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.
Purchasing a lease gives you the right to live in the property for a set number of years. You won’t own the property outright, the freeholder owns the property and the ground it sits on. Ownership of the property will ultimately revert to the freeholder once the lease expires. 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 freeholder 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?
When buying a leasehold property, it is essential to determine how long is left on the lease and how easy it would be to extend if you needed to.
As the lease gets shorter, the leasehold property reduces in value. A lease that is nearing or less than 80 years in length will be hard to sell. 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 will generally not lend on properties where the lease has less than 90 years left to run.
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 extending a lease easier and cheaper for leaseholders. In summary, the changes proposed are:
- To provide leaseholders with the right to extend their less up to 990 years with zero ground rent. Leaseholders currently have a statutory right to add 90 years to their lease.
- To stipulate a calculation for the premium payable by the leaseholder to extend their lease. Currently, this is negotiated between the freeholder and the surveyor acting on behalf of the leaseholder.
- To remove the payment of ‘marriage value’ when a lease has fallen below 80 years.
At the time of writing, these new proposals have yet to become law.
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 owners’ 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. As a result, share of freehold properties don’t suffer from depreciation in the same way as leasehold properties.
Are there any restrictions on a leasehold property?
Your leasehold agreement is likely to include several restrictive covenants setting out what you cannot do. Common restrictions are:
- No pets to be kept in the property without prior consent.
- No business to be run from the property without prior consent.
- No use of the property for holiday lets.
- No internal alterations to the property without prior consent. For instance, fitting a new kitchen or bathroom.
- Not fixing a satellite dish to the property without prior consent.
- Not to rent out a room in the property to a lodger or housemate without prior consent.
What are service charges?
The landlord or managing agent for a block will usually impose a service charge to cover the costs of buildings insurance, maintaining the fabric of the building and the shared areas. In London, the average service charge bill is £2,000 a 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.
Ground rent can be fixed or escalating. If it is fixed, it stays the same for the period of the lease. Escalating ground rents will increase over the course of of the lease.
What is a sinking fund?
Most service charges include contributions to a reserve or sinking fund that is used to cover large one-off bills should major renovations be required.
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.
When you buy the property, there may also be additional charges covering administrative costs of transferring the lease to your name.
Can you challenge the service charges?
Landlords are responsible for maintaining and repairing 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.