Owning a leasehold property is entirely different to owning a freehold house. When you purchase a leasehold property, essentially all you own is a lease agreement.
You don’t own one brick, and you don’t own any of the land that the property resides on. That sounds harsh, but that is the reality of owning a leasehold property.
When you enter into a lease agreement it outlines everything to do with the property, ground rent, service charges and the remaining term of the lease in years.
How long is left on the lease is one thing that will be a make or break decision when choosing to purchase a property, and can cause a headache and thousands of pounds worth of money to extend later down the line.
It’s incredibly important to understand everything about a lease from the outset, so you can avoid what happens when a leasehold ends.
What Is A Leasehold?
A leasehold is when you own a lease agreement to a property and you have a landlord/freeholder. The lease tells you how many years you have left on the term, your ground rent and service charges, and additional information about the property including information on what you can change/alter on a leasehold property.
Leaseholds are commonly held on flats in the UK, but you can get leasehold houses too.
How Do You Know How Long Is Left On A Lease?
There are a number of ways that you can find out how long is left on your lease. The best way is to locate a copy of your lease, the length left won’t be from the date you purchased the property, it is from when the initial lease was taken out on the property.
If you do not have a copy of the lease to hand you can download your title register and office copy of entry of the leasehold title from the Land Registry. You need to initially pay £3 to download a copy of the title register, it is then only a further £7 for the deeds request.
Alternatively, you should contact your solicitor who dealt with your purchase who should have the copy in their files.
If you don’t already, you should keep a copy of your lease safely to hand, this is literally your bible when you own a leasehold property and you will find yourself referring to this many times throughout owning the property.
At What Point Should You Extend A Lease?
It’s incredibly important to know the length of term left on your lease so you have ample time to file for a lease extension. You should always choose to start a formal lease extension before you hit 80 years and below.
What Is Marriage Value?
When the lease is extended where there is a lease below 80 years (or the freehold is bought by the leaseholder in the case of a house), the value of the property increases and this increase in value is shared between the freeholder and leaseholder (marriage value) under current law.
How Is it Marriage Value Calculated?
The biggest rip-off in a lease extension process is having to pay the landlord for half the so-called “Marriage Value” when the lease falls below 80 years remaining.
Working out how much the marriage value could be is hugely complex. It requires you to have to pay a valuer to do the calculation, and for the landlord to do the same thing using another formula, usually stacked in their favour.
It will also include the solicitors’ fees of yours and the landlords, and your land registry fees, and a settlement for all the ground rents and the premium. This is the ground rent that the landlord will now not get for the remainder of the lease.
In the calculation for “Marriage Value” the valuer uses the current market resale value of the whole value of your apartment, land + building. And not the value when the apartment was bought. It also takes into account if there has been any gentrification in your area, the landlord even gets a share of this even though they haven’t contributed to any infrastructural changes in your area at all.
The land is not yours: you are not buying the freehold. You’re only wanting an extension on the use of the building, and for which you will continue to pay for its maintenance and upkeep.
The situation is rather like a divorce settlement in which you continue to pay alimony to your landlord, for maintaining the children, yet they’ve all come to live with you and you have all their expenses without any compensation from your ex-partner. And the calculation takes no account of the defects in the building and its repair needs.
How Much Does A Lease Extension Cost?
A lease extension can cost thousands of pounds, but it does vary based on the length of term remaining on the lease, and current ground rent payments.
For a rough calculation, you have to work out the total ground rent over the life of the lease. Then divide the total by the number of years to run on the lease. This will give you an average value per year.
You can then use the average value per annum to work out the premium. This is not 100 % accurate, but it will give you a ball-park figure.
The freeholder may well also add on additional costs to the process which can set you back even more money. This is totally dependent on who the freeholder is, they often charge an enquiry fee, legal fees for their team and then the premium.
You will also have to appoint your own solicitor to ensure the formal lease extension is carried out in line with the law.
What Happens When A Leasehold Ends?
If you own a leasehold property, you do not want to be here at the point that a leasehold ends. This means that the freeholder retains ownership of the property as it becomes a freehold property.
You will lose everything that you put into the property, along with your deposit and mortgage repayments and there is nothing you can legally do about this.
This is what you enter into when you own a leasehold property, but the best thing you can do is to ensure that the lease you own is extended before you hit the 80 year mark.
There are other eventualities that your leasehold could end, this could be due to arrears in ground rent that forfeits your lease.
You will need to read the terms of your lease very clearly, but the landlord does have the right to regain possession of the property if ground rent remains unpaid, especially if you have an AST, this is usually when your ground rent exceeds £250 per annum.
What If You Can’t Afford A Lease Extension?
Unfortunately for many, a lease extension becomes impossible to fund which can lead to the lease expiring.
If you can’t afford a lease extension, a common route is to list the property at a highly reduced rate to a cash buyer as there is a serious lease defect. This is not ideal, but losing your complete investment is an even worse scenario.
With current leasehold legislation, nothing protects the innocent leasehold owner that may have purchased one as a first time buyer as they are generally cheaper, knowing nothing about the nightmares of what a ‘leasehold’ actually is. And how expensive service charges, ground rent and lease extensions can be overtime.
The best thing you can do is to never touch a lease with less than 90 years so you can completely avoid this issue where the leasehold ends, and you can’t afford a formal lease extension.
In January 2021, the government announced to review this part by allowing extension by 990 years and abolishing marriage value. However, the leasehold reform has currently been shelved, and there is still nothing that protects the leaseholder against this.
A leasehold property is a snare for the uneducated, and leases are serious business, and money. If you are interested in purchasing a leasehold property, understand the advantages and disadvantages before property hunting, and always get a copy of the lease before going any further.
Always seek professional legal advice when entering into a formal lease extension.