How to deal with leaseholds 

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A leasehold property is a type of real estate ownership where the homeowner does not own the land outright but instead has a lease from the freeholder, who owns the land.

How does a leasehold work?

This arrangement is common in the UK, particularly for flats and apartments. Dealing with leaseholds requires understanding the rights and responsibilities of both the leaseholder and the freeholder. This article aims to provide guidance on how to navigate the complexities of leasehold ownership.

What is a leasehold?

A leasehold is a form of property ownership where the leaseholder owns the right to occupy a property for a specified period, typically between 99 and 999 years.

The leaseholder sometimes pays an annual ground rent to the freeholder, who owns the land on which the property sits. Currently, 35% of property in London is owned on a leasehold basis.

London property that is leasehold

The leaseholder is responsible for maintaining the property, while the freeholder retains ownership of the land and may have certain responsibilities, such as maintaining common areas.

What are the advantages of a leasehold?

The advantages of a leasehold depend on if you are a buyer or a seller. Pay attention to this as it the opposite may be true if you

As a buyer

One of the primary advantages of a leasehold for buyers is that leasehold properties are generally more affordable than freehold properties. This is because the leaseholder does not own the land outright, which can make the initial purchase price lower.

Get more information about using the land registry as a landlord

According to data from the Land Registry, the average price of a leasehold flat in England and Wales in 2022 was £272,000, compared to £363,000 for a freehold house.

As a seller with leasehold ownership

For sellers with leasehold ownership, one advantage is the potential for a higher resale value compared to properties with shorter leases. Properties with longer leases are generally more desirable, as buyers prefer not to have the added expense of extending the lease or purchasing the freehold.

According to a report by the Leasehold Advisory Service, properties with leases of less than 80 years can experience a significant reduction in value.

As a landlord

For landlords, leasehold properties can offer the advantage of lower maintenance costs and responsibilities compared to freehold properties.

A landlord managing their leasehold

The freeholder is typically responsible for maintaining common areas and the structural elements of the building, reducing the burden on the landlord. This can be particularly beneficial for landlords with multiple properties, as it simplifies their management responsibilities.

What happens when a leasehold runs out?

If the leasehold on your property expires, it will transition from being a leasehold to a freehold. Consequently, ownership of both the land and building will return to the freeholder.

For instance, suppose you had sixty years remaining on your property lease in 2019. By 2079, despite having fully paid off your mortgage, ownership of the property would revert to your landlord.

Want leaseholds that don’t expire for 999 years?

Cozee have new build properties that do not expire for 999 years as part of new leasehold changes in 2024

What are the upcoming changes to leasehold property?

In the latest developments concerning leaseholds, changes include extending lease terms substantially to 999 years, with ground rents reduced to a nominal fee, thus providing greater security and value for leaseholders.

Additionally, the reforms seek to streamline the process of buying or selling leasehold properties, imposing clear guidelines on the provision of information and ensuring transparency regarding service charges.

These reforms also aim to broaden access to redress schemes, empowering leaseholders to challenge unfair practices without facing prohibitive costs.

Leaseholds vs freeholds – the difference in the buying process?

When purchasing a property, it is crucial to understand the distinction between leaseholds and freehold when buying.

Get more information about the buying process with Cozee

The buying process can be slightly more complex to for leasehold purchases but Cozee have our buying process simplified, making things easy to understand for the buyer.

Pay attention to the deeds (ownership rights)

The deeds of a property outline the ownership rights and responsibilities of the buyer. In the case of a leasehold, the buyer receives a leasehold title deed, which outlines the terms and conditions of the lease agreement, including the length of the lease, ground rent, and service charges. 

Cozee have deeds that are easy to understand

A deed of covenant is a legal document that sets out the obligations and responsibilities of both the leaseholder and the freeholder. It typically includes details such as the payment of ground rent, service charges, and any restrictions or covenants related to the use and maintenance of the property.

What is a deed of covenant of a leasehold?

A deed of covenant is a legal document that sets out the obligations and responsibilities of both the leaseholder and the freeholder. It typically includes details such as the payment of ground rent, service charges, and any restrictions or covenants related to the use and maintenance of the property.

Responsibilities and rights

One of the key differences between leaseholds and freeholds lies in the responsibilities and rights of the respective owners. With a leasehold, the leaseholder is responsible for paying ground rent to the freeholder, which is a yearly fee for the use of the land.

Additionally, leaseholders are typically required to pay service charges, which cover the maintenance and upkeep of common areas and shared facilities.

