lease with a portion of freehold, but the leaseholders have far greater influence over the building’s upkeep and costs.
Leaseholders have a shared right to purchase the freehold of their building with the other flat owners in the building. This is referred to as ‘freehold enfranchisement.’ Another possibility is to obtain the ‘right to manage’ (RTM). This implies that the building’s management and costs are taken up by the leaseholders. However, the freeholder retains ownership of the building and land.
10. Is it more difficult to sell a leasehold property?
No, however the legal procedures involved in purchasing or selling a leasehold house may take longer.
In addition to the work that would be performed on any transaction, your solicitor will be required to:
Examine the lease conditions and communicate with the landlord, managing agent, management firm, or residents’ association. Examine the management accounts, identify any scheduled works, and check that the mortgage lender’s criteria are completed. Look into any disagreements. Once this is completed, your solicitor must also notify your mortgage lender.
Short leases might cause delays since leases with 85 to 90 years remaining or less are more difficult to finance.
11. Upcoming Leasehold Law Changes
The administration has promised significant changes to leasehold legislation. Leaseholders in England will be able to renew their lease for up to 990 years at no additional cost.
Leaseholders might save tens of thousands of pounds as a result of the revamp.
12. Leaseholder Assistance and Advice
You can file a complaint if you believe you are being treated unjustly or are being overcharged for a lease extension.
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