Disadvantages of buying a leasehold property
Are you considering buying a leasehold property?
Not to be dramatic, but there are a few things you should know about leasehold properties before you decide to buy one. But are they even worth buying at all, or should you steer clear altogether?
Let’s find out more.
What is a leasehold property?
Leasehold properties are different to freehold properties. When you buy a freehold property, you become the owner of the building and the ground it stands on, on an indefinite basis.
Things are a little different with leasehold properties, where the following applies:
You don’t own the land
A leasehold is a property tenure where you own the building – but not the land it stands on.
You don’t own the building forever
Further, with a leasehold property, you only own the building for a fixed time. This is the remaining time left on the lease – and can differ widely between leases.
Newly-created leases can be anywhere from 99 – 999 years.
It’s probably a flat
In the UK, most flats and apartments are owned on a leasehold basis. This also includes flats above shops and houses converted into flats. Entire houses can technically be leasehold, but they’re usually shared ownership.
External walls of apartment buildings and communal gardens aren’t included in the leasehold – these remain owned by the freeholder (the person who owns the land and building).
Advantages of buying a leasehold property
So, should you buy a leasehold property? To help you decide, here’s a rundown of some advantages.
They’re cheaper than freehold
This is the main advantage of purchasing a property leasehold. For many people, owning a property freehold is not an option due to the costs involved, and rather than spend a lifetime renting, they opt for leasehold ownership. Although, a long lease of hundreds of years can mean little price difference.
Option to buy the freehold
You might be able to purchase the freehold on your leasehold property. You can then extend it to the maximum of 999 years, increasing the leasehold’s value and giving yourself the security of a freehold at a lower price.
If you live in a leasehold house, you can buy the freehold on your property outright if you've owned it as a leasehold for two years or more. This is subject to the freeholder’s approval.
If you live in a leasehold flat, it’s still possible, but your neighbours would all have to be on board and agree to all chip in to buy the freehold outright.
A solicitor's advice is a must when buying a freehold on a property you already live in.
No ground rent on new leases
There's good news for anyone looking to buy a new leasehold property in the UK. Thanks to the Leasehold Reform (Ground Rent) Act 2022, newly-created residential leases must be exempt from ground rent. This will mean savings of hundreds of pounds for new leaseholders.
Repairs and maintenance
You won't have to arrange repairs and maintenance if you own a leasehold property – the freeholder will do this. However, the cost is another matter, with the leaseholder bearing some or all of the cost of repairs and maintenance through service charges.
Disadvantages of buying a leasehold property
Leasehold properties are notorious for the disadvantages that can come with them. Here are the main things to be aware of:
Ground rent is a payment the owner of the lease makes to the person or organisation who owns the land – or the freeholder. Ground rents can be high, and there have been reports in the UK of freeholders taking advantage of leaseholders by raising ground rents to extortionate levels.
Ground rent is payable on most leasehold properties in the UK, and although this is set to be phased out, as previously mentioned, it still applies to existing leases.
When you buy a leasehold property, the lease will come with some associated terms that you should be aware of. We’ve already mentioned ground rent, but with leaseholder flats, there is usually a service charge to pay for routine repairs and maintenance, as well as the cost of one-off repairs to the external structure of the building or its immediate grounds.
An example would be a block of flats served by a lift. If the lift breaks down and is outside its warranty, the leaseholders will be billed a portion of the replacement cost.
Difficult to sell
It's essential to remember that if you buy a freehold property, the lease might already be nearing its end. When the lease expires, ownership of the property is transferred to the freeholder. While a 70-year lease might not sound like such a problem unless you plan to live to at least 100, bear in mind that a shorter lease can negatively affect the value of a leasehold property.
This means they can be more challenging to sell than freehold properties. Escalating service charges and ground rent certainly don’t help either.
The beauty of owning your property freehold is that you have a greater degree of freedom over what you do there. Want to rip up the floor to see what’s underneath? Convert the loft? If you’re the freeholder – go for it. Leases, however, can have restrictions similar to shorthold tenancies, including a ban on pets, smoking and alterations. Even if your freeholder does agree to something, you may need to pay a fee for the privilege.
The most important thing to do when buying a leasehold is to make sure you fully understand the lease and its terms. It’s strongly recommended that you seek independent advice before you buy, as things like unfixed ground rent and communal repair bills can affect your future finances, and an expiring lease will make the place harder to sell.
All in all, buying a leasehold property does have its advantages – mainly affordability over freehold – but you must make sure you read and understand every word of the terms of the lease before you proceed to avoid nasty surprises in the future.