You've found the home of your dreams and it's a leasehold. So what does that mean exactly?
With a leasehold, you own the property until the lease ends. At that point, ownership of it reverts to the freeholder.
As long as the lease is long, meaning you can easily resell your leasehold, they can be an excellent investment.
Buying a leasehold: everything you need to know.
Here's what to watch out for when buying a leasehold.
1. Be wary of short leases
Before viewing a leasehold, check the length of the lease with the estate agent or seller.
If it has less than 80 years left, think carefully about whether to proceed. Once that happens to a leasehold property, it can be harder to get a mortgage for it.
A lease of less than 70 years can start to significantly affect the value of the property.
2. A lease extension can be expensive
The cost of extending the lease can run into several thousand pounds.
The price depends on several variables, including the market value of the home, the lease length and the ground rent.
For example, if the lease on a flat worth £200,000 has 79 years to run, it would cost around £10,000 to extend it by 90 years.
The shorter the remaining lease period, the more an extension is likely to cost.
If a lease needs extending on a property you want to buy, the seller can have an important role to play.
As the current owner, they can claim the right to extend the lease before they sell the property to you.
If this doesn't happen, you’ll have to wait until you've owned the property for two years before you can extend it.
As it can be a complicated and costly process, it's best if the seller can extend the lease before you buy.
Take advice from your solicitor before making any decisions, as the process might add time and complexity to the sale.
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4. There are two methods for extending a lease
And the best route is always the statutory one.
The statutory route
Also known as a Section 42 Notice, the statutory route is a legal request for a lease extension from the leaseholder to the freeholder.
You'll need a specialist solicitor to file the legal paperwork, and possibly (in a worst-case scenario) to represent you at a tribunal in court.
The statutory route often ends up being cheaper than the less formal non-statutory route (see below), but you’ll need to cover legal fees.
This kind of extension adds 90 years to the remaining lease and it reduces your ground rent to zero.
So if you had 80 years left, your lease would become 170 years after a statutory extension.
The main downside to this approach is that it can take longer, and legal fees can add up.
But, unlike the non-statutory route, a freeholder cannot simply decline the request for the lease extension.
If they do and you end up going to a tribunal with your solicitor, a judge is likely to rule in your favour.
The non-statutory route
This is a more informal route to a lease extension, but there can be pitfalls.
With the non-statutory route, you approach the freeholder directly to request an extension to the lease.
They then respond with a fee and you either agree to it or decline it.
However, the freeholder may also simply decline to extend the lease.
With the non-statutory route, the freeholder may quote a fee that ends up being higher than it would be if you went through the legal route (see below).
The freeholder might also increase the ground rent with the extension or insert other terms into the lease.
The lease extension can be for any length via this route. So it might only be a short extension of 20 years or it might be up to 999 years.
The main advantage of the non-statutory route is that it's likely to be quicker than going down the legal route and it doesn't technically need a solicitor to handle it.
BUT you should always get a proposed lease extension checked by a solicitor before you agree to it.
5. Be on your guard if a leasehold property seems cheap
If a leasehold home seems too cheap, it should set your alarm bells ringing. It probably means the flat needs a lease extension.
If you do decide to proceed, make sure you factor this into your offer price.
Do your homework on the market rate and always ask about the length of the lease before making your offer.
5. Remember the lease won’t stay long forever
Even if the lease is a decent length when you buy the property, you need to remember that you may need to buy an extension in the future.
Be sure to factor this into your decision-making and get the ball rolling well before the remaining lease dips below 80 years.
6. Check all of the terms in your lease
Some leases may contain unpleasant surprises.
You may find, for example, that you have to pay thousands of pounds to your freeholder just to make simple changes to your home.
There could also be bans on owning pets or subletting. The key is to make sure your conveyancing solicitor finds out precisely what your lease entitles you to.
7. Watch out for costly ground rents
While annual ground rents – payable to the freeholder – are supposed to be of ‘peppercorn’ value, some can be very costly.
If your ground rent doubles every five or 10 years, you could face bills running into thousands.
Make sure you get a solicitor’s advice before you buy. If you’re getting an extension as part of a sale, make sure your solicitor has oversight on the lease and the future ground rent charges.
8. Beware of charges for maintenance fees
The freeholder is usually responsible for maintaining any common parts of a building. In a flat, this might be the entrance and stairs, the exterior walls and roof.
While the freeholder decides what work needs to be done, who will do it, and what it will cost, it is the leaseholder who has to pay.
Be sure to ask for historical and future service or maintenance charges. You don't want to be tied into high management fees for maintenance and repairs.
The freeholder should provide details of any projected expenditure, including any upcoming major works.
9. Watch out for insurance costs
As a leaseholder, you will have to pay a share of the building’s insurance.
Make sure you know exactly how much this is likely to be, so there are no surprises when it comes to buildings cover.
10. Buying a leasehold can be more complex
Sometimes buying a leasehold can take longer than buying a freehold property.
That's because your solicitor will need to obtain information from the freeholder or management company about the lease.
The management pack should include detailed information about ground rent costs, monthly service charges, proof of buildings insurance and accounts from previous years.
Obtaining all this could take extra time and extra checks may need to be carried out.
Find out more about why it might take longer to buy or sell a leasehold property.
11. Think about what will happen when you want to sell
If your lease is nice and long, you pay a peppercorn ground rent and you have a good freeholder who keeps service charges low, selling a leasehold will be straightforward.
However, if ground rents keep increasing and the lease starts to fall below 80 years, that could make selling a lot trickier.
12. Buying a share of freehold is possible but complicated
The alternative to ‘leasehold’ is to buy a ‘share of freehold.’
That means the freehold is owned by a company and all the flat owners have a share in it. With share of freehold, each freeholder has a say in the upkeep of all the communal areas.
Crucially with this arrangement, you remain in charge of how your money is spent.
If you have a leasehold house rather than a flat, you are within your rights to buy the freehold outright.
13. Permitted development rights don’t apply to leaseholders
The government has made it easier for homeowners to extend their homes without applying for planning permission.
But the bad news is that the new rules, known as Permitted Development Rights, do not apply to flats and leaseholders.
Anyone who owns a leasehold property will have to apply both to their freeholder and then for planning permission from the council to make any big changes.
Your freeholder is unlikely to refuse consent to small changes or extensions, but they are likely to charge you a fee for both the request and for granting permission.
It’s not always a big deal, but it can add a layer of hassle.
What does leasehold property mean?
A leasehold property means you don't own the building itself or the land it is built on.
Instead, you're leasing the home from the freeholder, who owns the land and building. They lease it to you for a set amount of time, which is often a term of 99 years or 999 years.
All properties are either leasehold or freehold. With a freehold property, you own the building and the land.
Most properties in the UK are freehold, however lots of flats are leasehold.
Buying a leasehold: everything you need to know