Buying a home is a significant life event. If you are considering a leasehold property, it is crucial to fully understand the implications of this form of ownership. At KhanMather, our Residential Property Solicitors are dedicated to guiding you through the intricacies of freehold, leasehold, and commonhold titles, empowering you to make confident and informed decisions when purchasing your new home.
What Does ‘Leasehold’ Mean?
Leasehold remains a prevalent form of property title in England and Wales, particularly in regions such as the North West, where 27% of properties are leasehold, and London, with 36%.
Unlike freehold ownership, where you purchase both the building and the land it occupies, leasehold means you acquire ownership of the building for a fixed period, known as the lease term. During this term, you “lease” the property from the freeholder, who retains ownership of the underlying land.
The parties involved in a leasehold agreement typically include:
- Leaseholder (Tenant): You, as the owner of the property for the lease term.
- Freeholder (Landlord): The owner of the land on which the property is built.
- Management Company (Optional): A separate entity responsible for maintaining common areas.
Lease terms commonly range from 99, 125, 250, to 999 years. It is vital to monitor the remaining years on your lease, as the property’s value diminishes significantly as the term shortens. Mortgage lenders generally show reluctance to lend on properties with fewer than 80 years left on the lease. Upon expiry, ownership reverts to the freeholder unless the lease is formally extended.
Common Leasehold Terms
When considering a leasehold property, you will encounter specific financial and operational terms:
- Ground Rent: This is an annual payment made to the freeholder as a condition of the lease, distinct from payments for services. Historically nominal, some modern leases incorporate “escalating” ground rent clauses, leading to substantial increases over time. Recognising these concerns, legislation enacted in July 2022 prevents the creation of new leases with ground rents exceeding a peppercorn (a nominal sum). The future treatment of existing leases with escalating ground rent clauses remains a subject of ongoing legal discussion.
- Service Charge: In addition to ground rent, leaseholders often contribute to a service charge. These payments, made to the landlord or a designated management company, cover the maintenance of communal facilities such as shared entrances, staircases, gardens, courtyards, or car parks. When viewing a property that may incur a service charge, we recommend requesting a copy of the service charge budget to assess the level of charge and factor it into your overall budget.
Restrictions and Covenants
Leases commonly contain restrictions, known as covenants, which can be more stringent than those associated with freehold properties. It is imperative to review the lease thoroughly to understand what you can and cannot do with the property. Common restrictions include:
- Prohibitions on external or structural alterations, including extensions, without the consent of the freeholder or management company.
- Limitations on pets, potentially requiring consent from the freeholder or management company.
- Restrictions on sub-letting the property without the consent of the freeholder or management company.
Extending the Lease or Purchasing the Freehold
Recent legislative changes have removed the minimum ownership period previously required before a leaseholder could approach the freeholder to purchase the freehold or extend their lease.
Under the Leasehold Reform Act 1967, leaseholders of houses have the statutory right to acquire the freehold interest, a process known as enfranchisement. While some freeholders may agree to sell their interest voluntarily, others necessitate a formal claim and adherence to a statutory procedure. Seeking professional legal advice is crucial to navigate this process effectively and understand the potential costs involved.
What is Commonhold?
Introduced by the Commonhold and Leasehold Reform Act 2002, commonhold offers an alternative to the traditional long leasehold system. Although its initial reception by mortgage lenders and developers limited its widespread adoption, new proposals aim to revitalise commonhold, enhancing the structure and management of multi-occupancy developments or estates.
In theory, commonhold enables individual unit owners (e.g., houses or flats within a larger building) to own the freehold of their specific unit. A “commonhold association,” comprising the individual unit owners, would be formed and registered at Companies House. This association would own and manage the common parts of the building and estate, such as entrances, communal gardens, car parks, and the building’s structural elements.
Instead of a lease, a “commonhold community statement” would define the rights of individual unit owners to use common areas and establish their mutual responsibilities. A “commonhold assessment,” similar to a service charge, would be paid to contribute towards maintenance costs.
Further legislation is anticipated to make commonhold a more widely utilised structure, and we are closely monitoring these developments to provide our clients with the most up-to-date advice.
If you have any questions, p[lease telephone Hannah on 0161 850 9911.