Leasehold properties are a popular type of home ownership in England and Wales, with millions of people owning them. However, leasehold tenure can be complex, with the laws changing recently and likely to change in the future.
In this guide, we will explain what a leasehold is, how it works, and some tips on what to do if something goes wrong.
What is leasehold?
When you buy a leasehold property, you own the property but not the land it is built on.
A leasehold property may include a leasehold flat, leasehold house or any other type of leasehold home. The land is owned by the freeholder, who grants you a lease allowing you to occupy the property for a set period of time. The length of the lease can vary, but is typically 99 or 125 years.
In the case of a leasehold house, the freeholder may own the land around the house as well, or the lease may only cover the house itself, depending on the agreement.
What to consider before buying a leasehold
- Lease length: Consider the length of the lease and how long it has left to run. If it’s less than 80 years, you may have difficulty obtaining a mortgage, and you may need to extend the lease.
- Ground rent and service charges: Find out how much ground rent and service charges you’ll be required to pay, and what they cover. Make sure you can afford them, and check if they’re likely to increase in the future.
- Restrictions: Check if there are any restrictions on how you can use the property. For example, you may not be allowed to sublet the property or keep pets.
- Maintenance and repair responsibilities: Find out what maintenance and repair responsibilities you’ll have as a leaseholder. In some cases, you may be responsible for maintaining the interior of the property, while the landlord is responsible for maintaining the exterior.
- Management company: Check if there’s a management company in place, and if so, research their reputation and experience. Make sure they have a good track record of maintaining the property and dealing with issues promptly.
- Insurance: Find out if the building is insured, and what the insurance covers. You may need to take out additional insurance to cover your belongings and any alterations you make to the property.
- Leasehold extensions: If the lease has less than 80 years left to run, you may need to extend it at some point. Consider the cost of extending the lease, and whether you’ll be able to afford it in the future.
- Solicitor: Hire a solicitor who has experience in dealing with leasehold properties. They’ll be able to advise you on the legal implications of buying a leasehold property, and help you understand the terms of the lease.
Get in touch with our experienced team here if you are considering a leasehold property.
What are the pros and cons of leasehold?
Pros:
- Leasehold properties are often cheaper than freehold properties, making them more affordable for first-time buyers.
- Leasehold properties are often easier to maintain, as the freeholder may be responsible for the upkeep of the communal areas and external parts of the property.
Cons:
- Ground rent – This is an annual payment made by the leaseholder to the freeholder. In some cases, ground rent doubles over time (see recent changes to the law below).
- Service charges – The leaseholder pays a service charge or other administration charges to cover the cost of maintaining communal areas and external parts of the property. The service charge may cover things like buildings insurance. These charges can also increase over time.
- Leasehold properties can be more difficult to mortgage or remortgage, as a mortgage lender may be reluctant to lend on a property with a short lease.
What are the recent changes to leasehold?
The UK Government has recently introduced changes aimed at making leasehold properties fairer and more transparent. These include:
- Banning the sale of new leasehold houses – Developers can no longer sell new houses on a leasehold basis, except in exceptional circumstances.
- Reducing ground rents to zero – Ground rents on new leases are now capped at zero, making it easier and more affordable for leaseholders to extend their leases.
- Making it easier to extend a lease – Leaseholders can now extend their lease by up to 990 years without having to pay ground rent.
Recently, there has been a dispute regarding developers who sell new build leasehold houses. It is expected that a new law will be implemented following a government review, prohibiting the sale of newly built leasehold houses.
Updates to the Ground rent act
Ground rent laws in England and Wales have changed as of 30 June 2022 in a bid to prevent escalating ground rent.
Landlords of regulated leases are no longer allowed to require a leaseholder to make a payment of annual ground rent. For new residential leases granted on or after this date, ground rents are limited to a peppercorn rent, effectively restricting ground rents to zero financial value.
Landlords are also banned from charging administration fees for collecting peppercorn rent, and if they do so, they may receive a financial penalty. Although there is no obligation on landlords to levy a peppercorn rent, they may not charge more than one peppercorn per year.
