Why Would Anyone Buy A Leasehold Property

When you purchase a property, you have full comprehensive ownership over the home or the land on which it is built, or you can have a leasehold agreement where you own the property for a certain amount of time without owning the land on which it is built.

For starters, a leasehold property can be beneficial because you can sell a leasehold even though you technically do not own the property completely. 

What Is Leasehold Property?

Leasehold means you lease a particular property from its owner or long-term lender, and the property owner or the lessor gives the right to the leaseholder to live on the property in exchange for making a down payment or paying ground rent, just like a traditional rental tenant.

Why would anyone buy a leasehold property? Leasehold properties are typically flats or maisonettes, which are smaller and low-cost houses, offering affordable homeownership options to first-time buyers. The agreement gives the leaseholder the right to live on the property for the agreed time period, and the buyer pays interest on the purchased leasehold estate.

Such properties can be conversions, brand-new homes, or purpose-built blocks that are more likely to be in the main city locations where you get shorter commuting times. 

In the case of a leasehold agreement, the property owner or lessor gives the leaseholder the right to live on the property for a specific timeframe. The fixed period of time can be short-term or a longer period of many years.

Property, being a depreciating asset on account of the decreasing number of years on the lease, provides the option to extend the lease term, and it is subject to the eligibility criteria, which must be met. A statutory lease extension can be made up to 90 years to the agreement term at a fair market rate without any ground rent.

Leasehold Vs Freehold: What's The Difference?

In the case of a freeholder, the maintenance of the building and communal area is the owner's responsibility, and the leaseholders pay the annual service charge to cover the relevant cost of maintenance.

Since the leasehold properties are not sold outright, they are often sold at a discount compared to freehold, so people buying for the first time or those who do not have a lot of cash saved up can purchase leaseholds available at a significant discount.

Leasehold properties are ideal rental properties as you can rent your properties to someone else and still pay the freehold owner for the property.

What Is Leasehold?

A leasehold means you do not own the building and the land; instead, you lease the home from the freeholder for a set time (e.g.  99 years or 999 years). All properties are either leasehold or freehold.

In the case of a leasehold, the more time left on the agreement, the more valuable the property is, and the buyer is never truly locked into a leasehold agreement, especially if you can find another willing buyer.

Leasehold Property Meaning

Leasehold property meaning - It simply means long tenancy. What is leasehold? With the leasehold properties, you own them for a certain time, and then the ownership reverts to the freeholder. Leasehold properties are ideal for first-time buyers from an affordability perspective.

The lease is where the property is developed and divided into several homes, and no one owns the freehold or the land on which the building is constructed.

Pros and Cons of Buying Leasehold Properties

• Leasehold properties are considered ideal for investment purposes because they give flexibility in renting a property. 

• Leasehold is considered an ideal rental property as you do not need to worry about paying for or owning the property, and you can avoid administrative and managerial issues.

• Leaseholds can be cheaper than freeholds, have lower down payments, and are more accessible to first-time investors.

• When you have a leasehold agreement, you can renovate as much as you want, except for certain terms and conditions that are part of the leasehold that are not found in many traditional rental agreements. So, when you rent a property, you can decorate the house but are not allowed to modify the inner structure, renovate, or make changes to the building.

• They can be bought for consistent interest rates. Even at the time of market volatility, you can predict how much you will pay for the leasehold for years or possibly decades to come.

• One of the advantages of leasehold properties is that it can be beneficial for someone buying a retirement flat, which can be sold as a leasehold because one will not have to worry about the repairs.

• In the case of leasehold, building insurance is bought for the whole block instead of individual flats, and some flats come with a share of freehold, which means the leaseholders work as a collective group who own the freehold of the building and have more control over the service charges.

Some Disadvantages Of Buying Leasehold Property 

There are some disadvantages of buying leasehold property - 

• You do not own the land on which the property sits, leading to a diminishing value of leasehold compared to the freehold. The buyers must always check the lease length before buying a leasehold.

• If the term is under 80 years, it can be difficult to get a mortgage; in such conditions, it is better to do a statutory lease extension with a solicitor than to go the non-statutory route.

• Even though you own the property as a leasehold, you must pay rent to use the land. Rather than using a mortgage and investing in building a home, you pay monthly rent but are not building anything. So, if you have a long-term goal of homeownership and do not want to pay for the house again, then you must go for freehold property.

• The leasehold properties are offered for some time, starting from two to 10 years or even longer. When you enter such an agreement, you are locked into the financial arrangement for a fixed duration, which can be a long time, unlike rental leases.

Buying a leasehold flat - 5 things you should check

The five things you must check before getting into a leasehold agreement include –1. Check the length of the lease with the estate agent or the seller. If the lease has less than 80 years left, you must proceed carefully, as getting a mortgage for such a property with a short lease term period is difficult.

1. A lease of less than 70 years can significantly influence the property's price. In the case of a leasehold, you may have to spend thousands of pounds to get an extension in the leasehold, and the price depends on several variables, including the market value of the home, the ground rent and the lease length.

2. The second important factor to consider is the ground rent, the amount due and the details of the rent reviews. You must check the ground rent review formula to understand the ground rent to be paid in the future, to asses how it can materially affect the value of the property.

3. The landlord usually employs a management company to undertake the routine maintenance and repair of the building and the common areas. The fees are recouped from the tenants, and the amount charged depends on the work required. You must read the service charge prerequisites and the procedure for reviewing and increasing the fees.

4. When you register the property with the Land Registry, your conveyance will notify the landlord and the management company and advise them to change the ownership.

