Leaseholds are a common phrase that surrounds the property industry amongst others like freeholds and commonholds but not everyone knows exactly what it means and the laws and regulations surrounding the topic.
In this article, we’ll be going over the exact type of property of a leasehold so you are informed on the topic.
There are also a lot of things associated with leaseholds that are vital you understand in detail such as maintenance and service charges and how long you can extend a lease.
What is Leasehold?
A leasehold refers to the ownership of a property for a set period of time but not the land on which it stands. It is therefore essentially a long-term lease that allows you to live in the property for a specified number of years in exchange for some money you pay up front.
During that time, the leasehold can be purchased and sold between whoever wants to live in the property. The person who owns the land, called the freeholder, can also sell the land that the leaseholder lives in as a separate deal.
However, when a lease expires, ownership reverts to the freeholder anyway and the freeholder then becomes the owner of everything, the land the property is built on and the property itself.
Leaseholds can be houses and they are commonly also flats. These come in a variety of configurations, including purpose-built blocks, converted houses, and above commercial or retail premises where a residence is located above a shop for instance.
Another common type of leasehold is a maisonette which are flats with separate entrances or two-story houses built on top of shops or other maisonettes but the key is they have their own door without a shared corridor.
What is the definition of a leasehold?
Owning a property for a set period of time but not the land on which it stands is classed as a leasehold and in this case you are a leaseholder but on the other hand, freehold ownership entails complete ownership of both the property and the land on which it is built.
What are the upcoming changes to leasehold property in 2022?
It’s been talked about for years, but the UK leasehold law is finally getting a major overhaul in 2022. The first phase of the Leasehold Reforms (and Ground Rent) Bill has already begun, with the headline change being the elimination of ground rents for new properties.
This is great news for anyone looking to buy a leasehold property to live in or rent out as the maintenance cost of living in one of the buildings will be significantly reduced as landlords won’t be able to charge as much.
If you already own a leasehold property, you’ll be relieved to know that your ground rent cannot be raised, and that when your lease term expires, the new agreement must charge zero ground rent which means it is only a matter of time before your costs are reduced.
The new law also affects retirement homes, as ground rent can no longer be charged on any property in which people are retiring. In April 2023 these regulations come into effect and landlords must comply with the new rule.
More leasehold reforms are on the way as well but it is not entirely clear what these will be. For the latest information from the government, click here.
What is meant by a lease?
When you enter into a contract with a landlord, for a limited time, you will have conditional ownership of the property you signed for. This is called a lease and usually refers to a tenant in a leasehold.
There are also documents that go alongside a lease that are important and tenants and landlords must have a copy of in order to fully understand the agreement they have or maintain a point of origin if there is a dispute.
For example, if there is a part of the law and property act 1925 that a landlord thinks a tenant hasn’t followed, they may wish to give them a section 146 notice in order to make them repair any damages they have done to an agreement.
If you don’t have a copy of your lease, you can get one from the Land Registry or the solicitor who assisted you in purchasing the apartment but asking the freeholder of a property if you are a leaseholder would also be a good idea.
Lease agreements are typically going to differ from property to property, but the terms for all flats in a block is often identical as a freeholder will rarely assign different terms for each leaseholder they have.
This is similar to how it would be rare for a tenant to have different terms of their agreement to other tenants all living in the same HMO as a landlord will most likely just issue the same agreement.
What is important about the length of a lease?
The most important thing you should remember about leaseholds is that the value of the property decreases as the lease term shortens. If a lease has less than 80 years left, it may be difficult to sell. To avoid this occuring, you may want to form a commonhold instead.
This is because renewing it becomes more expensive and when you extend a lease with less than 80 years remaining, you must pay the landlord 50% of the flat’s “marriage value” in addition to the usual lease extension fee.
The marriage value is the additional value that a lease extension would bring to the property.
It is also worth noting that most mortgage lenders will not lend on properties with leases that are less than 90 years old so it is therefore critical to keep this in mind when purchasing a leasehold property.
Is it possible to extend a lease?
If you live in a leasehold property and want to extend your lease, you must go through a legal procedure known as leasehold enfranchisement which can get complicated but it is worth doing.
Throughout this process, there are some prerequisites that must be met before you can do so. For example, before you can request a lease extension from the freeholder, you must have lived in the property for at least two years.
This is also referred to as serving a Section 42 notice under the Leasehold Reform, Housing, and Urban Development Act of 1993.
How do maintenance and service charges work?
When you purchase a leasehold property, you must pay a service charge. This fee supports the upkeep of communal areas such as gardens, hallways, elevators, and building insurance within the building where your flat is located.
The fee is usually fixed, but it can change from year to year so it is critical to request that your solicitor or conveyancer explain all charges and inquire whether the lease administrator has any future plans that may require additional fees.
Leaseholder restrictions
Check your lease for any restrictions before making any changes to your property. If you live in a flat, your lease may have specific rules, such as not allowing pets or prohibiting you from hanging laundry on your balcony.
If you intend to make significant changes to your home, such as adding an extension or converting your loft, you may need to seek permission from the freeholder.
It is important to note that a freeholder should not reject your request unreasonably, but they may require you to pay a fee before any work can be done but at the same time, permission is required to prevent legal issues down the line.
What is the best advice for owning a leasehold property?
It is critical to be aware of the potential pitfalls when purchasing a leasehold property. Some developers have sold freeholds to third-party companies, which then charge homeowners looking to buy a lot of unnecessary fees to buy the freehold.
Visit this website here for an example of the fees that you should look out for and can expect to pay.
This can make selling the property and obtaining a mortgage difficult which means it is vital you check if any clauses can be restrictive and not immediately obvious.
If you have any questions, you should contact your solicitor right away. Make sure you understand the lease’s terms, including how much you’ll be expected to pay annually and whether or not any cost increases are expected.
Another good piece of advice is to make sure you are regularly checking in on your property to make sure that you do not have a squatter who could adversely possess your premises if they stay there for a while.
What questions should you ask before buying a leasehold?
Below are some potential questions you should have for either the freeholder of the property or the solicitor you are working with before you go ahead and buy anything.
- What is the remaining duration of the lease agreement?
- What is the amount of ground rent?
- Will there be any changes in the ground rent in the future?
- What are the limitations and permissions mentioned in the lease agreement?
- What is the service charge amount, and what services are covered in it?
- Has any renovation work been carried out on the property?
- Is there a provision for a sinking fund?
- Is there any significant maintenance work planned for the property?
- Who is responsible for managing the property?
- How many leaseholders are currently behind on their payments?
All in all
In the process of learning about a leasehold, there will most likely be a few things that are confusing or do not make sense until you speak to the freeholder so it is vital you don’t rely on this article alone
That being said, be sure to find legal help if you need it as you may find it better to buy a freehold property and this is something people notice when weighing up the pros and cons of a freehold vs leasehold.
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