Buying a Leasehold Property (and the Legal Considerations!)
Purchasing a leasehold property can involve a number of risks. Here are some key legal considerations if you are considering buying a leasehold property.
What is a leasehold?
If you buy a leasehold, you will not own the property or the land on which its stands.
As a leaseholder, owning the leasehold to a property permits you to use and enjoy the property for a specified period of time. You do not own the property itself, but instead have an interest in the property for the duration of the lease.
The land remains owned by the ‘freeholder’. and your rights and resposibilities in respect of the property will come to an end once the leasehold has expired.
What is the difference between leasehold and freehold property?
If you own the freehold, you own the property and the land it sits on in perpetuity, giving you absolute control over the property and its use.
A leasehold, however, is temporary in nature, and extends only to the right to use the property for a set period of time. You are also likely to have additional responsibilities in respect of the property which should be factored in when calculating the cost of owning a leasehold compared with owning a freehold property.
While buying a leasehold remains less common compared to freehold ownership in the UK, purchases of new builds, flats and apartments can frequently be on leasehold terms.
What is a lease agreement?
Buying the leasehold on a property is a different process to that of a freehold purchase since you are purchasing the right to enjoy a property for a period of time, which is subject to an ongoing contractual arrangement between you and the freeholder.
The terms and duration of a leasehold should be set out in a lease agreement between the leaseholder and freeholder.
The agreement may include additional provisions or conditions, for example, restricting use of the property for the leaseholder, placing specific responsibilities on the leasesholder or making the leaseholder liable for additional charges such as ground rent and maintenance bills.
It will be important to ensure you understand and are in agreement with all terms of the lease before signing and creating the legally binding contract.
What does it mean to own a leasehold property?
Owning the leasehold does limit your rights in relation to that property when compared to the rights of a freeholder.
Length of ownership
Your ownership of the leasehold is only for a specified period. Therefore you should consider the length of the leasehold you intend to purchase as it can affect not only how much you can purchase it for, but equally importantly, how much you may be able to sell it for. Short-term leaseholds are considerably less attractive to potential buyers than those with a longer duration.
The duration of leaseholds can vary considerably, depending among other things, on the type of property. You can usually expect a lease of around 99 years for flats, and some new build houses having leases of 999 years.
When buying a leasehold, for example for a new build, you will need to ensure you are clear on the duration of the lease agreement so that you are fully aware of your situation and the potential impact in the future.
The freeholder will usually be responsible for maintenance of the building and land unless you have asserted your right to manage the property yourself. This can potentially cause disputes to arise between you as the leaseholder and the freeholder if one or the other does not feel the property is being managed sufficiently.
Maintenance & service charges
You will most likely need to pay additional charges on top of the purchase of your leasehold; including service charges for maintenance and ground rent (rent payable for the use of the land the property sits on). These can become quite substantial over the term of the lease. The lease agreement should set out the details of all additional charges.
Restrictions of use
You may not be able to use the property as you would like, and may be restricted from certain actions such as subletting the property to another person. You still have the right to sell the leasehold although selling a leasehold can be quite complex.
As the leasehold is a contract between you and the freeholder allowing you to enjoy the property for a specified period, there is the possibility of liability for damages or even having to give up the leasehold to the landlord if you do not keep to the terms of the agreement.
Can I obtain a mortgage on a leasehold property?
The duration of the leasehold will have a significant influence when it comes to securing a mortgage on a leasehold property.
It may be difficult to find a mortgage, or a mortgage on favourable terms, where the leasehold does not subsist for a long enough period following repayment of the mortgage. For example, if the leasehold is due to expire 10 years after your final mortgage payment, it may be hard to obtain a mortgage. The mortgage lender is likely to be concerned that should you default on your repayments, it will be difficult for them to sell the property at an adequate price on the basis of such a short leasehold.
Can I extend a leasehold?
If you are a leaseholder, there are certain circumstances in which it may be possible to apply to extend the leasehold duration, though this will incur additional fees. You can do this either by private agreement with your landlord, or you can invoke your rights under the Leasehold Reform Housing and Urban Development Act 1993.
Using your statutory rights, you may be able to extend your leasehold on a flat for 90 years, or by 50 years if you own the leasehold on a house. In order to qualify for a statutory lease extension, you must hold a residential lease of more than 21 years that you have owned for at least 2 years.
Various other aspects need qualification before your lease extension may be granted and owning the leasehold on a property does not guarantee you will be able to rely on your statutory rights.
If you qualify to rely on your statutory rights, you will have the right to extend the lease for fair market value.
Statutory lease extensions are highly complex, and legal advice should be sought to guide you through the process.
Can I buy the freehold on my leasehold property?
Similarly to extending your leasehold, there are statutory rights that may enable you to purchase the freehold of your leasehold property, which will then give you the rights granted as a freehold property owner.
The first option when looking to buy the freehold is to approach the current freehold owner directly to negotiate the purchase of the freehold.
If the freeholder is not open to selling the freehold to you, you may be able to purchase the freehold despite their position on the matter if you meet certain criteria under the Leasehold Reform Act 1967:
• The property must be a house
• The house must have been leased on a long lease of at least 21 years
• The leasehold must have been owned for at least 2 years
If your landlord doesn’t consent to your purchase of the freehold, the case may be taken to the County Court for resolution. If the issue is in regards to the price to be paid for the purchase, the dispute must be taken to the First Tier Tribunal (Property Chamber).
Purchasing the freehold of a leasehold property can be a lengthy and expensive process, especially where there are disputes as to the amount to be paid and where there are disagreements between the leaseholder and freeholder about the purchase in general.
Why seek legal advice
Leasehold properties typically involve more complex legal aspects than freehold, and you have certain legal responsibilities you must adhere to as a leaseholder. You must also be cautious if you are looking to purchase the leasehold on a property as you may struggle to mortgage or sell the interest if you get it wrong. If you wish to extend your lease or purchase the freehold, this can incur significant expenses and could result in a lengthy legal dispute.
As such it’s crucial to seek expert legal advice whatever the stage of the leasehold process to avoid costly mistakes and to ensure you get the best outcome for you.