Buying a leasehold property – what you need to know

It’s fair to say that if we were designing a system of property ownership for the modern era, leasehold would not be it. It’s quirky, archaic and still rather prone to exploitation, but successive governments have worked hard to iron out many of its problems, and it can be a perfectly practical way to own property – so long as you understand your rights.

What is leasehold?

Leasehold is a form of property ownership. If you are a leaseholder, you don’t absolutely possess your property in perpetuity. Rather you own the right to live in your home (or rent it out) for a set period of time – sort of like an extremely long tenancy where the landlord has fewer responsibilities.

The ‘landlord’ in this case is the freeholder, who ultimately owns the fabric of the building.

The vast majority of leasehold properties are flats. In this scenario, the freeholder normally owns the whole building or block, and the leaseholders own their individual flats. While houses are occasionally leasehold, there’s no good reason for this except to unfairly exploit the leaseholder, and it’s recently been outlawed for new-build houses.

Freeholds can be bought and sold, and there are a lot of companies that make their money buying up freeholds then profiting from them in a number of different ways.

How long is a lease?

There’s no set period for a lease. Normally when the property is built or developed (in the case of older buildings being divided up into flats), the newly created lease will be lengthy – a common lease period, for example, is 199 years.

While a new lease will last well beyond your own lifetime, older leases might not have so much time to run, and if you come across a brilliant flat in a great location at an unusually attractive price, it might be because the lease doesn’t have many years left on the clock.

When the lease expires, the ownership of the property reverts to the freeholder, and it can cost you a great deal of money to buy it back. Fortunately the days of unscrupulous freeholders scalping the leaseholder for everything they’ve got are over, and if you aren’t able to come to a sensible financial arrangement with the freeholder then an official tribunal will use a set formula to determine a fair price for the lease.

What are the practical implications of a leasehold property?

Assuming you’ve bought a property with enough years left on the lease that it’s not going to revert to the freeholder until you’re long past this earth, there are a few aspects of leasehold property that will affect your life to some extent. These will all be set out in your lease agreement, so it’s worth reading this very carefully indeed before you sign on the dotted line.

The main impact will be financial, since you’ll have to pay bills including ground rent and service charges.

Ground rent is not typically very high. While there have been recent scandals over housebuilders exploiting the system to place rapidly escalating ground rents on new-build homes, this was essentially a scam and has now been outlawed. For most leasehold flats, the annual ground rent might run to a couple of hundred pounds a year, and there will probably be provisions in the lease for it to increase in line with inflation.

More onerous by far will be the service charges. It’s a freeholder’s responsibility to maintain and insure the fabric and communal facilities of the building, but these costs can all be recouped from the leaseholders through service charges. Most freeholders will use a managing agent (often an affiliated company), and these agents will have fees of their own. The costs of maintaining a building can be considerable, and individual leaseholders can easily find themselves with annual service charge bills running into the thousands.

Finally, there will probably be all kinds of prohibitions or conditions listed in your lease. You’ll probably have to ask the freeholder for permission to keep a dog, for example, and if you want to rent your flat out to someone else, you’ll usually need to get a signed licence to sub-let (which of course incurs an administration fee).

What’s the main alternative to leasehold property?

If you’re buying a flat, the main alternative to leasehold is shared freehold. In this situation, the flat will come with a portion of the overall freehold for the building, but it’s worth noting that this brings its own set of challenges. The buildings still need to be maintained and insured, and you’ll have to work with your fellow residents to achieve this and to make sure everyone pays their fair share.

What are the upsides of leasehold property?

If your freeholder and managing agent are both decent and conscientious, living in a leasehold property can be pleasantly uncomplicated. Whatever kind of building you live in, there will always be buildings insurance to sort out, gutters to clean, roof leaks to fix, fire alarms to maintain, and a host of other maintenance issues. In a leasehold property, you just pay your money and that’s the end of it. If something breaks, you call the freeholder (or more often their agent) and they sort it out. There’s no catting around for quotes, quibbling with neighbours or chasing fellow residents for money.

What are the big downsides of leasehold property?

Obviously such a system is ripe for exploitation. Many freeholds are bought up by specialist companies, and they’re not in it for the measly ground rents. The real money is in the management, and since it’s up to the freeholder to hire the management company, they’re perfectly at liberty to employ themselves. Look at the boards of directors for the company that owns your freehold and the agency they use to manage the property, and you’ll likely see some names in common.

Often the freeholder/agent will have their own maintenance contractors, and you can see why this could be bad news in some cases. Prices can be inflated at various stages of the process without worrying about competition, and by the time the agent has added their own fees, the service charges can quickly spiral out of control.

Fundamentally, one of the biggest problems is that the people running up the bills aren’t the ones paying them, and there’s very little real incentive for freeholders and managing agents to work in a cost-effective way. Quite the opposite, in fact.

What protection is there for leaseholders?

Loads, fortunately. The law around leasehold property has really started tightening up, with plenty of measures aimed at empowering and liberating leaseholders.

Among other things, leaseholders who think their service charges are too high can take the freeholder to a tribunal who will determine whether the charges are genuinely fair and reasonable. The tribunal can also determine a fair price for leaseholders looking to buy or renew their leases.

In the case of major works, freeholders and their agents can no longer simply hire whoever they like. They’re obliged to conduct proper tender processes (including letting the leaseholders nominate a contractor), and while they don’t have to go with the lowest quote, they do have to justify it if they don’t.

There are also more drastic measures available. If enough of the leaseholders in a building are in favour, they have the right to hire a managing agent of their own choosing, or even to force the freeholder to sell them the freehold at a fair price.

All of this has rather changed the landscape of leasehold property management. As it becomes increasingly difficult to exploit the system, shrewd management companies are realising that their future lies in building positive relationships with leaseholders, and standards of service have been improving significantly as a result. The lot of a leaseholder certainly isn’t perfect, but it’s better than it’s ever been.