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What Does Leasehold Mean When Buying A House?

When you are looking to buy property, one of the most important things to consider is whether the property is leasehold or freehold. But what exactly does leasehold mean when buying a property?

Leasehold means that while you own the property itself, the land on which it sits is owned by someone else. This person is known as the freeholder, and issues you a lease to occupy the land for a specified period, usually for a long term.

On the other hand, freehold means that you own both the property and the land. Typically, occupiers of a leasehold property will be required to pay ground rent to the freeholder on an annual basis, alongside maintenance fees for the upkeep of the land.

What fees are involved with leasehold properties?

There are a handful of small fees that are sometimes payable with leasehold properties. Typically, ground rent is a given, however, it is usually a very cheap fee that is only paid once per year and will barely make a dent in your finances.

If you reside in a flat or any shared accommodation, you may also have to pay service fees that cover any work needed to be done on the property. Also, in shared accommodation you will also have to pay part of the building insurance, since your property forms part of the building.

How long does a leasehold last?

A standard leasehold will be put in place for a long period of time, anywhere from 100 to 999 years. When most people buy a leasehold house, they enter it at the beginning or middle of the leasehold, and therefore the approaching end of the contract is not for a very long time.

If a property has less than 80 years on its lease, this is the point when the value of the property begins to be affected. Estate agents and mortgage lenders will - at this point - think twice about listing or lending on a property, as the sale may be decreasing in value.

As an example, a leasehold with 60 years left may be worth 10% less than a leasehold of 100 years. So if you purchase a house for £150,000 with only 55 years left, it may be worth more like £135,000. If this is the case with the property you are looking at, it will be made clear to you by the estate agent and any mortgage lender.

When a lease gets to this point, this is typically when the lease is either extended, or purchased by the leaseholder.

How do you extend a leasehold?

The UK Government has put in place a series of acts to ensure that leaseholders are protected against short leases. As a leaseholder, you have the right to extend the lease or buy the freehold outright, but this is not a cheap thing to do.

If your house is close to the end of the lease, you may have the right to extend the lease by 50 years, and renegotiate the terms with the freeholder (EG who pays for maintenance / building work).

This legal ability only applies if you have held the leasehold for 2 years or more, and the property was originally leased on a long lease which tends to be 21 years or more.

If you are looking to extend your leasehold, we recommend contacting a professional to ensure it is done in your best interest. If the freeholder rejects your offer of renegotiation, you can challenge them in court.

How do you buy a leasehold from the freeholder?

When a leasehold is purchased from the freeholder, this is called enfranchisement. This process, while potentially tedious, can help the value of the property, and grant you the right to do what you like with your land.

If you purchase the leasehold, the land then belongs to you, and you will no longer have to pay the ground rent. However, this means that everything to do with the property is now your responsibility. Whether you do this or not is totally up to you, and many leaseholders actually prefer to keep things as they are.

Things to look out for when buying a leasehold house

If you are looking at buying a leasehold, here are a few things to keep your eye on.

1) Short Leases

As we have already said, buying a property with a short leasehold can raise issues regarding the value of the property. If the lease has less than 80 years left, take care whether to proceed or not. If a mortgage lender looks reluctant to lend on the purchase of the house, this may be a red flag telling you to think whether you are ready to deal with renegotiating the leasehold, or buying the lease outright.

2) Cheap Properties

If a leasehold property seems cheaper than others of a similar style and location, this may be a tell tale sign that the lease is due to expire fairly soon. Sometimes, sellers can try to sell a leasehold with a short term at the same price as a long term, hoping they will not notice. Make sure you find this out before committing.

3) Growing Ground Rents

While annual ground rents are of fairly low cost, they can grow over time. Sometimes a lease will have the ground rent double every five, ten or twenty years, which can be very expensive if left to grow for a long time. One of the main issues facing leaseholders is the freeholder hiking up costs whenever they like, so make sure you find out whether this is possible for yours.

4) More Complex Purchase

This is not something that can be realistically avoided, so if you are looking to purchase a leasehold, make sure that you are prepared to endure a longer and more complex purchase. This is because it will involve an extra party - the freeholder - and all the relevant information will need to be obtained be your solicitors. If the freeholder is in no rush to get a new tenant in, this can take a while.

More first-time house buying articles:

  1. Finding The Perfect Home
  2. What is a Home Report?
  3. Can I Take Photos When Viewing Property?
  4. Best Websites For Finding a First Home
  5. What is a Buy To Let Mortgage?

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