It is crucial to review the lease agreement carefully to understand the specific responsibilities and rights associated with the leasehold property as the average ground rent for leasehold properties in London: £300 – £500 per year. And approximately 60% of leasehold properties in England and Wales are subject to service charges.

Future Implications

There are a few implications that occur over time that vary between leasehold and freehold ownership

Lease extensions

As the lease term decreases, the value of the leasehold property can diminish. To maintain the value and ownership rights, leaseholders may need to consider extending the lease.

a woman considering a lease extension for her leasehold

The process of extending a lease involves negotiating with the freeholder and paying a premium, which can be costly, especially for shorter leases.

Leasehold enfranchisement

Leasehold enfranchisement is the process by which leaseholders can collectively purchase the freehold of their property, effectively becoming the freeholders themselves. This option can provide greater control and ownership rights but also comes with additional responsibilities and costs.

It is important to consider the long-term implications of leasehold ownership, including the potential need for lease extensions or enfranchisement, as these factors can have a significant impact on the value of the property.

Currently and according to plazaestates.co.uk, the average cost of a 90-year lease extension for a flat in London is £15,000 – £30,000 yet approximately only 25% of leasehold are available for a lease enfranchisement in the first place.

What are the benefits of buying a leasehold property as a landlord?

Investing in a leasehold property can offer several benefits for landlords, making it an attractive option for those looking to build or expand their rental portfolio.

Higher capital appreciation 

Leasehold properties, particularly new builds, can offer landlords the potential for higher capital appreciation over time. This is especially true for properties located in high-demand areas, such as central London.

Looking for London property with high capital appreciation?

Leasehols listed with Cozee are sold brand new and appreciate in value over the years significantly

Higher rental yield

One of the primary advantages of buying a leasehold property as a landlord is the potential for higher rental yields.

Leasehold properties are generally more affordable than their freehold counterparts, which means landlords can invest in properties at a lower initial cost. This lower entry point can result in a higher rental yield, which is calculated as the annual rental income divided by the property’s value.

leasehold property in london

In 2022, according to leaseholdvaluation.com, the average rental yield for leasehold properties in London was 4.5% and the average rental yield for freehold properties in London was 3.8%, highlighting this difference.

Can be bought off the market

Many new build developments are sold as leasehold properties, which means landlords can often purchase these properties directly from developers, bypassing the traditional open market.

This is especially true for property listed with Cozee, deals can provide landlords with access to brand-new, high-quality properties that may not be readily available on the open market.

Additionally, buying off-plan can sometimes offer discounts or incentives from developers, further enhancing the investment opportunity for landlords.

Want to know what leasehold deals Cozee have?

Cozee have off the market deals exclusive to landlords who work with us. Enquire today to get in touch with an agent to find a perfect deal

The South East region offers the biggest leasehold house price bargains, with leasehold properties selling for £205,000 on average compared to £370,000 for freeholds, representing an 80.5% difference.

What are the disadvantages of buying a leasehold property as a landlord?

While leasehold properties can offer several benefits for landlords, it’s important to consider the potential drawbacks and challenges associated with this type of ownership.

Limited control

As a leaseholder, landlords have limited control over the property compared to owning a freehold. The freeholder, who owns the land, has the ultimate authority and can impose restrictions on alterations, renovations, or changes to the property.

Get more information on buying freehold property instead

This lack of control can be a significant disadvantage for landlords who may wish to make modifications to the property to suit their rental business needs or cater to specific tenant preferences.

Ongoing costs

In addition to the standard costs associated with property ownership, such as maintenance and repairs, leasehold properties often come with ongoing expenses.

These include ground rent, which is a fee paid to the freeholder for the right to occupy the land, and service charges, which cover the maintenance of common areas and shared facilities. These ongoing costs can add up over time and potentially impact the profitability of the rental business.

However, it is important to note that despite potential price differences, the demand for leasehold homes is expected to increase, possibly narrowing the price gap between leasehold and freehold properties in the future. The graph below explains this trend.

Short term leases

Many leasehold properties have relatively short lease terms, often ranging from 99 to 125 years. As the lease term decreases, the value of the property can diminish, making it less attractive to potential tenants and buyers.

the disadvantages of leasehold property

This can pose a challenge for landlords who may need to factor in the cost of extending the lease or purchasing the freehold to maintain the property’s value and marketability.

Lease extensions

To maintain the value and appeal of a leasehold property, landlords may need to consider extending the lease at some point. The process of extending a lease can be costly, involving negotiations with the freeholder and the payment of a premium.

This added expense can impact the overall profitability of the rental business and should be carefully considered when evaluating a leasehold investment. On average, leasehold property is one third cheaper than other types of property

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