Leasehold properties are those sold by freeholders. The owner of a leasehold property only owns the property for a set period of time and when this expires there are a series of things that may occur. In this article, these details around the options available after a leasehold property expires will be highlighted.
On top of this, how you can protect yourself as a leaseholder will be discussed and if buying a leasehold is the right idea in the first place based on what happens when it expires and the general pros and cons of the agreement. It may be the case that you refer to signing for a lease option agreement instead.
What happens when a leasehold expires?
When a leasehold property expires, typically the freeholder may take back control of the property and it is again rightfully theirs. The property will then be a freehold which is what most properties in the UK that are sold to people on the open market are classed as.
This means the freeholder can then sell the property again to whoever and go about selling a house on the open market. Alternatively, a landlord can create another leasehold agreement and sell it that way if they choose to but this differs based on the freeholder’s or landlord’s preferences.
How to work out the length of time left on a lease
To find out how long is left on a leasehold agreement you should check your paperwork or ask the freeholder. It is understandable to not know how long is left on a leasehold especially if when you bought it the amount of years left on the agreement were so long you didn’t consider that it would ever expire in your lifetime.
In this way, despite some properties being leasehold agreements, they may financially work out the same as buying a house as a freeholder because the expiration date is so far in the future any depreciation of a leasehold will not occur for decades into the future.
What happens when a 99-year lease expires in the UK?
99-year leases are sometimes the maximum amount that freeholders put on the leasehold agreements. When this 99-year lease expires, leaseholders can add on extra years. As the number of years remaining on the lease goes down you will typically have to pay incrementally more in price to extend the lease which is usually by 90 years.
This 90 year figure is what leaseholders are entitled to after two years of owning a leasehold property based on the Leasehold Reform Housing and Urban Development Act 1993. This extension of the leasehold must be based on a “fair market price”. You can learn more about this price here on the government website.
For example, a leaseholder who wants to add on 90 years to the leasehold agreement who has 60 years left on their leasehold may pay around £25,000 whereas a leaseholder who wants to add 90 years to that agreement who has 95 years left on their agreement may just pay a few thousand pounds.
What is a leasehold property?
Leasehold properties are those that are bought under the rules that the owner does not own the land the property is built on, they only own the property. The person who owns the land the property is built on is called the freeholder.
Freeholders will sell leasehold agreements to buyers for a set number of years when they have outright ownership of the property. However, they will never own the property and land combined so they are restricted with what they can do to the property, for example, they may not be able to do any renovation or make any structural changes.
This also affects if an owner is able to sublet the property for additional income and would definitely restrict the buyer from converting the property into a commercial lease if they wanted to.
Newly created leases can have a wide range of lengths, some developers and freeholders will choose to price a leasehold agreement lower and set the length of time around 99 years whereas other developers may charge slightly more for a lease and extend the length of the lease for hundreds of years. (The maximum length of time a lease can last is 999 years).
Short leases may not be desirable anyway because whenever a lease starts to age and has less than 80 years left, it can be hard to take out a mortgage on this leasehold. It is therefore important to find buyers who can get approval for a mortgage as lenders do not like lending money for the short term in this kind of agreement.
Before buying a leasehold, what are some things to consider?
There are a few things you should consider when buying a leasehold property and one of the main things is what happens when it expires. Next, you may want to check with the freeholder if you can make any alterations to the property or if any alterations have happened in the past and what the plans are for the future too.
If there are planned works on a development like a shared block of flats for example, this may impact the quality of living you are able to have in the short term but as time goes on you will be able to perhaps benefit from capital appreciation of the leasehold as the area becomes more desirable to live in.
As well as this, freeholders might want to charge a ground rent or service charge which would be an additional cost you have to take on as a leaseholder. Finally, planning ahead and seeing if there are reserved funds that have to be paid for the leasehold is a good idea.
As a leaseholder, you don’t have full control over what goes on on the land that your property is built on which means if the freeholder has plans for the future that you do not agree with you cannot do much about it but if these plans align with your goals for the property in the future then you may not see this as a problem.
What are some precautions you should take as a leaseholder?
