There are two ways to own property: Freehold and Leasehold.
A Freehold is when you own the property indefinitely, with Leasehold property you have the right to the property for only the length of the Lease. The Lease is granted by the Freeholder so when the Lease comes to an end, at the end of the term, the Freeholder gets the property back. Lease terms for residential property are usually for at least 99 years. Usually, houses are Freehold and flats are Leasehold.
Why do flats need to be Leasehold?
Flats are Leasehold so that the repairing obligations for the structure of the building can be enforced. In English property law a positive obligation that involves spending money can only be enforced through a Lease.
Let’s assume that there are two flats, one above the other. If they were Freehold then the first floor flat would own from the middle of the building, upwards and the ground floor flat would own everything below that.
If the top owner does not repair the roof and guttering, damp and water could damage the flat below, Similarly, if a large crack formed in the ground floor flat, meaning that the first floor became dangerous to live in, there would be no legal way to enforce any obligations for the first-floor owner to make the ground floor owner maintain his property.
However, if the flats are both Leaseholds, with someone else (the Landlord) owning the Freehold, the Landlord would own the structure of the flats. Both Leaseholders would have made promises to the Landlord to maintain their properties. Either Leaseholder flat can require the Landlord to maintain the structure so whether it is the roof or the foundations, the necessary repairs would be carried out.
The Landlord will normally be able to recover the cost of the repairs from all the tenants, but this is a way for properties to be maintained.
Ground Rents
Most residential long Leases require the tenant to pay ground rent. This is usually a small amount. Typically leases charge ground rent at £20 or £35 a year. However, problems occur when these Leases are used as a valuable investment tool. They then:
- Allow for, and have regular, increases in the amount of the ground rent. Even small regular increases can result in a ground rent of thousands of pounds a year.
- Charge the tenant high administration and legal costs for consent whenever the Lease is transferred to a new owner.
- Charge the tenant high fees for consent to alterations to the property, such as an extension.
- Charge a fee for registering any notices, such as a change of owner.
Mortgages
20 Years ago, a mortgage company would lend money on a Leasehold property if there was still fifteen years or more left after the mortgage had finished.
As most mortgages are for 25 years, any Lease with at least 40 years left was acceptable to the mortgage company. The lenders have tightened up their rules so that they now won’t accept Leases of less than 60-70 years.
People are now finding that Leasehold Properties that they bought 25 years ago are not easily saleable. They either need to buy the Freehold or sell it to someone who does not need a mortgage. One option costs money and the other means that you receive less money than you expect – a lose-lose – situation! See our separate note on enfranchisement for further options and explanations.
Service Charge & Insurance
Most Landlords arrange insurance for the structure of the building and most Leases contain a service charge provision that allows the Landlord to divide up the cost of insuring and maintaining the building between the tenants. There are some statutory controls over how a Landlord can charge a service charge, but they can also increase so high as to deter investors in the Leasehold Property.
The Leasehold Advice Service
You can find lots of helpful advice on Leases at the Leasehold Advisory Service
Leases are complicated and you must obtain legal advice before taking one on. Your lawyer needs to check what controls there are to protect you from possible exploitation by the Freeholder. Talk to your Local Specialist Property Lawyers, Toomey Legal Limited, for advice on the terms of your Lease.