What is a leasehold?
Leasehold is a type of ownership, common in the UK housing market.
As a leaseholder, what you buy and then own is a right to live in a property for a fixed period, typically between 99 to 999 years, in return for a ground rent.
In contrast, the land on which the property is built, and usually the property itself, belongs to the freeholder, who is the landlord of the leaseholder.
The easiest way of understanding leasehold is to think of a block of flats. Each flat is owned by a separate person, the leaseholders, whereas the building itself is owned by someone else. Expenses for the maintenance of the building, such as cleaning or gardening are split between the leaseholders with each paying what is known as a service charge.
Most flats in the UK are leasehold, but so are many houses.
The arrangement between the leaseholder and the freeholder is governed by a document known as a lease. The lease sets out the boundaries of the premises, the rent, charges and rights and obligations of both the leaseholder and the freeholder.
With a leasehold, your position is akin to a long-term tenant. Given the length of the arrangement, a leaseholder has certain additional rights under law compared to a short-term tenant, as well as rights and obligations under the lease.
Ownership of the freehold property is often thought to be better because you don't have the obligation to pay ground rent and you have fewer restrictions on what you can do with the property.
However, there are advantages to being a leaseholder. Leasehold properties are often less expensive than freehold equivalents and more easily available to buy, particularly in urban areas.
Many people confuse leasehold and freehold. Because they pay a mortgage, they assume they own the freehold. However, given that leasehold rights can last tens to hundreds to years, mortgage providers are usually willing to lend to purchase a long lease.
What happens when the leasehold expires?
Technically, when a lease expires, all legal rights in the property revert to the freeholder. The leasehold title and freehold title are no longer separate interests, but a single one.
If you're the leaseholder, if your lease runs out, the property no longer belongs to you, even if you've lived there for a long time.
But leaseholds rarely expire. Most are extended well before the lease ends.
If the lease does expire, the arrangement continues. The landlord might may serve a prescribed notice proposing an assured periodic tenancy in return for a monthly rent. Or they might serve notice to gain possession of the property, although they will need a court order to do this.
If neither of these happens, you may still be able to extend the lease or buy the freehold - although possibly these will be expensive.
Remember, it's possible for your leasehold to expire even if you have finished repaying mortgage payments on a leasehold property. Your mortgage pays for the cost of the lease, not for the cost of the freehold.
Finding out how long you have left on the lease
Determining the remaining term on a lease is easy.
If you're the owner, this information should be present in your copy of your lease agreement or your property's official copies (the 'title deeds') from the Land Registry. For a few pounds you can download the title deeds from the Land Registry's website.
Alternatively, you could request the lease title from your solicitor or the freeholder, but they are likely to charge you more.
If you're thinking about putting in an offer to buy a leasehold property, then your estate agent should tell you the remaining lease term. Your solicitor will also flag a short lease during the leasehold's conveyancing process.
What is a good remaining length?
A lease length of 80 years or more is considered a long lease. But you'll want a remaining term of 83 or more years left on the lease if you're buying. When the lease drops below these numbers (known as a short lease), an extension costs you much more.
A desirable amount is at least 99 years.
How can you extend the leasehold?
UK law gives leaseholders legal rights enabling them to extend the lease on their property.
These rights come in two flavours - the formal route and the less formal, or negotiated, route.
The formal route is usually preferred because it follows a predefined procedure that provides a dispute mechanism for the leaseholder should the freeholder not agree to the extension.
If you negotiate via the informal route, the freeholder may not agree to some terms that the statutory route gives you as rights.
However, like any legal process, it involves procedures that need to be followed and costs to consider.
How much does it cost to extend a leasehold?
Extending a leasehold comes with its financial considerations.
The amount required to extend a lease varies based on several factors. These include the current value of the property, the lease length remaining, and the ground rent payable.
Generally speaking, the shorter the lease, the higher the price to extend it.
Even with long leases, when you extend, you'll have to pay a small fee to the freeholder for their time as well as their legal costs.
However, it's essential to bear in mind that the cost of not extending a lease can be substantially higher.
As the lease length drops, the value of a short lease decreases significantly. This could have implications on future house repayments and might limit your pool of potential buyers should you wish to sell.
Buying the freehold
Buying the freehold is another avenue to explore.
If you purchase the freehold, you become the property owner in totality - of both the property and the land it sits on. This process is known as 'enfranchisement' and effectively makes you your own landlord.
However, this route is not without its hurdles.
Not all leaseholders will have the right to buy the freehold, and there might be pushback from the current freeholder.
It's also worth noting that the cost of buying a freehold can be steep. It typically depends on the market value of the property, the length of the lease, and the annual ground rent.
As such, professional advice is often invaluable in this process. Conveyancing solicitors or lease extension specialists can help you understand the full costs and guide you through the process. While their expertise comes at a price, their involvement can potentially save you time and reduce the risk of legal missteps.
Should you buy a leasehold property?
Deciding whether or not to buy a leasehold property hinges on many factors. From your financial situation to your long-term plans, it's a decision that deserves careful thought.
For instance, buying a leasehold flat can offer a more affordable route into property ownership, especially in areas where freehold properties are considerably more expensive. This might make it an attractive option if you're eager to get onto the property ladder.
It's also worth remembering that most flats in the UK are leasehold properties.
However, leasehold ownership does come with its challenges. You might have to pay ground rent, annual service charges, and other costs that could add up over time. See what to expect to have to pay in expenses as a leaseholder.
There can also be restrictions on what changes you can make to the property, as specified in the lease agreement. Additionally, when the lease runs out, the property reverts back to the freeholder.
To make a good decision, you need to understand the terms of the lease agreement. This includes knowing how many years are left on the lease, the costs involved, and your rights and responsibilities as a leaseholder.
As always, it's beneficial to consult with a conveyancing solicitor during the purchasing process. While it's possible to follow the process yourself, the involvement of a professional can provide a more secure route. They can offer advice, handle documentation, and liaise with the estate agent, mortgage providers and the land registry on your behalf, saving you time and avoiding potential pitfalls along the way.
In conclusion, buying a leasehold can be a great step towards home ownership. But as with all property purchases, it's important to do your homework and make sure you're fully informed before taking the plunge.