When looking at what happens when a leasehold expires, you should understand how you can protect yourself. If you buy a leasehold with only a few years left on the agreement, you will likely be selling the leasehold for far lower than you bought it for if you aren’t able to add on additional years to the agreement.
Someone buying a property in a leasehold agreement where they know they only have a few year left with the property will not see the agreement as valuable as there is only a short period of time before the deal expires and the leasehold becomes the property of the freeholder.
For example, if you bought a leasehold agreement for £200,000 and there were 30 years left on the lease, you may find that if you sold it after 10 or 20 years you cannot recover the same amount of money back because no one wants to buy it for the remaining amount on time left on the lease before the property is given back to the freeholder as the leasehold expires.
Evaluating leasehold lengths is vital to make sure that your leasehold doesn’t depreciate significantly and you lose a lot of money in the process.
What is the right process for extending a lease on a property
Leaseholders can always approach the landlord or the freeholder of their property to extend the lease as long as they have been in the agreement for at least two years. This can be done through a formal or informal route.
Formally, through a clear and detailed procedure, the leaseholder and freeholder have to visit a tribunal if they cannot come to an agreement. On the other hand, informally, it would simply be a verbal exchange where the leaseholder asks the freeholder to negotiate on the lease. Generally, it is recommended to start informally because the cost of doing a formal extension can involve legal fees.
Also, there are lease extension calculators online that can help out with the process of negotiation which you can find on the government website here.
Another way a leaseholder can extend a lease on a property is if they got together with the other leaseholders on their development and bought out the freeholder. This is a deal known as a “share of freehold”.
Once this deal is complete it would mean that all the leaseholders of a property can extend their leases by buying the rights of the freeholder and there would be a manager who does all of the maintenance of the group of properties at the same time.
This process requires at least half of the units in a freehold plot of land to agree to the agreement and usually the cost of doing this is similar to what it would take to extend a leasehold agreement by 90 years which is what would happen most of the time anyway.
What happens when a leasehold agreement is not renewed?
If a lease is not renewed the property will simply be transferred back to the ownership of the freeholder. This would give the freeholder the right to change the property in any way they want which may include using the premises as their main place of residence or setting up another leasehold agreement.
What is the price of extending a leasehold agreement?
The cost of extending a lease depends on a few factors including the flat value or the leasehold properties value, the amount of years left on the lease, the number of years you plan on adding to the leasehold and finally, how well you are able to negotiate with the freeholder.
There also may be additional costs to consider when extending a leasehold. For example, valuation costs of the property, legal fees and stamp duty. Stamp duty is only needed to be paid if the property price is more than £125,000.
It would be typical for these legal fees to come to a total of £1,000 to £3,000 for a typical sale of a leasehold property such as a flat.
What are the pros and cons of leaseholds?
If you think what happens when a leasehold expires is hard to get your head around, there are a series of other pros and cons you should consider if you still want to take out a leasehold agreement. The below headings highlight them all.
Pros
- Leasehold properties are usually cheaper than buying the same property freehold
- The maintenance of the property may be delegated to the freeholder or landlord
- Service charges can result in a cleaner environment with desirable amenities
- The leaseholder is not responsible for the structure of the entire premises
Cons
There are several disadvantages that come with leasehold properties too. These include:
- Costs can add up as you pay charges for ground rent and service charges to a freeholder
- There may be rules around what kind of animals you can keep as pets in your property
- You will usually require permission to make any changes to the structure of the property like in a renovation or for your own creative freedom in creating home
- The property may not be able to be used as an address to run a business from
- There can be rules around whether you’re allowed to sublet or lodge in the property which can help to offset your mortgage payments and increase your income
- There are a series of legal costs involved when you sign a leasehold agreement which may cost more than taking out a mortgage for a traditional residential property
- If the lease expires, you will no longer own the home and some people see this as being at the mercy of a freeholder
Wrapping things up
Leasehold agreements are a complicated matter and understanding what happens when a leasehold expires is important for someone interested in buying one to make a decision on whether to buy one or not. Overall, whenever a leasehold expires it is typically removed or passed back to the ownership of the freeholder who will decide on what to do with a property.
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