What happens when a leasehold ends?

What happens when a leasehold ends?

If you’re asking yourself this question, we’re here to tell you everything about leasehold, freehold, lease length and what’s involved. Let’s get back to basics and find out more about the meaning of each term.

Different forms of home ownership

There are different forms of legal ownership; freehold and leasehold are the most popular, whilst commonhold is not so prevalent.

What is freehold?

If you own the freehold, it means that you own both the building and the land on which it stands. In the land registry you will be known as a freeholder, owning the ‘title absolute’.

What is leasehold?

Leasehold means that you just have a lease from the freeholder (sometimes called the landlord) to use the home for a predetermined number of years. The leases are usually long term and can even be as high as 999 years. There will be more on lease length later on.

What is commonhold? 

Commonhold is a variant of freehold, created by the Leasehold Reform Act of 2002. Commonhold is where a multi-occupancy building is divided into a number of freehold units, so each individual flat owns its own freehold. The common parts (such as staircases and hallways of flats) are owned and managed by a Commonhold Association; a company that is itself owned by the freeholders of the flats. This means there is no superior freeholder, but the owners of the flats jointly manage the common and external parts of the property. There will be more on this topic later.

Leasehold vs freehold

As we’ve established, the main difference between a leasehold versus freehold property is ownership rights. But which one is best?

As a leaseholder, even though you have bought the property and make a mortgage repayment each month, you still have a landlord who is the freeholder. The freeholder owns the land on which the property is built, and you (as a leaseholder) pay ‘ground rent’. If you want to make any structural changes to the property (such as building an extension), you’ll need to get the permission of the freeholder. Many freeholders will charge a fee and it’s the freeholder that controls the cost of building insurance and service charges.

Meanwhile, a freeholder owns the property and the land on which it is built for an unlimited period.

Here’s a quick summary for you of the difference between freehold and leasehold:

Freehold

• You won’t have to pay annual ground rent
• You don’t have a freeholder failing to maintain the building, or charging huge amounts for it
• You have responsibility for maintaining the building’s roof and the outside walls
• Whole houses are normally sold freehold, but some new build homes can be leasehold

Leasehold

• A leaseholder has a contract with the freeholder that sets down the legal rights and responsibilities of either side
• For flats, the freeholder will normally be responsible for maintaining the common parts of the building (such as the entrance hall and staircase, as well as the exterior walls and roof). However, other leaseholders might have claimed their ‘right to manage’, in which case it is their responsibility
• Leaseholders will have to pay maintenance fees, annual service charges and their share of the building insurance
• Leaseholders normally pay an annual ground rent to the freeholder
• Leaseholders will have to obtain permission for any major works done to the property
• Leaseholders may face other restrictions, such as not owning pets or subletting

Responsibilities for the leaseholder and the freeholder

It’s common for leaseholders to be required to pay maintenance fees, an annual service charge and their share of the building’s insurance. They will also have to pay an annual ground rent to the freeholder.

In their role as ‘landlord’, the freeholder is responsible for making sure the common areas of the property (such as the communal entrance and corridors, the roof, and the path to the front door) are maintained in a good state of repair and that the building itself is insured against fire, destruction and damage. The leaseholder needs to obtain contents insurance.

If the leaseholder should fall behind with payments, the leaseholder can be taken to court and in addition, the freeholder can prevent the leaseholder from either selling or re-mortgaging the property until payment has been made.

Unfortunately, this system is open to abuse. Freeholders are unregulated and can make money from the service they provide to leaseholders.

However, there is an alternative. If the majority of leaseholders in a building come together (this will be more relevant for residents of flats), they will be able to exercise their ‘right to manage’ and appoint new managing agents to prevent excessive service charges from being applied.

Another option is for the majority of leaseholders to persuade the freeholder to sell the property. Known as ‘collective enfranchisement’, each flat would own a share of freehold and residents would manage the maintenance and insurance of the building themselves. As there are legal procedures and costs involved, professional advice and assistance should be obtained.

If there are more than four individuals joining in with the purchase, it’s recommended that a company is formed to purchase the freehold. The company can then grant the leases.

Before the company decides to carry out the lease extensions, it will need to ensure that Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) liabilities are considered, otherwise the company and its leaseholders could receive a large tax bill. If the freehold is held as an asset of the company, it is likely that there will be SDLT implications, so it is important that the freehold is held by the company on trust for the leaseholders. You may want to read more about ‘commonhold’ at the top of this article.