Also, you must be aware of the charges, as they impose a charge for each notice, so you must carefully check the costs and requirements listed on the completion statement. Also, you will be asked to enter into a Deed of Covenant with the landlord that you will comply with the covenants noted in the lease.

5. Once the agreement is completed, if the seller has paid ground rent or service charges for a period exceeding the completion date, you will have to reimburse the seller for a proportionate part of it, called an apportionment. You pay the amount directly to the landlord or the managing company whenever the fees are due next time.

Disadvantages Of A 999 Year Lease 

The leasehold term of 999 years is considered comparable to a freehold. An informal lease extension process can extend a lease by up to 999 years. The formal lease is set at 90 years, and you need co-freeholders' cooperation to extend the lease to 999 years informally for zero premium.

When you are trying to extend the term, the involved parties will bargain and renegotiate the ground rent, and this may not work in certain cases when the leaseholders fail to reach a consensus.

There can be hidden costs of 999-year leaseholds; for instance, the ground rent may double every ten years, or there can be restrictions on the use of premises in the agreement. 

Why Does a Leasehold Exist?

Land is a finite resource, and getting land ownership suitable for properties is difficult. Leasehold gives flat owners ownership of properties considered ideal rental properties. The leasehold properties are not sold outright; they are often sold at a discount compared to the freehold properties.

Leasehold flats have a low down payment, and you can renovate the area of the leasehold property.

The leaseholds have consistent interest rates when the markets are highly volatile.

Is Leasehold Bad?

Leasehold flats tend to be cheaper than freehold properties, as they provide an option for first-time buyers to get on the property ladder. It means you lease to own a particular leased property. With a leasehold property, you purchase the rights to occupy the property for a certain number of years, which determines the length of your lease, and it is mentioned in the lease agreement.

As a part of the lease agreement, you need to agree to the obligation to contribute to the cost of maintaining the communal areas of the building, including the structure and roof. You need to pay the ground rent to the freeholder for the use of the ground and building owned by the freeholder.

Escalating fees and onerous leasehold clauses have led some building societies and banks to refuse leasehold mortgages, making selling difficult.

Some leases have clauses to obstruct when you use the property, and there can be restrictions on the use of properties. So, if you are unsure of anything, you must carefully read all the clauses and speak to your solicitor immediately if you need clarification. You must be careful and know what you are entering into and how much you will have to pay annually or other costs if the dues increase.

Disadvantages Of Buying Leasehold Property

Many experts believe buying a leasehold property is like getting into long-term rental agreements where you do not have ownership over the communal areas of the building. Depending on the terms of the agreement, when the agreement expires, the ownership transfers back to the freeholder.

Leasehold flats may come with shared ownership, so you must go for the house rather than a flat because, with a house, you get the option to buy the freehold. If you buy a flat, you must opt for a low-rise property to avoid the cladding issues.

In the case of buying a leasehold property, you will always need permission from the freeholder to alter the home, and you may have to face restrictions on owning a pet, sub-letting the property or using the premises to run your business.

Further, when you try to make alterations to the leasehold without the freeholder's permission, heavy charges may be imposed for breaching the lease agreement, and it can also land you in court.

And leaseholds take longer to buy and sell.

How Long Is A Leasehold?

The leasehold ownership of a flat is a long tenancy where the right to occupancy and use the flat for a long period is referred to as the term of the lease. A lease can be granted for 99, 125, or 999 years, and the flat can be bought or sold during the term. 

Is It Hard To Sell A Leasehold Property?

Leaseholds require additional layers of paperwork and checks, adding more processing time. For long-term leaseholds, the selling process is almost similar to the freehold. However, some extra paperwork may be needed, and you must contact a solicitor with leasehold expertise to know all the steps involved in transferring the property. 

What Is Leasehold Rights?

One of the rights of the leasehold is "quiet enjoyment" of the flat for the term of the lease. It means you have the right to reside on the premises without any unreasonable interference from the landlord.

The leaseholder has the right to expect the landlord to maintain and repair the building and manage the common areas and the parts of the buildings or ground which are not specifically granted to the leaseholder, like the rights to access the entrance hall and the staircases. The leaseholders have self-repairing leases where they must maintain and repair their flats.

How Much Does It Cost To Buy The Freehold Of A Leasehold House?

You need to pay to occupy the property, and there can be a host of fees that a buyer may have to pay on top of what they are paying for the property. Also, you may have to pay the legal charges and the upfront fees imposed by other parties assigning the lease.

The process involves additional documentation from the Land Registry, and the signing agreements must comply with ground rent and service charge requirements. You have to pay the management company service charges annually and monthly, as well as the ground rent.

Extension of leasehold can be expensive; if the lease on a flat worth £200,000 has 79 terms, it may cost over £10,000 to get an extension by 90 years. The more the extension is likely to cost more. 

Should You Buy A Leasehold Property?

A leasehold flat is usually cheaper because of the risks involved. If you are purchasing a lease, you get the right to live in the property for the agreed number of years, but technically, you do not own the property outright, so you need to pay the annual ground rent and service charge.

You are not allowed to carry out major refurbishment or extension works. Sometimes, you need to get consent from the freeholder to do the extension work, and there is no guarantee they will allow it.

Charges When Selling Or Buying Leasehold Property

The cost of purchasing or selling a leasehold property is less than freehold. Still, when you try to sell the leasehold property, additional charges are often payable on the completion imposed by the third parties, including the management company or the freeholder.

The charges vary from property to property. You need to pay for more paperwork; for instance, you must get the certificate of consent, deed of covenant, application to join a management company, and transfer of a share certificate in the management company, get the office copy entries and other supporting documents from the HM Land Registry, prepare the contract documents for the solicitor approval, and more.