Intro
Leaseholds have got a bad name recently in the UK – especially for flats.
In the extreme, families have found their purchased home to be un-sellable and are forced to continue paying a mortgage even though the home may be worth much less.
Luckily not every case is like this. There are many flat owners in the UK living with leases that enjoy their homes!
The focus on this post is specifically on leaseholds in flats.
The Government is separately in the process of phasing out the sale of leasehold houses (which was largely deemed to be unnecessary for many).
Different Between Freehold & Leasehold Properties
If you buy a flat instead of a house, you will likely be purchasing the leasehold to the property instead of the freehold. This is an important difference!
Freehold
Most of the time buying the freehold to a property gives you ownership to both of the following:
- The building
- The land the building is on
Leasehold
However buying the leasehold to a property only gives you the following:
“The right to use the building (for a set time period – the lease)”
The land will continue to be owned by the person (or company) who owns the freehold. This individual is called the freeholder or the landlord. If you only own the lease to the land, you will be called the leaseholder or tenant (this is very different from the more popular use of ‘tenant’ and ‘landlord’ when talking about renting a property).
There is another type called Share Of Freehold – but this is a little more complicated so we have done a separate post for this.
Details In a Leasehold
Lease Period
When a lease is purchased on a new property, it is created from scratch and typically starts at 99 or 125 years. This is how long you have to occupy the land (i.e. stay in a home).
In practice, if you are buying a leasehold on a property that is not a new build, you will inherit the current lease that the seller holds and is selling to you. It is important to note that the amount of time remaining on the lease does not automatically reset when it is sold.
How do I Find Out The Details of the Leasehold For a Flat?
The lease should be available from most parties that are involved in a property sale (estate agent, seller or the seller’s solicitor).
If you can’t get a copy from any of these parties you can order one from the land registry.
Inside a Flat Lease Document
Unfortunately every lease document can be different in the UK. There is not one size fits all and the leases have all been created over a huge time period. Some really old leases contain very strange conditions. But for most leases there are some common phrases.
Common Definitions:
Demised Premises –The parts of the property that are owned by the leaseholder
Easements – Rights relating to your access over shared areas of the property e.g. entrances and shared staircases are normally grouped into this easement definition.
Restrictions:
There really is no limit to what kinds of restrictions are written into a lease document (which is why you should always read them), but the following restrictions are typical examples that have been found:
- No pets allowed
- Noise restrictions (some specify during a certain time of day)
- Requirement to keep the floor carpeted (noise protection for the flat below you)
- Repair and maintenance requirements (some structures may not be the freeholder’s responsibility – such as the windows in the property)
- Restrictions on home renovations – such as extending a property, making structural changes (like knocking through walls)
Charges:
The lease will also stipulate the charges that are due from the leaseholder. The main charges are:
- Ground rent
- Service charges
Leasehold Flat Charges
Service Charges for Flats
Service Charges are payments that the leaseholder will have to make to the freeholder in exchange for the running and maintenance of the building. Service charges can include all of the following:
- Charges for cleaning communal areas (inside and outside the property)
- Lift maintenance
- Concierge
- Insurance policies
- Heating/lighting of communal areas
- Gardeners
- Cinemas
- Gyms
- Pools
- Any other communal facilities
The landlord must present written evidence of these costs to leaseholders.
It’s worth bearing in mind that if your block of flats have a large number of these amenities expect to pay a higher service charge each year.
Some leases will also require leaseholders to pay into a Sinking Fund as part of the service charge. This fund is designed to build up over the years to pay for expensive renovation projects (such as fixing a roof for an apartment block). Some sinking funds are saved only for emergency spend.
It can be annoying to contribute to a sinking fund, but when the one off emergency does arrive it pays to be prepared.
Ground Rent For Flats
Ground rent relates to payments made by the leaseholder to the freeholder due to the fact that the land continues to be technically owned by the freeholder. Historically this was set at a very low level (often called a ‘peppercorn’ rent) as most of the ‘charge’ for the leaseholder occupying the land is reflected in the price of buying the lease. However, in recent years many property developers have sold leasehold properties with ground rents that have been much more expensive over time.
Increasing Ground Rents
Some leases have stipulated that a ground rent charge may increase. In the more extreme cases, ground rents have doubled over 5-10 years (effectively a 10-20% yearly increase). This means that ground rents beginning at a few hundred pounds per year can run up into the thousands of pounds in a few years of owning the property.
High ground rents can also make it more difficult to sell your flat as new buyers may not be able to afford the high ground rents.
High ground rent levels have now led to some lenders refusing to provide mortgages for these homes, which can add a further difficulty to the buying process.
Consequences of Not Paying Charges
If either service charges or ground rent charges are not paid by the leaseholder when required, the freeholder can take court action that could, in the extreme, result in the leaseholder losing possession over the property that they purchased. So it is important to keep up to date with any payments you owe.