Disputes

Naturally, it is common for there to be disputes between freeholders and leaseholders. Leaseholders often complain that freeholders don’t maintain the building to a sufficiently high standard, or they don’t keep common areas clean and tidy. Meanwhile, it’s usual for freeholders to complain that leaseholders are breaching the terms of their lease, by making too much noise, keeping pets, or not getting permission for building work that has been undertaken.

Fees can also be a major source of contention, with leaseholders feeling their freeholder is over charging, but being unable to change the situation. Ground rent in particular can be an area where opinions differ on what is reasonable.

In fact, this very topic was in the news in December 2021 when The Competition and Markets Authority (CMA) forced British housebuilder Taylor Wimpey to remove its ten-year doubling ground rent terms as well as its ground rent review scheme.

The non-ministerial government department that’s responsible for strengthening business competition and preventing and reducing anti-competitive activities commented: “Affected leaseholders’ ground rents will no longer increase and will remain at the amount charged when they first bought their home.”

CMA reports that around 5,400 leaseholders contacted Taylor Wimpey to apply for relief, but that ten-year doubling ground rents had been sold to 10,500 buyers.

Andrea Coscelli, Chief Executive of the CMA, said: “This is a huge step forward for leaseholders with Taylor Wimpey, who will no longer be subject to doubling ground rents. These are totally unwarranted obligations that lead to people being trapped in their homes, struggling to sell or obtain a mortgage.”

Meanwhile, The Rt. Hon. Michael Gove MP, Secretary of State for Levelling Up, Housing and Communities, added: “Unfair practices, such as doubling ground rents, have no place in our housing market – which is why we asked the CMA to investigate and I welcome their success in holding these major industry players to account.”

What are the implications of being a leaseholder?

If you are a leaseholder, your lease will tell you about the conditions of living there, such as:

• how much you’ll have to pay to maintain the property
• whether you or your landlord has responsibility for repairs

Not abiding by the conditions of the lease could mean you’re taken to court and ordered to pay a fine. In addition, the court could take away your lease.

However, you will have the right to:

• obtain information about service charges or insurance policies
• access the freeholder’s name and address
• be consulted about certain maintenance and running costs
• challenge some charges in special circumstances

Your lease will also set out the way the service charge is organised and what can be charged. If you pay a service charge, you have the right to:

• ask for a summary showing how the charge is calculated and how it is spent
• see paperwork supporting the summary, such as receipts

The freeholder will usually be responsible for insurance of the building (not the contents) and this will be part of your service charge. However, you could be asked to pay into a fund to cover any unexpected maintenance or repairs, such as replacing the roof.

Also, it’s common for a leaseholder to have to pay ground rent, but the freeholder can only increase the ground rent if the lease says this can happen; as previously mentioned.

Does all that mean that a leasehold property is worth less than a freehold property?

When the term of the leasehold goes down to 0 years, the property reverts to the freeholder. What this means for you as a buyer is that if you have a 40-year leasehold, you can only use the property for 40 years and then it will go back to the freeholder. As such, it is generally fair to say that the shorter the lease, the less the property is going to be worth.

Lease length

This seems like an appropriate time to talk about lease length. Many flats on new developments have a lease that runs for 999 years. Flats bought from the council under the Right to Buy scheme often have a lease of 125 years. In most other cases, the lease will be for a period of 99 years.

A 99-year lease was, under historic common law, the longest possible term of a lease. Importantly, it was not to be literal, but merely an arbitrary time span that was expected to be beyond the life expectancy of any possible leaseholder or owner. However, 99-year leases continue to be common now as a matter of business practice, perhaps due to tradition.

What happens when a leasehold expires on a property? 

When the leasehold on a property expires, the property reverts back to being a freehold property where ownership of both building and land belong to the freeholder. As a leaseholder, you may think that the home is yours because you’ve paid off your mortgage, but when the leasehold expires, you’ll have no legal rights to the property.

It’s for this reason that many people use a conveyancing solicitor experienced in leasehold properties before making a purchase. In fact, if you are considering investing in a leasehold property, it’s worth finding out:

• cost of the ground rent
• annual service charges
• insurance policies that need to be paid
• duration remaining on the lease

To find out just how long is left on a lease, you’ll need to access the Lease Title. Your estate agent should have this information, or you can pay a fee to the Land Registry and find out for yourself.

Importantly, a landlord cannot end your agreement directly after the lease has expired, so it’s unlikely that you’ll be made homeless.

So should I avoid buying a property with a short leasehold period?

It really is your own personal choice. Leases that are for fewer than 80 years can significantly affect the value of the house. If you have a short lease, the property can even decline in value and the number of people that want to buy will be severely reduced. In fact, mortgage companies could be reluctant to lend on it; seeing the property as not being a safe investment for their money.

