Leasehold properties have a reputation for being bad buys, but is this way of thinking really fair? Millions of people own leaseholds across the UK after all, so surely they can’t all be bad – can they?
In order to answer these questions, and ascertain once and for all whether buying a leasehold property really is such a poor investment decision, it’s important to initially understand what exactly a leasehold property is.
What is a leasehold property?
When you buy a property in England or Wales, there are two main types of agreement you can purchase – a freehold and a leasehold. A freehold effectively gives you full ownership of a property and the land it stands on. When you buy a house, for example, you will typically become the freeholder of that property.
Having a leasehold, on the other hand, means you can essentially rent a property from a freeholder for a denoted period of time, whether that be years, decades or centuries, but you will never actually own the land it is built on. For example, if you rent a flat and pay money to a designated landlord, unless that landlord owns the entire block of flats you live in, they will be a leaseholder.
Because of this, most flats are sold as leasehold properties, with the freehold being held by the builder or firm they have sold the freehold to. Conversely, most houses are freeholds, due to there typically being only one property on that piece of land. This isn’t always the case, as the case of new-builds under the Help To Buy scheme proves, but as a general rule, flats are leaseholds and houses are freeholds.
Leasehold vs. freehold
Now, while this may all seem fairly clear-cut so far, there are a number of issues that leasehold properties suffer which freehold properties don’t. Let’s take a look at some of the main examples.
- Managing Agents. The freeholder of a property will usually appoint a managing agent to deal with the day-to-day management of the property – keeping the communal parts of the building, such as the garden, staircase, roof and lift, in proper working condition. However, while the freeholder decides which work is done and who by, it is the leaseholder’s responsibility to front the cost, meaning that any decision-making related to repair work is out of their control. The only aspect a leaseholder does have control over is any changes they want to make inside their own property, brought up – for example – following a pre-purchase building survey.
- Consent To Sell. If a leaseholder decides to sell their flat or property, depending on the lease they have, they might need to gain consent to sell from the freeholder. This freeholder will typically charge for the privilege which, again, will be the leaseholder’s responsibility to pay.
- Buildings Insurance. The freeholder is responsible for the property’s building insurance, requiring leaseholders to make contributions towards the overall yearly cost. However, when it comes to the annual renewal, the leaseholder will get no control over how much they are expected to pay. In essence, you pay for the buildings insurance but don’t get a say in how much it costs or which insurance provider to use.
- Service Charges. Freeholders are entitled to charge leaseholders for the services they provide, regardless of the actual work carried out. For example, a roof repair could actually cost £80,000 to complete, but a freeholder could add a 15% service charge on top of that, and disproportionately charge a leaseholder for the work.
- Lease Term. Leases with less than 80 years until they expire will doubtless cause problems when the property is eventually sold. This is because the cost to renew the lease increases massively the closer it gets to expiring; a charge which freeholders will expect the leaseholder to pay.
- Freeholder Consent. Depending on the lease involved, if a leaseholder needs to make a small alteration to their property, they may require the permission of the freeholder. Freeholders will unsurprisingly charge for providing this, which it will be up to the leaseholder to pay. If the freeholder refuses to give consent, they will prevent the leaseholder’s planned alterations from taking place.
- Poor Service. Since many freeholders use the help of a managing agent, the service that leaseholders receive is generally fairly poor. This isn’t always the case but many leaseholders say that they are often left waiting for quite some time when trying to make alterations to their property, or when asking for freeholder consent.
As these points clarify, it’s not hard to see why buying a leasehold property is generally regarded as a poor investment choice. However, that’s not to say it’s always the wrong thing to do, as there are many leasehold properties who have happy leaseholders occupying them. The most important thing is to make sure you understand everything going in. If you are thinking of buying a leasehold property, don’t let this article or the points we’ve raised put you off. Seek comprehensive legal advice, explained in plain English, and ensure you know what you are letting yourself in for before you decide to buy.