For flat owners
The process of owning a leasehold flat may be more complex than owning a leasehold house, as flat owners often have to deal with additional complications such as service charges and shared communal areas.
Additionally, most flats in the UK are leasehold properties, which means that the flat owner needs to be aware of their lease terms and any restrictions that may apply.
What should I consider before buying a leasehold property?
Before buying a leasehold property, it is important to consider the following:
- The length of the lease – If the lease is short, you may struggle to sell the property in the future, or may face high costs when extending the lease.
- Ground rent – Make sure you understand how much ground rent you will be required to pay.
- Service charges – Find out how much you will be required to pay in service charges, and what these charges cover.
- The freeholder – Research the freeholder to make sure they are reputable and financially stable.
- Restrictions – Some leases may include restrictions on what you can and cannot do with the property. Make sure you understand these restrictions before buying.
Leaseholder responsibilities
As a leaseholder of a leasehold property, it’s important to understand your responsibilities under the terms of your lease. One of the most significant aspects of a leasehold property is the lease length, which determines how long you have the right to occupy the property.
When buying a leasehold property, it’s important to carefully review the lease terms to ensure that you understand the obligations and restrictions that come with the lease.
Leasehold homeowners are responsible for complying with the terms of the lease, which may include restrictions on alterations, subletting, or the use of the property. It’s important to note that lease terms can vary widely between properties, so it’s essential to read your specific lease carefully to understand your obligations.
In addition to complying with the terms of the lease, leasehold homeowners may also be responsible for contributing to the maintenance and repair of communal areas and facilities, such as shared gardens, hallways, and elevators.
This responsibility is typically outlined in the existing lease, and failure to comply with these obligations could result in legal action or fines.
Leaseholder restrictions may also apply when it comes to selling or transferring ownership of a leasehold property. For example, the lease may require that the leaseholder obtains permission from the freeholder or management company before selling the property, or may require the payment of fees or charges for transferring ownership.
What is a sinking fund?
This is a reserve fund held by the landlord or management company of a leasehold property. It is set up to cover the costs of future repairs or maintenance work that will need to be carried out on the building or common areas. The money in the reserve fund is built up over time by contributions from leaseholders, usually paid annually as part of the service charge.
Sinking funds are particularly common for leasehold flats, where the costs of maintaining and repairing the building are shared among all the flat owners. They can also be found in some leasehold houses, particularly in developments where there are communal areas such as shared driveways or gardens.
The amount of money that each flat owner contributes to the reserve fund is usually calculated based on the size and value of their property, as well as the estimated costs of future maintenance work.
The sinking fund is typically managed by the landlord or a management company, and the money can only be used for specified purposes such as repairs, refurbishment, or replacement of communal areas or equipment.
The aim of a sinking fund is to ensure that there is sufficient money available to cover the costs of future maintenance work, without the need for the landlord or management company to request additional funds from leaseholders on an ad hoc basis.
Freehold vs. Leasehold
A freehold property is one where the buyer owns the property outright, including the land and the property on it, and there is no time limit on their ownership. They are responsible for all maintenance and repairs on the property.
On the other hand, a leasehold property is one where the buyer owns the right to live in the property for a fixed period of time (the lease term), typically ranging from 99 to 125 years. The land on which the property is built is owned by a landlord or freeholder, who may charge the leaseholder ground rent and other fees. The leaseholder is responsible for paying these fees and maintaining the property within the terms of the lease.
What should I do if something goes wrong?
If you experience problems with your leasehold property, there are a number of steps you can take:
- Talk to the freeholder – If you have concerns about the maintenance of the property or the level of service charges, talk to the freeholder in the first instance.
- Seek legal advice – If you are unable to resolve the issue with the freeholder, consider seeking legal advice.
- Join a residents’ association – If you live in a block of flats, consider joining a residents’ association. This can give you access to advice and support, as well as providing a collective voice for leaseholders in the area.
- Contact your local authority – If maintenance problems or service charges are not being addressed, contact your local authority’s housing department. They may be able to help resolve the issue.
- If you have any further questions about leasehold properties, it is important to seek legal advice before making any decisions. A qualified solicitor or surveyor will be able to provide the necessary advice and guidance.