What does leasehold mean? What do you need to know?

What does leasehold mean

There are four primary types of property ownership in the UK: Freehold, share of freehold, commonhold and leasehold. Most new build apartments in the UK are leasehold and some new build houses are also leasehold.

As an investor, there are several things you need to consider when you buy a leasehold property. This article tells you all the things you need to think about if you’re buying a UK leasehold investment property.

What does leasehold mean?

If you own a leasehold property, you own a lease over part of the building. The lease is granted to you by the landlord (the freeholder) who is the person who owns the building and the land the building sits on. You will have a lease agreement that grants you the right to use and occupy the demised premises (your apartment) for a specific period of time.

How long does a lease last?

Before you purchase a property, you will need to consider the length of the lease. Most new build developments in the UK will have lease terms of between 125 years and 999 years, although in some rare situations they will be shorter. When buying a property, you need to consider what a reasonable amount of time is.

If there are less than 70 years remaining on the lease, it will be more difficult to obtain a mortgage and therefore, harder to sell the property.  

However, if you have owned the lease, i.e. the property, for more than 2 years and the original lease was granted for more than 21 years, you have the ability to extend the lease. This will of course come at a cost, but it is possible.

What’s included in the lease?

The lease agreement sets out the rights, responsibilities and obligations of the leaseholder and the landlord (the freeholder).

What are the advantages of leasehold properties

The main benefit of leasehold properties over other forms of tenure, is the that leaseholder has less responsibility. In the case of leasehold, it’s the landlord who is required to maintain the building, not the leaseholder. A management company will be appointed who will be responsible for the maintenance and the insurance of the building. As the leaseholder, you pay a service charge (a management charge) each year to the management company for the management of the property.

What is a service charge?

The service charge is the cost of maintaining, operating and managing the building. The service charge will include the items such as buildings insurance, electricity for the common parts, cleaning communal areas, gardening, fire equipment and the Management fees for the company that manages the building.

How is the service charge calculated?

The total expenditure for the building maintenance is spilt between all the leaseholders and allocated on a proportional basis according to the size of your property within the building.

Who pays the service charge?

The leaseholder pays the service charge. If you sublet your property (which you will need consent from the freeholder to do), in most circumstances it will remain your responsibility to pay the service charges and ground rent. In the UK it would be highly unlikely for your sub-tenant to pay the service charge and ground rent.

What are the disadvantages of leasehold properties?

One of the main disadvantages of leasehold property is that you have to seek permission of the landlord to do certain things, such as make structural alterations, or refit your kitchen or bathroom. You will more than likely need the landlord’s permission to get a pet or to sub-let your property. What you can and can’t do and the things you require permission to do, will all be set out in the lease agreement.

If you apply for consent to carry out structural alterations or refurbishment works, the additional things you need to consider are:

  • How long obtaining the consent might take. 
  • What your rights are – what you can and can’t do.
  • Under what circumstances the freeholder could decline permission.
  • What fees you could be charged for making the application. 

The other main disadvantage of leasehold is that you’ll have to pay a ground rent and a service charge.

Architects drawings of apartments.  You will  need the permission of the freeholder to make changes to your investment property

What is Ground Rent?

A ground rent is a regular (usually annual) payment made by the leaseholder to the freeholder   Before buying a leasehold property there are three questions you must ask specifically relating to ground rents which are:

  1. Is it financially viable / how much is it at today’s date?

    When you running your investment analysis of a property, you must include the ground rent, as this will impact the performance of your investment.
  2. Is it currently a reasonable amount?

    You should find out what the ground rents are of other similar schemes in similar locations, to check the ground rent is line with other developments.
  3. How is it reviewed? THIS IS REALLY IMPORTANT!!!

    A number of cases have been identified by the UK government regarding unfair leasehold practices.   The primary issue being that some leases allowed for ground rents to double every 10 years, thereby creating a highly burdensome rent review provision for leaseholders.  This may not sound like a lot, but if we put this into context with two different scenarios you can see where the issue with this lies:

    a) Ground rent is £300 p.a. which doubles every 10 years.  In 50 years the ground rent will be £9,600 p.a.

    b) Ground rent is £300 p.a. and linked to an inflationary increase of, say, 2% every year .  In 50 years, the annual ground rent would be £942 p.a.

If the ground rent doubles every 10 years, this will have a significant impact on the performance or your property, on your ability to obtain a mortgage and on your ability to sell your property. 

YOU MUST ENSURE YOU CHECK THE POSITION REGARDING THE GROUND RENT REVIEWS BEFORE YOU COMMIT TO PURCHASING YOUR PROPERTY. YOUR SOLICTOR WILL BE ABLE TO ADVISE YOU.

Is leasehold not as good as freehold?

Leasehold is not necessarily a lesser type of ownership, the reality is that in many situations it’s impossible to create anything other than a leasehold. If you take a block of apartments for example, it’s not possible to grant everyone a freehold, so leasehold becomes the common and prevailing type of ownership.

Should I buy a leasehold property?

Yes you should absolutely buy a leasehold property, providing you read the terms of your lease carefully before you buy and pay particular regard to the provision for ground rent reviews (see above).

We hope you have found this article useful.  For more information on about investing in the United Kingdom check out our other articles and request your copy of our Buyers Guide to the UK by emailing [email protected]

Important notice:  Proptech Pioneer and its associated companies seeks to provide investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect.  You use the information at your own risk and accept no liability if you rely on this information.   Proptech Pioneer is not a tax advisor, conveyance, lawyer, financial advisor or mortgage advisor.  You should seek independent advice from independent professionals before making any investment decision.