If you have bought an apartment in the United Kingdom you are considered to be an owner, but the actual owner is always your landlord, and you are their tenant. This sounds confusing but when you stop and think about it for a sec suddenly it becomes clearer. This is what forms the well-known property ownership system in the UK called leasehold. When you buy the flat in the block you obtain a lease which is valid for a specified length of time, after it ends, the flat reverts back to the freeholder.
Another Form of Property Ownership in the UK
Absolute ownership in the United Kingdom is called freehold. By owning a freehold, you own the land and the building. There are no worries regarding the lease running out or property being transferred back to the freeholder upon lease expiry. You are the true owner and although you’re responsible for ensuring that your land and physical property is maintained, this is something that you can control. Freehold is much better when compared with leasehold ownership where costs are established by managing agent of the block and control of maintenance costs are limited.
Why Leasehold Ownership Can Be Problematic
Generally, leasehold properties are cheaper than equivalent properties on a freehold basis. This is because leasehold properties attract different charges which are needed to run the leasehold property. Because leasehold properties are cheaper, they also can be more problematic than freehold properties.
Leasehold Properties Have an Expiration Date
Will you want to purchase a property you’re going to have to hand back to the landlord in a couple of years? No. No. Nor would the people you want to sell to in the future – or their potential buyers. Which is why you will need to remain extremely critical of the remaining years on the lease when looking at buying a leasehold property.
When you are buying leasehold property which has less than 80 years remaining you face a problem. Most mortgage lenders will not fund your purchase because short lease property resale value will be diminishing quite quickly. A leasehold property is a bit like a grocery product – with an expiration date. If the product remains unsold and is approaching expiration date grocery store will discount it to achieve a sale. The same happens to the leasehold property once the lease term falls under 80 years the property starts losing value because it becomes unmortgageable.
Lease Extension Process and Costs
At the moment, leaseholders have an automatic right to extend the lease on a leasehold property for an additional 90 years on top of the existing term (providing leaseholder meets the qualifying criteria). Before being able to extend the lease on statutory grounds leaseholder must be a legal owner of the leasehold property for at least 2 years. The freeholder cannot refuse the lease extension and is obliged to grant it upon which new lease will have 90 years additionally as well as peppercorn ground rents.
Lease extension premium is linked to how much years are left on the lease. The shorter the lease the more expensive it will be to extend it. Also, if your lease has any ground rents these will increase the lease extension premium. Lease extension can become significantly more expensive when the lease reaches below 80 years and thus extending lease early is beneficial because of potential cost savings.
To find out how much lease extension you will need to instruct a chartered surveyor to prepare a valuation. But if you’re buying a leasehold property with a short lease and do not want to incur professional valuation costs you can always use an online lease extension calculator which provides you with ballpark lease extension premium range.
Service Charge And Ground Rent Payments
As a leasehold homeowner, you’re just liable for ensuring that the internal demise of the property is in good condition. The maintenance and management of the communal areas and external parts of the building where leasehold property is situated is the responsibility of the freeholder and their managing agent. Visit: Best information Today
To manage the building the funds are needed and leaseholders are required to contribute to the upkeep of the building. The contributions come in the form of service charge which is demanded every year by the managing agent.
The service charge can differ significantly from building to building and it is important to inquire with managing agent about the level of annual service charge. It is best to make an inquiry before making an offer on the leasehold property to ensure that you’re not caught off guard.
The ground rent is another matter which deserves to be mentioned separately. Usually, ground rents tend to be 0.01% of the property value but also can be much higher than that. It is important to ensure that ground rents are not above the lenders’ guidelines otherwise you might struggle to sell leasehold property in the future.
How Leasehold Property Can Be Converted Into Freehold
In the UK, statute law allows you to convert leasehold property into freehold via a mechanism called collective enfranchisement. This process allows leaseholders to purchase the freehold from the landlord by paying consideration.
To qualify for collective enfranchisement half of the leaseholders in the building must participate in the enfranchisement process. There are benefits by acquiring the freehold such as gaining more control over service charge, not having to worry about lease length and ensuring better saleability of the property. Upon collective enfranchisement, every leaseholder can grant themselves 999 year leases.