A leasehold is a legal agreement where you buy and own a property, but not the land it’s built on. You will only own the property for a set amount of time – this is the lease.

Leasehold vs. Freehold

The legal agreement where you own the property but not the land it resides on is called a leasehold. If you own both, it’s known as a freehold. Leasehold and freehold are the two main types of land tenure.

With leasehold properties, when the lease ends, ownership returns to the landlord or freeholder, who owns the land and who has essentially granted you or the previous leaseholders the right to the lease.

Owning a property on someone else’s land will incur you charges. This is called ground rent, whereby you pay rent to the freeholder while you’re living there. The amount (usually only around £50 per year) should be stipulated in the lease.

You may also need to pay annual services charges and make contributions towards communal repairs or the upkeep of grounds and gardens. These costs often rise annually, so be aware that you are going to need to budget for price rises.

In addition, there may be restrictions on how you can change or alter your leasehold property. For example, if you want to make significant internal changes to the property, add an extension, or change its use (from residential to commercial), you would have to apply to the freeholder for permission.

How do I know if my property is a leasehold?

It is a legal requirement that all properties for sale state if the tenure is freehold or leasehold. If you are unsure, ask!

Leaseholds used to just be aligned with flats but more recently a wave of new-build houses have been sold as leaseholds too. An estimated 4.2 million homes have a leasehold attached in England, many of them newly-built city apartments.

But the government has proposed to implement “a ban on the unjustified use of leasehold in new houses” – a consultation process is currently in place.

Scottish parliament passed legislation in 2000, 2002 and 2012, which all but ended leasehold in Scotland.

When you buy a leasehold you will 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.

How long is a leasehold?

The exact length of a lease varies from property to property, but they are generally long: between 90 and 999 years!

Due to the fact a property will return to the hands of the freeholder when the lease comes to an end, a short lease (say 40 years) can drastically impact the property value and could cause real problems when it comes to remortgaging or selling.

In fact, the general rule of thumb is to avoid properties with a lease of 80 years or less. 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.

Commercial leases are a major exception to this: most commercial leases are rarely longer than 25 years. Unless you are buying a commercial property – a restaurant with some flats above it, for example – you don’t need to worry about that, though.

What happens when the 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.

Properties with short leases may be cheaper than those with a long lease of 99 years or more but that’s essentially because they are worth less than if they were freehold. Plus, they may end up draining your finances later down the line if you try to extend the lease or buy the freehold.

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

How can I extend the leasehold?

If you have your heart set on a property with a shorter lease, you can always 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.

Government legislation introduced to protect leaseholders means that if the property is a flat, you have held the lease for two years, and the lease was more than 21 years when you purchased, you could extend it by 90 years.

If you live in a house with a leasehold (this is primarily new builds) you may have the right to extend the lease by 50 years on the same conditions as above.

The freeholder does not have to accept your offer. If they reject it, you can challenge them in court.

It’s worth seeking legal advice before you do anything – but generally speaking you need to start applying for a lease extension well before your lease reaches the point where it has just 21 years left to run.

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’ll need to pay legal fees for both yours and the freeholder’s solicitors – plus stamp duty the amount above £125,000.

If you want the most long-term solution, it’s worth looking into buying the freehold outright.

Can I buy the freehold?

The quick answer is yes. With a flat, you will only own 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 the leaseholders the chance to buy it – a rule known as “first refusal”. The cost of a freehold is dependent 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 in to your calculations.

Can I sell my leasehold property?

Although you personally might not mind 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 then 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’s mortgage company may even refuse them a mortgage, or you may find that the value of your property has fallen because it is less attractive to potential buyers.

At the very minimum, lenders are unlikely to give you a 25-year mortgage unless the lease has 55 years remaining before it ends, and this will apply to anyone else who is intending to buy the leasehold from you.

Proposed government changes to leasehold rules

In 2018, the government launched a consultation on plans to improve the rights of leaseholders, in particular to prevent housebuilders from selling new houses as leasehold. There are also proposals to cap ground rents and make it easier to buy a freehold.

However, due to Brexit, the legislation may not be passed in 2019.

Another controversial issue is over the rights of leaseholders in developments which are part-residential and part-commercial, where buying and extending a leasehold is not possible if more than 25% of the development is commercial.

The moral of the story? Check all your paperwork and terms and conditions before buying a property to avoid being caught out later down the line.

Edited by: Sarah Guershon