Navigating the property market: why leasehold properties matter

In today’s property market, even where prices appear to be on the decline,  finding the right path to homeownership can still be a daunting task. For many buyers, especially first-timers, leasehold properties offer an attractive way to get on the property ladder in competitive markets. 

These types of homes make up a good portion of housing in the UK. As a leaseholder, you have the right to live in and enjoy the property as your own. However, you don’t actually own the land or building, since those belong to the freeholder, and leaseholds do come with some strings attached. There are limitations and costs baked into these agreements that you’ll need to consider closely before signing anything.

Victorian mansion apartments in Marylebone Road, London.

Conducting your due diligence is key to ensuring you enter into a leasehold arrangement with eyes wide open, to secure one that seems fair to you in both the near and long term. Don’t gloss over the fine print or just assume everything will work out with the freeholder. Educate yourself on the ins and outs so you can make an informed decision. With some smart preparation up-front, a leasehold could end up being a successful path to home ownership for you.

Pros and Cons of leaseholds

Pros:

  • More affordable purchase price: Leaseholds are usually cheaper to buy than comparable freehold properties since you don’t own the land. This can make them an attractive option for first-time buyers or landlords looking to make a profit. 
  • Less maintenance: The freeholder is typically responsible for exterior maintenance and repairs to the building, so you don’t have to worry about large repair bills.
  • Access to amenities: Leasehold properties, like flats, often come with shared amenities like gyms or pools which can be a perk for residents. 
  • Investing potential: Leaseholds can still appreciate in value over time and be a worthwhile investment.

Cons:

  • You don’t own the land: This means you don’t have full control or ownership of the property or what happens to it in the future. 
  • Lease eventually expires: When your lease term is up, the property goes back to the freeholder. This can impact resale value as a lease gets shorter, so needs to be factored in when you buy. 
  • Ground rent and service charges: You’ll have to pay fees to the freeholder for the land and building upkeep. These costs can increase over time.
  • Resale limitations: Buyers may be deterred from purchasing a leasehold with a short remaining lease period.
  • Freeholder disputes: If you have a difficult freeholder, they can make the leasehold experience more challenging.

So, while leaseholds offer an affordable entry point to ownership, they do trade off some freedoms and equity for that lower price. Consider both angles before opting for a leasehold.

Seeking advice from a property lawyer may be prudent.

Extending a lease

When your lease begins to expire, you may want to consider extending it. This helps maintain the value and marketability of the property. The lease extension process does vary somewhat between England, Wales, Scotland, and Northern Ireland. But there are general steps and costs to be aware of.

Typically, you can first try negotiating an extension with your freeholder. However, they are not obligated to agree to an extension. If you are unable to reach agreeable terms, you can pursue a legal lease extension by serving what is called a Section 42 notice. This formally starts the process.

You’ll need to have owned the lease for at least two years before extending. The notice triggers a timeline for you and the freeholder to agree to an extension length and premium cost through negotiation or third-party determination. The total fees are generally split between the premium to the freeholder and your own legal/valuation costs.

Once the terms are determined, you can formally complete the extension by signing the necessary legal documents. This all comes at a substantial cost, often tens of thousands of pounds, so do weigh up the value of extending versus other options, such as moving. Nevertheless, for long-term living or asset building, extension brings peace of mind.

Apartments alongside the Regent’s Canal in London.

What to look out for when buying a leasehold

When evaluating a leasehold purchase, there are several key factors you’ll want to research thoroughly before committing to the property. First, as we’ve discussed, you’ll want to pay close attention to the length of lease remaining, as this directly impacts the future resale value. Most lenders require at least 70 years remaining on a lease. However, the longer the better when it comes to the length; opt for as long a lease as possible.

Another important financial consideration is the ground rent amount. Check if the ground rent is nominal or structured to increase substantially over the duration of the lease. New properties have had ground rents abolished, but they’re still present for existing leasehold properties. So, high or escalating ground rents will eat into your equity in the property over time. You’ll also want to closely analyse the service charges you’ll be responsible for paying as a leaseholder. Understand exactly what’s covered by the fees, whether it be refuse collection, landscaping, building repairs, and so on. 

Scrutinise the lease terms

Beyond the costs, you’ll also want to pay close attention to any allowable modifications stated in the lease terms. Be sure to check for restrictions on enhancements or renovations you may want to make, as too many limitations can become problematic. Additionally, research the reputation of both the freeholder and their property management company by reading online reviews. You want to ensure they have a track record of providing responsive and reasonable service to leaseholders.

Before signing anything, it’s wise to run concerning lease language by a property lawyer experienced in property contracts. If you’re buying, you will be legally required to instruct a solicitor to help you with this. Being informed on the ins and outs of the lease upfront prevents unwelcome surprises later on.

Be well-informed and guided

When weighing up whether to buy or rent a leasehold property, it’s imperative you are aware of all the facts. Do your homework to fully understand the lease terms, costs and limitations before signing anything. If you’re opting for an existing leasehold, have a plan and budget in place for extending the lease when needed if it’s already on the shorter side.

While leaseholds do limit full ownership, they can still be a worthwhile path to affordable housing if you enter the agreement informed. Be as well-informed as possible and seek professional guidance; this will create a stronger opportunity to view a leasehold as a successful and enjoyable housing option.

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