What does 'Leasehold' mean when buying a property?
Find out what Leasehold means when you are buying a property. 'What does Leasehold mean?' plus over 150 other property related terms and jargon in plain English
Flats or houses can be leasehold, but what does this mean?
The best way to describe leasehold is with an example.
Let's say I've built a block of eight flats. I own the land and I own the building, both of which I don't want to sell outright.
Instead I say "You can live in one of the flats for the next 99 years for a one off payment of £X;". I put together a document known as "the lease" which lays out your rights and obligations.
Some Jargon here:
- Leasehold - that's what this flat now is - you hold it because of the lease.
- "Lease Length" - in this example 99 years.
- "Lease Value" - in this example £X
- "Lease Extension" - you can add more years to the lease length (for a price) at any point after purchasing the lease.
- leaseholder - that's what you are if you accept my offer (or I accept your counter offer!).
- freeholder - that's the term given to me, the party that still owns the building and land.
Your rights will be much stronger than those of a tenant renting with monthly payments. You'll have to be an absolute nightmare (usually to your neighbours) or breached the lease fundamentally in some other way for me to persuade a court you have breached your lease and take the flat back.
Your solicitor should check the lease carefully and make you aware of anything strange, especially in terms of your obligations but I would recommend you give it a read yourself even if it is dull as dishwater. One of my leasehold properties says "I cannot hang my laundry to dry in the garden or within site of the windows"!
More common might be restrictions on pets or your rights to rent it out so watch out - every lease can hide nasty surprises!
The Leasehold Service Charge
Now I said "You can live in one of the flats for the next 99 years for a one off payment of £X;". Its not quite so simple. I still own the bricks and mortar of the building so I'm responsible for some maintenance issues as well as things like lighting in the communal areas, perhaps a lift and a garden.
In the lease I'll specify that you have to pay me an amount every year to handle these sorts of commitments. This is known as the Service Charge. If the block is fairly simple this would probably be a few hundred pounds a year. If there is a gym and swimming pool in the basement, a communal terrace with shrubberies on the roof, a porter at the front door and other such luxuries then the service charge could easily be a few thousand pounds a year.
When you are buying a leasehold your solicitor will ask to see the last three years accounts from the freeholder or their managing agents so you get some idea of annual costs.
Your solicitor will also ask if any major works are planned and, if so, is there money saved for them in the Sink Fund (a savings account for properties) are should you expect a big bill in the near future.
The Leasehold Ground Rent
Now as the Freeholder I haven't quite finished taking cash from you yet. The block of flats sits on some land so I'll also want an annual payment for "Ground Rent".
In most cases this is less than the service charge - between £10 and £250 per year. But watch out. Ground Rent is one place where dubious freeholders really can sting you. Your solicitor should (but often doesn't so make sure you do) check if there are any controls on changes to Ground Rent payments.
Some properties, especially new builds, start with very low Ground Rents that then escalate at well above the rate of inflation. Taylor Wimpey, one of the UKs largest house builders, were caught doing this with a Ground Rent that doubled every ten years. It looked harmless at first but a £250 per year ground rent in year one would become an annual £8,000 ground rent obligation after 50 years!
If you're buying a leasehold property make sure you do it the smart way - pick up a copy of my ebook How to Really Buy a Property.