Whether you’re after a flat in a landmark white stucco terrace, a new-build or a Victorian conversion, if you’re looking in Belgravia, Mayfair or the surrounding areas, it’s likely you’ll be viewing leasehold properties.
We look at the difference between leasehold and freehold and answer some of the questions we often get asked about buying a leasehold property.
What is the difference between a leasehold and a freehold?
There are two different forms of legal ownership for residential property: freehold and leasehold.
Purchasing a freehold is the most typical way of selling houses, it gives the buyer sole ownership of both the building and the ground it stands on.
A leasehold gives the purchaser the right to occupy the property for the period specified in the lease. Leases are usually long term – often 90 years or 120 years and as high as 999 years – but can be short, such as 40 years. In England, flats are generally owned on a leasehold basis.
Read our blog for more information on the difference between leasehold and freehold.
What is a lease?
A lease is a contract between you and your landlord, which sets out both parties’ rights and duties. The landlord is responsible for maintaining and repairing the building structure and communal areas and insuring the building itself. The leaseholder will agree to keep the property in good order, pay the service charge and ground rent, and abide by the lease restrictions and consents.
Your lease will allow you to occupy the property for a fixed number of years.
Is the length of the lease important?
Before you put in an offer on a leasehold property, find out how long is left on the lease.
When first drawn up, leases can run from anything between 99 years and 999 years, far longer than the number of years you’ll own the property. As time goes on the lease period reduces, ownership of the property will ultimately revert to the freeholder once the lease expires.
As the lease gets shorter, the leasehold property reduces in value, a residential lease with less than 80 years left to run constitutes a short lease. Most mortgage lenders will be unwilling to consider a property with a short lease. This is, in part, because once a lease has less than 80 years remaining, it becomes more expensive to renew. When a lease with less than 80 years to run is extended, you will have to pay 50% of the flat’s ‘marriage value’ to the landlord on top of the usual lease extension price. The marriage value is the amount of extra value a lease extension would add to your property.
Consider how long you are likely to stay in the property and how many years will be left on the lease when you come to sell.
Mortgage lenders tend to require at least 90 years left to run so that there is time to extend the lease.
Can I extend my lease?
The legal process for extending your lease is called leasehold enfranchisement. At the moment, you can only ask the freeholder for a lease extension once you have lived in the property for more than two years. This is known as serving a Section 42 notice under the Leasehold Reform, Housing and Urban Development Act 1993.
If you are buying a property with a short lease you can make leasehold enfranchisement part of your negotiations with the vendor. As long as the current owner starts the enfranchisement before the sale is complete, you can inherit and continue the process.
New government reforms will make it easier and cheaper for leaseholders to extend their leases. The government says leaseholders will be given the right to extend their lease by a maximum term of 990 years, and that an online calculator will be introduced to make it simpler for leaseholders to find out how much it will cost them to buy their freehold or extend their lease. This would potentially stop freeholders quoting inflated prices.
What does share of freehold mean?
If you buy a property with a share of freehold, you own your leasehold plus a share in the property’s freehold.
If there are up to four flat owners, this can be done by having all the owner’s names on the property deeds. For larger blocks of flats, a company owns the freehold and each of the tenants holds shares of this company.
With a share of freehold, you get greater control over maintenance obligations, which often results in the property being kept to a higher standard than those owned by a landlord whose aim is to profit from the building.
The other main benefit is that you can extend your lease at no extra cost, this means that share of freehold properties don’t suffer from depreciation in the same way as leasehold properties.
Are there any restrictions?
Make sure you find out any restrictions or consents that are stipulated in the lease. For instance, pets may not be allowed, or you may need permission to undertake home improvements or to run a business from your property.
What are service charges?
The landlord or managing agent for a block will usually impose a service charge to cover the costs of maintaining the fabric of the building and the shared areas. The charge may also include buildings insurance. Fees will vary depending on the size of the development and the value of the flat, so it’s important to know how much you are likely to be paying each year.
What is ground rent?
Many owners of leasehold properties will need to pay ground rent to the landlord on an annual or half-yearly basis. This has traditionally been a token fee for renting the land the property sits on.
The recent leasehold scandal saw many freeholders inserting clauses into the lease stating that the ground rent will increase periodically, for instance, double every 25 years. This has left many homeowners facing spiralling costs. The new government reforms effectively abolish ground rent by giving all leaseholders the right to extend their lease at zero ground rent.
What is a sinking fund?
Some service charges include contributions to a reserve or sinking fund that is used to cover large one-off bills should major renovations be required. Find out if any major work is planned and confirm whether the sinking fund is sufficient to cover the costs. Additional costs would be shared between the leaseholders and would add a premium to your service charge.
Are there any other charges?
There may be other administrative charges detailed in the lease agreement.
When you come to sell the landlord may charge you an admin fee for providing information to your buyer’s conveyancer and mortgage lender. You may also have to obtain a license to sell the property to cover vetting the new owner. Some retirement flats also have an exit or transfer fee, usually a percentage of the property’s value.
The lease may also stipulate charges payable during your ownership. For instance, if you re-mortgage you may need to pay the landlord an admin fee to cover changing your lender. You may also need to pay to receive consent for restrictions on your lease, for instance making improvements to your home or permission to rent out your property.
There may also be additional charges when you buy the property covering administrative costs of transferring the lease to your name.
Can you challenge the service charges?
Landlords have a responsibility to maintain and repair the building structure and communal areas and leaseholders have an obligation to pay for these services.
Most landlords are professional and charge reasonable fees for the work they do. If you are concerned, you can request invoices for the work carried out on the building to ascertain whether you are getting value for money.
If the landlord makes unreasonable charges you can apply to the First-Tier Tribunal (Property Chamber), more information can be found on the gov.uk website.
Best Gapp is a Belgravia estate agent, chartered surveyor and property valuer that specialises in leasehold enfranchisement. To find out more about buying leasehold, and our range of properties, please contact us.