UK Property - What is a leasehold property? A guide for overseas buyers.
Please note that law is a complex subject and you should not rely on this article without professional advice on the facts of your case.
In most countries other than the UK there is no concept of a lease or a leasehold interest in real estate as a valuable and saleable asset, instead a lease or letting or equivalent property is understood to be a short term arrangement under which the tenant or occupier pays a market rent to live in the property. Whilst some countries give statutory rights for tenants to continue to occupy the property after of the written contract/tenancy agreement in most cases the tenant/occupier will never acquire a valuable interest.
In the UK there is a concept of a leasehold property as a valuable and marketable interest in real estate. Here, we are not referring to commercial tenancies or short term residential tenancies but to long term leases of residential property. Although I have referred to the UK, this article applies primarily to property in England and Wales, since Scotland has different system of property ownership. Northern Ireland is similar to England and Wales but there are some differences.
A long lease from a technical perspective is one which was for more than 21 years when first granted. In reality, by convention, a long lease will normally be for an initial term of 99 or 125 years although sometimes it can be for 999 years. It is important to note that if you want to buy an apartment/flat in England and Wales then you must buy a leasehold interest. Whilst it is sometimes possible to buy a share in the freehold of the building in which the flat is contained the title to the flat itself will be leasehold. This is for technical legal reasons. A leasehold title to a flat is perfectly acceptable and marketable. A freehold flat is very rare and perhaps surprisingly is generally considered to be defective and is less marketable than a leasehold flat.
Houses are sometimes also bought as leasehold but this is much less common than with flats. Houses are generally sold with a freehold interest. A leasehold house is also generally saleable and marketable, subject to have the details checked by a solicitor. In many cases a holder of a long lease will also have a right to buy the freehold of the house. This can provide an additional investment opportunity.
The highest grade of title is a freehold and every piece of real estate in the UK has a freehold owner. When a flat is first sold (rather than let on a short term basis) the freeholder grants/issues a lease to the buyer. When that buyer sells the flat they transfer the lease to their buyer. Sometimes there is an intermediate or head lease. A full market rent is not paid but often what is called a ground rent is charged. This usually ranges between £50 and £300 a year increasing at intervals, commonly of 25 years. The lease will set out a management regime under which, for example, the leaseholder of the flat will have to pay a contribution to the communal expenses of the building such as for repairs, maintenance and cleaning.
A key aspect of the value of the lease is the length of the term remaining. When the lease has more than 100 years left on it the flat will have a relative value to the freehold value of 98/99%. As the term declines that relative value will decrease. So for example at around 90 years left the relative value is around 95%. Once a lease has 80 years left or less then its value will be affected by another factor, the price to be paid for extending the lease, which increases considerably – see the next paragraph. Once it gets to around 70 years or less it will become increasingly difficult to sell or remortgage. It should be noted that there is a special market in Central London where shorter lease flats are more readily saleable and where necessary any borrowing can be arranged usually through specialist private banks.
Most flat owners have a legal/statutory right to extend their lease to restore its full value which involves a price being paid to the landlord/freeholder calculated accordingly to a special formula. Where the lease gets to 80 years or less this price increases by roughly 50% as it is necessary to pay an additional element called a marriage value. Interestingly, there is a special investment opportunity with the purchase of shorter lease properties. There is more detail in a separate article. [link to article on short leases investment opportunity}
- If you want to buy an apartment/flat in the UK you have to buy a leasehold interest.
- There is nothing to worry about in buying a leasehold property. It is important to have all the details checked by a UK conveyancing lawyer, preferably one who specialises in leasehold and what is called leasehold enfranchisement.
- The value of the flat will be affected by the number of years remaining on the lease. This is more significant once a lease gets down to around 80 years remaining.
- In most cases there is a legal right to extend the lease. There is special market for short leases in Central London but short leases in any area can provide an investment opportunity.