Is there anything I can do to protect myself if I’m a leaseholder?

The first thing you should do is to find out how many years are remaining on the lease. A reasonable lease length should be between 90-125 years. If you take on a property with a short lease, consider trying to extend it with the freeholder’s permission. Negotiating a lease extension will invariably add value to the property.

Is it possible for me to extend the lease?

The Government has given leaseholders protection against short leases by giving them the right to extend their lease. The law varies, depending on whether you have a house or a flat.

If you have a house, you could have the right to extend your lease by 50 years and renegotiate the terms of your lease; such as who pays for maintenance on the house. However, you only have the legal right to do this if you have held the lease on the property for two years and it was originally leased on a so-called ‘long lease’; typically longer than 21 years.

Residents of flats will normally have the right to pay a premium and extend their lease by 90 years, on top of the unexpired term if (as with those in houses), the lease has been held for two or more years and the flat was originally on a ‘long lease’.

If you do want to extend your lease, you’d be wise to do it sooner rather than later. That’s because as the lease gets shorter, the cost of extending it gets more expensive at an exponential rate. This is particularly true for leases that are shorter than 80 years.

With about 60 years remaining on a lease, the cost of extending the lease will increase by about 1% of the value of the property each year. So for example, if the property is worth £200,000, the fee for extending the lease will increase by around £2,000 each year. Therefore, if your lease is for less than 80 years, you may want to investigate how to extend the lease before it gets too expensive.

What happens if the freeholder is absent?

In cases where there is an absent freeholder, a notice has to be served on the freeholder at their last known address. The leaseholder will need to demonstrate that all efforts have been made to find the address of the freeholder, then an application will need to be made to the County Court and the matter be decided by the Leasehold Valuation Tribunal.  The leaseholder’s valuer will have to prepare an expert witness report and when the tribunal has decided on the premium to be paid, the Court will effectively grant the lease extension on behalf of the freeholder.

Is there a reason for me to NOT extend the lease?

Depending on your circumstances, it might not be worth getting involved in the expense and hassle of extending your lease if:

• you have a long lease that is more than 90 years
• you cannot afford to extend the lease
• you’re only planning to be in the property for a few more years (unless you need to extend the lease to make it more attractive to potential buyers)

Is there an alternative? Can I buy the freehold on a leasehold property?

Most flats are leasehold. Houses can be leasehold too – especially if they’re bought through a shared ownership scheme – but houses are often freehold.

You can ask the freeholder to sell the freehold to you at any time. Alternatively, if a freeholder wants to sell the freehold of a building containing flats, they will usually have to first offer the leaseholders a chance to buy it. This is known as the right of first refusal.

Are there going to be any changes to leasehold terms?

Millions of leaseholders will be given the right to extend their lease by a maximum term of 990 years at zero ground rent, following an announcement made in January 2021 by Housing Secretary Rt. Hon. Robert Jenrick MP.

Under the current law, many people face high payments for ground rent. Freeholders can increase the amount of ground rent with little or no benefit seen by those that have to pay the extra charges.

The changes announced mean that any leaseholder who chooses to extend their lease will no longer pay ground rent to the freeholder; potentially saving them thousands of pounds.

Rt. Hon. Robert Jenrick MP said: “We want to reinforce the security that home ownership brings by changing forever the way we own homes and end some of the worst practices faced by homeowners. These reforms provide fairness for 4.5 million leaseholders and chart a course to a new system altogether.

“The government is also now establishing a Commonhold Council – a partnership of leasehold groups, industry and government – that will prepare homeowners and the market for the widespread take-up of commonhold. The commonhold model is widely used around the world and allows homeowners to own their property on a freehold basis, giving them greater control over the costs of home ownership. Blocks are jointly owned and managed, meaning when someone buys a flat or a house, it is truly theirs and any decisions about its future are theirs too.”

Professor Nick Hopkins, Commissioner for Property Law at the Law Commission added: “We are pleased to see government taking its first decisive step towards the implementation of the Law Commission’s recommendations to make enfranchisement cheaper and simpler. The creation of the Commonhold Council should help to reinvigorate commonhold, ensuring homeowners will be able to call their homes their own.”

Any questions?
We hope that this article has answered questions you have about leasehold, freehold, and what happens when a leasehold is due to expire, or within a few decades of finishing. If you have a property with a short lease and you’d like to chat with us about a fast cash sale, our experts are available 24/7. Send an email or call us for more information.