The disadvantages of leasehold property for landlords

There are a lot of advantages and disadvantages of leasehold property and as a result, a lot of people are left confused when making a purchasing decision of this nature.

In fact, some would even argue that there are a lot more disadvantages rather than advantages, leaving them confused as to why anyone would buy a leasehold property in the first place.

So, in this article we go over a complete list of disadvantages so you can consider everything that could go wrong with a leasehold property purchase.

What are the financial cons of leasehold property?

The main disadvantages of leasehold property relate to money and the strict covenants of the lease that restrict a leaseholder from doing certain things that they otherwise would be able to if they bought the property using the mortgage for example.

Leaseholds are still tied to the freehold and the freeholder still has some level of management over the leaseholder and this is where a lot of the disadvantages stem from.

Unless you buy the freehold of a property, there will always be some level of restriction.

Extortionate service charges

Service charges are likely to be included in your lease agreement as a tenant and they may start to add up to quite a bit making them a major disadvantage and sometimes deal breaker for those looking to buy a leasehold. 

The exact cost you’ll pay annually, however, is determined by several factors, including the size of your flat, the number of other dwellings in the property, the managing agent or freeholder, and any significant maintenance work planned for the property.

It’s important to remember that service fees can rise over time too and things like property maintenance, cleaning, ad hoc repairs, and building insurance should all be included in the cost of what may begin to rise. 

However, service charges are typically projected for the coming year, so it is easy in this sense to be able to predict when and where money is able to be taken out of your account.

As a result, it’s critical that you understand what you’re paying for and how service charges work as a tenant. Always thoroughly read your lease agreement to get a good idea of what to expect in terms of costs and services covered.

Leaseholders aren’t made the priority

In the experience of most leaseholders, property management agents do not appear to prioritise the needs of leaseholders. It is critical to remember that the management company’s primary goal is to please the freeholder, who is their primary customer. 

Therefore, leaseholders may not receive the level of customer service they deserve as a result and because the freeholder is in charge, the management agents may not feel obligated to prioritise leaseholder satisfaction either.

It’s disheartening to know that freeholders frequently ignore leaseholders’ complaints and that leaseholders’ dissatisfaction is not always taken into account by the freeholder, making it even more difficult for leaseholders to have their concerns addressed.

The management company could be bad

Not all management of a leasehold property is necessarily good as there is a chance that the freeholder doesn’t care that much about their leaseholders and they may neglect any requests made or not want to do any updates to the property despite charging a large amount of service charges.

Lease agreement is signed over a fixed period and will cost to increase

When dealing with a leasehold property, keep in mind that the lease agreement is only for a set period of time. The lease’s remaining term gets shorter and shorter with each passing year.

Another thing to consider is that once the remaining term is 80 years or less, it may become more difficult to sell the property. That’s because a lease term of less than 70 years can make it difficult to obtain a mortgage or remortgage, so keep that in mind if you’re considering purchasing a leasehold property.

Leases of less than 80 years can be harder to sell and reduce in value

In general, as the length of time left on the lease goes down, there is less desire for the purchase of the property by the general public. This is because after the 80 years, the leasehold is returned to the freeholder and they will no longer own anything.

On top of this, the reason why a leasehold of 8- years is so important is because leaseholds are typically owned for about 30-40 years at a time before they are sold on. 

So, if you buy a leasehold with 80 years left, it will be hard to convince someone to buy a leasehold they will again own for 40 years and not be able to sell on for any money.

At the end of the day, all leasehold and freehold agreements are in place mainly because those buying the leasehold are trying to buy somewhere that they can eventually sell on for a profit and if they cannot do that then the lease becomes significantly less appealing.

You may not be able to mortgage a property that is 70 years or longer

In the same way as why people don’t want to buy a leasehold agreement if there is less than 80 years on the lease, a lender will refrain from lending money on a leasehold agreement that has less than 70 years on it as the leasehold will very likely go down in value.

This means someone who is interested in buying a leasehold may not be able to obtain the right level of finance and they could end up being restricted in what they can buy as a result.

Restrictions around sub-letting

Sub-letting is a way for a tenant to be able to help manage their finances and in some cases is a big part of the leaseholder being able to pay off their mortgage because subletting allows them to increase their income.

