A Leasehold property means that you have the right to occupy the property for the number of years attached to the lease. Once the lease comes to an end, the ownership of the property is returned to the landlord. This contrasts to purchasing a freehold property, where you own the land and the property outright.
Under the Leasehold Reform Act 1967, leaseholders have the right to purchase the freehold of their house. This is known as ‘Right of First Refusal’. If the leaseholder chooses otherwise, they have the option to negotiate with the freeholder to buy the freehold.
What happens if I don’t purchase the Freehold to my house?
You don’t have to buy the freehold to your house, but it may be wise to do so, depending on the remaining term of your lease. It is well known that less than 70 years remaining on a lease is a serious cause for concern.
Problems can arise with your short lease property when you come to sell and your buyer wishes to use a mortgage to raise funds. Due to most mortgage lenders being hesitant to lend on a short lease property, a non-mainstream lender may be the only solution. However, it is for this reason that they are so much more expensive for a potential buyer.
This coupled with the risk of the purchase price decreasing with time as the lease gets shorter, makes a Leasehold much less desirable in the long term. Hidden fees also need to be considered. You may end up paying thousands of pounds to extend the lease after a few years which would then make it a complicated and costly process overall.
Alongside this, a Freeholder may request money from you throughout your ownership to go into a sinking fund. This is cash that will be set aside to cover any future major works on the property. However this means you could have to contribute to something you were unaware of when acquiring the property. You may not have the funds in the future, and you may not even have the benefit of these improvements if you chose to sell.
What about if I don’t extend the Lease?
If you choose not to purchase the freehold or extend the lease, you may then be faced with an expired Lease. This does not mean you must move out instantly, but it does leave you in a vulnerable position. The landlord may serve notice of termination, meaning you may then need to vacate the property and the leasehold reverts to the freeholder.
I have a Lease with a term of 999 years and therefore won’t need to extend the lease, does this mean I no longer have any unforeseen charges to think about?
You will not only need to look out for short leases, you need to check the terms of your lease, looking out for any excessive fees for maintenance, ground rent and ensuring the terms are not too onerous on the tenant.
It is often the case that ground rent is escalated, meaning the ground rent you pay will double every ten years. The average annual ground rent is estimated to be at £371 at present, with the UK government estimating that it could go up to £10,000 by the year 2060. This could have a serious adverse effect not only on you as the tenant, directly, but when you then come to sell the property.
Similarly, the terms of the lease means you are at the mercy of your freeholder because in order to make changes to the property, permission from the freeholder is required. Common terms of a lease include no pets/animals at the property, no subletting and no alterations without prior consent. Should the terms of a lease be ignored, the freeholder may have grounds to forfeit the lease, again another way in which you could cease the right to occupy.
Because of these reasons it makes purchasing a leasehold property much less desirable when compared to a freehold house. Before purchasing a leasehold property it is crucial to obtain independent legal advice prior and throughout the purchase. Remember, a solicitor has the power to discover these issues prior to you proceeding therefore a leasehold house should not be out ruled and could be an option, with the right guidance.