*** Charges Update ***
There has been progress in recent years for new home buyers. Barratt Homes have now eliminated ground rents for new homes.
Other Charges For Leaseholders Of Flats
Some lease agreements also outline other charges that may come into focus if certain actions are taken. Examples include the following:
- Administration Charges – covering areas such as supplying documents to a leaseholder and levying late payment charges
- Permission/ Consent Fees – leaseholders may have to pay a fee to the landlord if they want to perform a particular action that is outlined in the lease. Examples can include property renovations (major and minor) and subletting the property. Note that the permission fee amount may not be explicitly stated in the lease for these actions (although it must be ‘reasonable’ and can be challenged if not).
The Competition and Markets Authority (a UK regulator) is currently probing some of the largest housebuilders over the misselling of leases (mainly relating to houses rather than flats).
Short Leases Warning
There is no definitive time period describing what a ‘short lease’ would be. However, when leases approach 80 years or less a number of difficulties begin to occur:
1. Lenders View On Short Leases
Banks and other mortgage providers become nervous over the future value of the property they are lending against.
A typical mortgage is 30 years long but could be as much as 40, and a bank will want at least this amount of time remaining on the lease after the current mortgage is paid (for it still to be attractive to another buyer if it was ever sold).
If the lease is shorter than 80 years, lenders are unlikely to be comfortable with it.
2. Marriage Value (only for leases with 80 years of less)
Marriage value is an incredibly old legal concept, but it is one that could cost you significantly.
When a lease is extended at the request of the leaseholder (for example from 70 years to 160 years) the law acknowledges that the property is likely to have increased in value because of this. This so-called ‘benefit’ must be awarded equally between landlord and leaseholder, which effectively means half of this value increase needs to be paid by the leaseholder to the landlord immediately when the lease does get extended.
Costs do vary and depend on various factors, but can typically range from a few thousand pound to tens of thousands. The leaseholder is also required to cover the professional/legal costs that the freeholder has to incur.
Note that the formula for calculating the cost of a lease extension is complex and must be undertaken by a qualified professional.
Note:
At the time of writing, under the current system marriage value only becomes payable if the time remaining on the lease is 80 years or less. If the lease extension is completed before this, there will be no marriage value to pay (although the leaseholder will still need to cover the legal and valuation costs of the freeholder).
For this reason, most lease extensions are performed well before the lease reaches 80 years.
But this is an area that is being hotly debated and could change!
Solutions for Flats With Short Leases
A lease can be remedied by any of the following actions (both come under a process called Enfranchisement). Note that the law is expected to change significantly on enfranchisement in 2021:
1. Extending the lease
By coming to an agreement with the landlord to extend the lease, the property can be sold with a longer lease and therefore become attractive to more buyers (purchasers with a mortgage in addition to cash purchasers). In some instances, a longer lease can also increase the value of the property (although there are other factors at play here).
Extending the lease will require payment to the freeholder. The size of the payment required is initially negotiated between parties (the law is open to debate) and can go to a tribunal if not agreed. Broadly speaking, the lower the number of years remaining on the lease, the higher the cost will be to extend.
The maximum extension size for residential properties tends to be 90 years for flats and 50 years for houses, although this is subject to other factors.
2. Buying the freehold from the current freeholder
Leaseholders are legally entitled to buy the freehold of the property from the freeholder.
However there are a number of steps that have to be done before you can start this process. As it is unlikely for a first time buyer to acquire the freehold in this way at the time of purchasing the flat, we have not gone into detail
Note that enfranchisement options are only available for home owners that have held the lease for at least 2 years and the lease was originally 21 years or more.
Negotiating Tips for Purchasing Leasehold Properties
It is possible to come across properties for sale that have leases close to the critical 80 year mark.
If you were interested in these properties but wanted to try to reduce the risk of falling into a short lease in later years, then it is best to make clear in your offer to the seller that an extension of the lease must be started as a condition of you proceeding with the purchase. The seller of the property would need to assign the benefit of such an extension to you as the buyer (allowing you to request the extension before the minimum 2 year period described above).
Final Comments
Benefits of Lease
A lease agreement does mean that through various service charges the building is maintained for all tenants. Provided that the relevant charges in the lease are not excessive, this can make the property more enjoyable to live in.
As a lease is time restricted, the cost of one is often cheaper than purchasing a freehold in the same location.
Our View:
There are a number of key areas to look out for when exploring leasehold properties. They are, unfortunately, more complicated than purchasing a freehold property (which is why solicitors tend to charge more for reviewing leasehold titles).
However, for some large cities in the UK, it would be significantly more challenging for a first time buyer to afford to buy the freehold to a property in the local area compared to a leasehold. We therefore consider leaseholds to have their place in the market.