If you owned a home and it was within the mortgage regulations to be able to sublet, you could very easily, legally sublet your home using a lodging agreement and this is a great way for people to save on tax too as there is a £7,500 tax free allowance.

So, if you were in the process of paying off a house you could live in one of the rooms in the house, and rent out the other two which would enable you to be able to save some extra money and in some cases may even cover all of your mortgage payments.

In a leasehold property, this is unlikely to happen as there are usually terms of the leasehold that restrict a buyer from being able to do this in their property.

A freeholder may charge more to sublet

Subletting restrictions may be taken advantage of as a result and the freeholder may upsell a leaseholder on this to make some extra money and charge a fee to be able to sublet.

This would reduce the amount of profit you could make from subletting anyway and may make the process not financially viable if in the first place.

The fees for conveyancing will be higher

Things like solicitor fees and paying for the time of financial advisors, surveyors and also the charges that a mortgage lender will- give in order to process a leasehold will all generally be higher.

This is because leasehold property generally has a higher number of covenants and legalities that need careful consideration.

You cannot benefit from the appreciation of land

Unfortunately, because you won’t own the land that the freehold is on, you won’t be able to benefit from the increase in value of the land over time. However, you will be able to benefit from the increase in the value of the property itself so this is not all bad news.

Rent may be increased

While the cost of renting the land may appear reasonable when you first sign the lease, it’s important to keep in mind that the amount you pay may change in the future because the property’s value may rise over time, and if this occurs, you may end up having to pay more money than you can afford. 

It’s something to think about if you’re thinking about leasing land in a leasehold agreement rather than looking to buy the leasehold, because you don’t want to end up in a bad financial situation later on where you cannot afford to make payments.

It is easier to find yourself in legal trouble

Although leaseholders have some legal safeguards in place to ensure that they are being charged fairly and reasonably for services, there are still risks associated with contesting these charges that are put forward by the freeholder. 

If you decide to take your freeholder or management company to court over the issue, you may be required to pay their legal fees if you lose the case. This is something that has happened before and often happens as a result of leaseholders taking their freeholder to court over disputes on service charges. 

If the court case doesn’t end how the leaseholder expects then they may have to pay the legal fees that are incurred themself and the legal fees of the freeholder. So legal trouble can have consequences.

Higher mortgage deposits required

Because of the general higher deposits that happen in leasehold property, it is less likely that someone is able to meet the affordability criteria even for the same property. 

For instance, if there is a four bed property that is a freehold, this may cost less than if the property had exactly the same attributes but was listed as a leasehold property. This is as a result of there being a higher maintenance cost for a leasehold property.

So, lenders increase the size of the deposit required to reduce the mortgage payment on a leasehold as they are aware the buyer will also have to pay additional fees like service charges and ground rent.

Expensive ground rents

Ground rent has been a major source of concern for leaseholders and is known as an additional amount paid by a leaseholder to the freeholder (on top of service charges).

This amount was traditionally very small if it was charged at all, but over the years, some leaseholders have been charged ground rent of more than £250 per year which as you can imagine can add up and sometimes double every few years.

This can make it extremely unaffordable for leaseholders who end up paying hundreds or even thousands of pounds per year and those paying such high ground rents may find it difficult to refinance or sell their property too. 

Changing the terms of the ground rent can also be costly because it necessitates the leaseholder to amend the lease or obtain the freeholder’s agreement, both of which can cost thousands of pounds in legal fees.

To address this issue, the UK government is working to make ground rent removal easier and less expensive for current leasehold homeowners and changes to the system are expected to be implemented in 2023.

Meanwhile, all new leases are now exempt from ground rent. You should not be charged ground rent if you are considering purchasing a new leasehold property, such as a new-build home. So this is excellent news for first time buyers.

What covenants are restrictive that affect how you live in a leasehold?

Sometimes, it is not about finances or the monetary aspects of leaseholds but instead about the way in which you are able to move around a property. Below are some of the disadvantages related to this.

You may need written permission

A great disadvantage of leasehold property is that you will need to contact the freeholder of the property if you want to make changes to a property, no matter how small these changes may seem. For instance, if there was a wall that needed repainting, you may have to contact the freeholder for something as small as this.

