What is a leasehold property?

If you own the leasehold of a property, you own the building but not the land it’s built on. You own the property for only a set amount of time – this is the lease.

There are two different forms of legal property ownership: freehold, which is when you own both the property and the land it’s built on, and leasehold, meaning you have a lease from the freeholder, which allows you to use the property for a number of years.

What is leasehold and how does it work?

So, what does leasehold mean? And what is a leasehold property?

When you buy a leasehold house, you either take over a new lease created by the freeholder or you take on the existing lease that the previous owner of the property had been holding.

You will be charged ground rent when buying a leasehold property on someone else’s land, although it’s often simply a nominal annual fee.

You may also need to pay an annual service charge and make contributions towards the upkeep of communal grounds and gardens as well as any repairs. These costs often rise annually, so make sure you budget for price rises.

There may be restrictions on how you can alter your leasehold property, meaning you are unable to make significant internal changes, add an extension, or change its use (from residential to commercial), unless you apply to the freeholder for permission.

Ownership returns to the landlord or freeholder at the end of the lease.

How do you know if you’ve bought a leasehold property?

It is a legal requirement that all properties for sale must state if the tenure is freehold or leasehold.

Traditionally, leaseholds have been associated with flats but more recently a wave of new-build houses were sold as leaseholds, too. There have been government proposals to ban new build leaseholds due to concerns that housebuilders were treating leaseholders unfairly.

Legislation passed since the turn of the century has all but ended leasehold in Scotland.

How long is a lease?

The length of a lease varies between properties, but they are generally long-term affairs of between 90 and 999 years.

Because the property will return to the freeholder when the lease comes to an end, a short lease can negatively impact the property value and cause problems when it comes to remortgaging or selling. 

It is best to avoid looking at properties that don’t have long left on a lease, although it might be out of your hands, anyway - some lenders won’t even offer you a mortgage if you want to buy a property that has fewer than 80 years left on the lease agreement.

What happens when a lease ends?

When the lease ends, the freeholder will own your property, even if you’ve paid off your mortgage in full.

That means that even if you have been in the property for the full 80 years of the lease and are mortgage-free, you will have nothing to show for it. In effect, it is a dwindling asset.

Extending a lease is a complex legal process that will cost you time and money, so think very carefully before you commit.

Can you extend a lease?

If you have your heart set on a property with a shorter lease, you can ask the freeholder to extend the lease before you buy it (they may ask you for more money). Alternatively, you can try to extend the lease once you’ve bought it.

You have certain rights if you have owned the lease for at least two years and the lease had at least 21 years left to run when you took it out, but you should take legal advice before you do anything. 

The main thing to remember is that the sooner you start the process the better. Don’t leave things until there are only a few years left on the lease.

The shorter the lease, the more it costs to extend it. Get an estimate on how much this might be with the lease extension calculator.

If you own the leasehold to a flat, you will probably need to ask all the other leaseholders in the block to agree to request a lease extension for their properties as well.

In addition to the cost of the lease extension itself, you will need to pay legal fees for both you and the freeholder, plus stamp duty if necessary.

Can you buy the freehold?

Yes. With a flat, you will own only a share of the freehold but with a house you will own the entire freehold.

If a landlord is planning to sell the freehold, they must first offer you the chance to buy it – a rule known as ‘first refusal’. The cost of a freehold depends on negotiations between you and the landlord. Remember, you will have to pay the legal fees on top.

While buying a leasehold property is not as straightforward as an ordinary house purchase, it may be something that you have to consider if you are buying a flat. You just need to be aware that there are likely to be extra costs, and factor these into your calculations.

Can you sell your leasehold property?

Although you might be happy buying a property with a short lease, it could affect your chances of getting a good resale price when you move.

If you buy a property with a leasehold of 70 years and stay there for 25 years, the next owner will be buying a property with just 45 years left on the lease. 

That will make your property much more difficult to market. The new buyer might struggle to get a mortgage, and you’ll probably find that the value of your property has fallen because it is less attractive to potential buyers.

Commonhold Properties

Finally, commonhold provides a relatively new alternative to long term leasehold as it allows owners to be responsible for their individual properties with no time limit on how long you own the property.

Commonhold property owners can also form a commonhold association, which owns the land, building and common areas, taking on the responsibility for the maintenance and servicing of these areas.

7 May 2021