Most flats and many recently built houses in the UK are sold as leasehold properties rather than freehold.
A leasehold property is one where a landlord (the owner of the freehold) sells a long-term lease to the leaseholder rather then the property itself. The lease gives a right to an occupation and use of the property for the term of the agreement.
The term of a lease is usually for at least 99 years, and in many cases, for 999 years.
Leaseholders are likely to be required to pay an annual ground rent to the freeholder.
Some of the ground rent may be used to provide services to all the leaseholders, such as mowing the grass in communal gardens or cleaning of stairwells. However, a proportion of it will be income for the freeholder.
Leaseholders are likely to be restricted in what they may do in the property and whether they can make changes or extensions to it. It may not be possible, for example, to keep pets, or to replace windows with those in a different style.
As the remaining term of the lease reduces in length each year, the value of the leasehold also reduces.
To illustrate (using over-simplified assumptions), if house prices are increasing on average at 3% a year, a freehold property bought for £99,000 might be worth £114,768 five years later. However, given the declining remaining lease term, a similar leasehold property with 99 years remaining may only be worth £109,000 five years later.
Even with house price growth, the rate of growth may be reduced even more if there are fewer than 80 years remaining on the lease. It is difficult to find a competitively rated mortgage for a leasehold property with a short lease where there are fewer than 80 years remaining on it.
Extending a lease before selling the property may give the sellers a higher sale price. In any case, it is recommended to renew a lease if the remaining term is fewer than 90 years.
Read more about what happens when a lease term ends.
The Leasehold Reform Housing and Urban Development Act 1993 gives a leaseholder the right to extend the lease, provided he or she has owned the leasehold for two or more years.
The lease on a flat can be extended by 90 years, while the lease on a house can be extended by 50. The rent for the whole of the new remaining term is limited to a peppercorn rent, i.e. one close to zero.
Extending the lease involves serving formal notice on the landlord. This should include certain information, most importantly, the price that the leaseholder proposes to pay for the extension. This should be calculated by a professional surveyor.
The price is based on a formula designed to compensate the landlord for a loss of ground rent and the postponement of the right to take possession of the property at the end of the term.
Additionally, the landlord is entitled to half of the marriage value - the increase in value as a result of the extension of the lease. No marriage value is payable if there is more than 80 years left on the lease at the time that formal notice is served. This is another reason why renewing the lease before the remaining term and short makes financial sense.
The extension can take time sometimes years. If the lease has close to 80 years remaining, a deed can be executed that ensures that the benefit of the early notice remains with the leaseholder (i.e. that the leaseholder does not have to give up any of the marriage value).
The landlord does not have to accept the leaseholder's price. He or she can negotiate it. However, having had a professional valuer produce it, there is unlikely to be much negotiation room. If the landlord does still not accept the price, then the dispute can be taken to mediation or to a tribunal.
You may want to read more about how to extend the lease of a leasehold property.
A leaseholder may be able to buy the freehold of his or her property. This is known as enfranchisement.
Where leaseholders of multiple properties (flats) group together to buy the whole freehold rather than individually renewing their leases, the process is called collective enfranchisement.
Enfranchisement can be complicated. We recommend seeking advice from a solicitor. The following is a brief explanation.
If the owners of at least half of the flats in a building wish to buy the freehold the whole building, then the landlord cannot refuse to sell.
The price of the freehold is calculated using a special formula prescribed by law, known as the premium.
The leaseholders usually acquire and hold the freehold through a company set up for this purpose. The company is the nominee purchaser, and each leaseholder is a shareholder of the company. The leaseholders remain leaseholders but with an interest in the freeholder. The articles of association and the shareholders agreement set out how the company is managed and what individual leaseholders may do.
The basic process of collective enfranchisement is as follows:
- checking eligibility for enfranchisement: of the building and of the tenants
- organising for enfranchisement
- choosing the nominee purchaser
- selecting and instructing professional advisers (solicitors and surveyors)
- assessing the purchase price
- serving the Initial Notice
- preparing for the subsequent procedures
The above steps do not necessarily need to be carried out in any particular order and often proceed together. However, they must all take place.
Participating tenants are liable for paying the freeholder's reasonable professional fees.
Where a leasehold relates to a house, a leasehold tenant has the right to purchase the freehold on which the house is situated. In other words, he or she does not need to come together with other leaseholders to enfranchise collectively.
Buying a freehold gives the owners more control over the management of the property.
For example, they will be able to change it or extend it in a way that might not have been possible under a leasehold, and which may increase the value greatly.
However, purchasing the freehold means that owners become responsible for the maintenance of the whole property. Management tasks such as repairs and meeting new regulations increase total property costs. With the increase in costs, disputes between the freeholders in a property such as a block of flats become more common.