On top of this, even if you think the request to make changes is fairly reasonable, the freeholder has the ultimate say and can deny your request for changes at any time.

Some say that owning a leasehold is like having the responsibility of a homebuyer in terms of finances but having the same rights as a tenant in terms of being at the mercy of the freeholder on the rules that can happen within your own home.

You may not be allowed pets

Many leaseholders may find it aggravating that they are frequently prohibited from keeping pets such as dogs or cats and this can make it difficult for them to sell their property because many potential buyers are pet owners.

Especially given the number of pet owners has greatly increased in recent years who prefer to live somewhere where they can keep their pets. As a result, having such restrictions can reduce the pool of potential buyers for a leasehold property.

You may not be able to run a business from home

If you’re thinking about buying a leasehold property and running a home-based business, you should be aware that some lease agreements prohibit this. Look into title good leaseholds in this case.

With the increase in remote work due to Covid-19, those who need to work from home may face difficulties so it is recommended to have your conveyancing solicitor review the lease agreement before purchasing the property.

As a result, you will be able to make an informed decision about whether the property is suitable for your needs.

Freeholders may not have the same level of regulation

While you may be able to see the importance of abiding by the law, not all freeholders are like this and will follow regulations or even keep things moral. It is a leaseholder’ right to be able to contest any charges given to them with things like section 20.

However, not all types of freeholders will take this seriously and they will add charges to a leaseholder that may seem unreasonable as under the law, charges just have to be reasonable which means things are certainly open for interpretation.

What are the disadvantages in terms of disruption?

Where you live in a property and how your housing situation is set up can have a big impact on the utility of your space. Unfortunately, there are a fair amount of disadvantages when it comes to leasehold agreements that effect how a space is set up.

The front entrance could be shared

Having your own front door as a leaseholder may not be available to you as a lot of leaseholds may have shared entrances, especially if it is a flat or there is an area of the development that is open to all leaseholders before there are private spaces.

This means you may have to get used to things like the noises in a development from other people who are enjoying the space or cigarette smoke that could be unpleasant if you aren’t a smoker etc.

However, this may be intentional because if you have bought an enfranchisement leasehold, you will not be able to get away from this as you have all bought your leasehold together.

Serviced accommodation requires visitors

If there is a serviced accommodation feature of your leasehold then this will require people to come in and out of the building. If you value privacy in particular, this could become particularly disruptive and you may need to have the right.

There may be ongoing construction

Leasehold flats and homes are often sold to new build buyers which means there is likely going to be an ongoing development at the time as the entire plot of land where homes are being built are finalised.

In fact, this is one of the reasons why leaseholds are quite popular, because there is the promise that by the time the development has finished, the owners of the home that have bought in the beginning would have found themself a good deal as their home will increase in value.

The completion of a development of houses in this sense will likely increase the value of the houses that were originally built there. If you were able to negotiate with the freeholder to begin with, you could find yourself with a good deal.

However the disadvantage of this is of course the construction that goes on in the meantime that could yield dust, excessive noise and perhaps even shrapnel that is a danger to young children.

Also, it is not guaranteed that the development will go up in value as sometimes, the large number of houses being built actually does the opposite and helps to meet the buyer demand in the area which causes house prices to drop.

Little or no outside space or garden

Garden space is one of the biggest disadvantages for those who want to enjoy the outdoors. This is because a lot of leaseholds are flats without access to a garden and any outdoor space that is available is often very well maintained by management and you are unable to make the space into your own.

In this sense, you may be better off going to a local park or walking outside to enjoy the outdoors in the same way if you were the owner of a leasehold.

However, whether outdoor space is available for a leaseholder or not is up to the terms of their agreement and the type of property they are buying as it may well be the case that they do have a garden and based on their permissions they are able to enjoy a garden.

In summary

Overall, there are a lot of disadvantages of leasehold property to think about and it may not be the right thing to do for a lot of people because of the great list of disadvantages above.

Despite this, leasehold property is still certainly a route that buyers can take if they want to and it does work out well for a lot of people. It is recommended you read our article on what happens when a leasehold expires because all cons of leaseholds stem from here.