When buying a property in a project on a leasehold plot, there are some important things to know. Unlike freehold property, where you own the land, leasehold means you own the property for a set number of years, after which it goes back to the landowner. This can affect things like getting a loan and selling the property later. In this article, you’ll learn the key points to consider and the steps to take when buying in a leasehold project, so you can make a smart and informed choice.
See also: Leasehold Property: Everything you Need to Know
What is leasehold property?
A leasehold property means you have the right to use a building or apartment, but you don’t own the land it’s on. Instead, you rent the land from someone else, called the freeholder, for a certain number of years. You can live in or use the property as long as the lease lasts, but when the lease ends, the land goes back to the freeholder. Leasehold properties are often found in city areas, like high-rise apartments and office buildings.
Key characteristics of leasehold property
With a leasehold property, you only own the building or apartment, not the land it sits on. The lease agreement will set a specific time period, like 99 or 999 years. You’ll usually need to pay rent to the landowner, known as ground rent. There might also be rules about how you can use the property, make changes to it, or rent it out.
Leasehold vs. freehold
When you own a freehold property, you own both the land and the building on it completely. You have the freedom to use, sell, or change the property however you want. On the other hand, a leasehold property means you’re renting the land from someone else for a set amount of time. You only own the building or apartment and have to follow the rules set in the lease agreement.
| Feature | Leasehold | Freehold |
| Ownership | Limited to the building | Complete ownership of land and building |
| Term | Fixed term | Perpetual |
| Ground rent | Usually payable | No ground rent |
| Restrictions | More restrictions | Fewer restrictions |
| Value | Generally lower than freehold | Generally higher than leasehold |
Common uses of leasehold plots in real estate
Leasehold plots are used in different areas of real estate:
- Homes: Many high-rise apartments, flats, and maisonettes are leasehold.
- Business: Offices, shops, and factories can be leasehold.
- Mixed-use: Some projects combine homes and businesses with leasehold parts.
- Land development: Builders might lease land to construct and sell properties.
Key considerations before buying
Leasehold terms
When looking at a leasehold property, check how long the lease lasts. A longer lease might cost more but gives you more security. Also, find out about the ground rent—how much it is now and if it might increase in the future, as big increases can raise your costs and affect the property’s value. Look at service charges too, including any extra costs that might come up. Research the company that manages the leasehold to ensure they are reliable. Also, be aware of any rules about how you can use, change, or rent out the property.
Property and location
Examine the condition of the property and think about any future repair costs. Consider how good the location is, including nearby amenities, transportation options, and any future development plans that might affect the area. Check the property’s market value and compare it to similar leasehold and freehold properties to ensure you’re getting a fair deal.
Financial implications
Set a clear budget for buying the property, including the purchase price, legal fees, stamp duty, and any mortgage payments. Check with lenders about getting a mortgage for a leasehold property, as some may have special rules or higher rates. Make sure you can afford the property in the long run by considering ground rent, service charges, and possible maintenance costs.
Legal and administrative processes
Get advice from a solicitor who knows about leasehold properties to help review the lease and make sure your interests are protected. Have a thorough property survey and inspection done to spot any potential problems. Also, understand how stamp duty will affect your purchase.
Future considerations
Think about how the property’s value might change if you decide to sell it later, especially as the lease gets shorter. Look into whether you can convert the leasehold into a freehold. Also, consider if the property might increase in value or provide rental income in the future.
Terms and conditions of the lease
Review how ground rent is structured and whether it might increase in the future. Understand what service charges cover and how they’re calculated. Look for any rules about how you can use the property, make changes, or rent it out. Find out who takes care of maintaining the building and shared areas, and be clear on what insurance you and the freeholder need to have.
Renewal options and associated costs
Check if your lease includes options to renew it. Ask about any fees or extra costs for renewing the lease or extending its term. Also, consider the legal fees for checking the lease and negotiating any changes.
Impact on property value
The length of the lease can greatly affect the property’s value. A longer lease usually means a higher value because it provides more security and stability. On the other hand, a property with a shorter lease might be worth less because it has less security and could face issues when the lease ends.
Costs involved
Initial purchase costs
- Property price: This is the main cost and reflects the value of the property.
- Legal fees: You’ll need to pay a solicitor to handle the paperwork and check the lease agreement to protect your interests.
- Stamp duty: This is a government tax on property purchases, based on how much you pay for the property.
Ongoing costs
- Ground rent: This is a yearly payment to the landowner, which might go up over time and affect how affordable it is.
- Service charges: These cover the costs of maintaining shared areas like hallways and gardens, and can vary based on the property and its services.
Potential for additional fees
Lease extension or renewal
Sometimes, you can extend or renew the lease when it runs out, but this often comes with extra fees.
Alterations or subletting
The lease might have rules about changing the property or renting it out to others. If you want to make changes or sublet, you might need permission from the landowner, which could involve extra costs.
Rights and responsibilities
Right to quiet enjoyment
You have the right to use your property without being disturbed.
- Right to information: You can access details about the property, like financial records and maintenance plans.
- Right to challenge decisions: You can question any decisions made by the landowner or the management company.
Responsibilities for maintenance and repairs
- Inside your property: You are usually in charge of taking care of the inside of your property.
- Common areas: Your service charges help pay for the upkeep of shared areas, like hallways and gardens.
Long-term considerations
Lease expiry and renewal
What Happens as the lease gets shorter: As the lease gets closer to ending, the property usually becomes less valuable. This is because buyers worry about the uncertainty and extra costs of extending or renewing the lease.
How to extend the lease: Extending a lease involves a legal process where you must notify the landowner. This can be complicated and take time. Costs include legal fees, valuation fees, and a payment to the landowner. The payment amount depends on factors like how long is left on the lease, the property’s value, and the ground rent.
Future market value
How leasehold properties are seen: Leasehold properties are often seen as less desirable compared to freehold ones because of limited ownership rights and potential extra costs. However, they are common and accepted, especially for apartments and flats.
Effect on resale value and investment returns: A longer lease can make a property more valuable when selling. As the lease gets shorter, it can be harder to sell, and the property’s price might drop. This can reduce investment returns, especially if you hold the property for a long time. Additionally, the costs to extend the lease can cut into potential profits.
FAQs
Lease length, ground rent, service charges, restrictions, and maintenance responsibilities.
An annual payment to the landlord, it can increase over time.
Fees covering maintenance of common areas, paid by leaseholders.
Advantages include lower initial costs, while disadvantages include limited ownership and potential future costs.
Longer leases generally have higher property values.
Yes, but it might be more difficult and have higher interest rates.
Ground rent, service charges, and potential maintenance costs.
Shorter leases can reduce property value and make it harder to sell or rent.
Legal fees, valuation fees, and a premium payable to the landlord. What should I look for in a lease agreement?
What is ground rent and how does it affect me?
What are service charges and who pays them?
What are the advantages and disadvantages of buying a leasehold property?
How does lease length affect property value?
Can I get a mortgage on a leasehold property?
What are the ongoing costs of a leasehold property?
How can leasehold affect my ability to sell or rent my property?
What are the potential costs of extending a lease?
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
