Leasehold Property Basics – what you must know
All land in England and Wales has a freehold title (including land that is not yet registered with the Land Registry). All land belongs to the Crown but the owner of the freehold has an exclusive right, in perpetuity, to use and occupy the land or receive rents from it and so for all practical purposes the owner of the freehold title is the absolute owner of the land.
The owner of the freehold title land may if he wishes grant a lease and if such a lease meets certain conditions (it is for a term of 7 years or more, is created by deed and is at a low rent), then a new title is created, called a leasehold title. The leasehold title is said to be granted “out of the freehold”. The owner of the freehold is the landlord, also called the freeholder or reversioner and the owner of the leasehold title is the tenant or leaseholder.
What is a Lease?
A lease is an exclusive right to use and occupy the land comprised in the lease for a fixed period of time, called the lease term in return for the payment of an annual rent called a ground rent. The leaseholder has the right to sell the lease just as a freeholder can sell freehold property and the purchaser becomes the leaseholder and takes the benefit of the remaining lease term.
As well as granting a right to occupy land, a lease will impose various obligations on both the landlord and tenant called covenants. The types of covenants contained in a lease will depend on whether it is a lease of a house or a flat.
Lease Term and Terminating the Lease
The lease term is the period of time for which the right to occupy the land is granted. Most residential leases will be grant for terms of 99, 125 or 150 years, though there are some leases for 200, 800 or even 999 years.
The lease will be granted in return for the payment of a premium (the purchase price). Upon expiry of the term, i.e. after the number of years for which it has been granted have elapsed, the lease comes to an end and the right to possession returns to the freeholder, so rather than buying the land, a tenant who purchases a lease is actually purchasing a right to occupy the land for an agreed period.
A tenant under a long lease does have a right to extend the term provided he has owned the property for at least two years. If he has owned it for less than two years he may still extend the lease at the landlord’s discretion. In either case the landlord is entitled to charge a premium. In effect the tenant is buying an additional lease, albeit for a short term. The greater the number of years for which the lease is extended, the more the landlord is entitled to charge.
As well as coming to an end automatically upon expiry of the term, a lease may be brought to an end by the landlord (subject to obtaining a court order) as a result of a breach of one or more covenants, such as the covenant to pay rent and/or service charges or not to cause a nuisance. This is known as forfeiture. There is no requirement for the landlord to compensate the tenant for the loss of the remaining term.
Selling Leasehold Property
Leasehold property can basically be bought and sold just like freehold (the tenant who sells is said to be assigning the lease) though when granting a lease the landlord may impose certain requirements on resale in order to control to an extent who the property is sold to. If these requirements, which although incurring fees are rarely very onerous, are not complied with this would constitute a breach of the lease and could lead to forfeiture.
Advantages of Leasehold Property
The disadvantages of owning a lease as opposed to the freehold are clear – a diminishing term equals diminishing value plus you may have less control over what you do with the property.
Where the property is a flat however there are also major advantages. As well as the landlord being responsible for repairing, insuring and maintaining the building and common parts (though this is not always the case), where the flats in a block are held on leases, provided they are all in the same form and well drafted, they create obligations on the owners of each flat which would not be enforceable if the properties were all freehold.
Flats in a block physically dependent on each other therefore it is essential that any tenant be able to force any other tenant to meet his obligations such as insuring or contributing to the insurance premium and repairing and maintaining the structural parts. These types of covenants to perform an action or expend money are called positive covenants and are generally only enforceable against the original parties. So if all of the flats in a block were freehold then whilst all of the tenants could covenant with each other, once a flat was sold the new owner would not be bound. After a while none of the owners would be bound.
Positive covenants in leases on the other hand are always enforceable by the landlord no matter how often a flat changes hands and a well drafted lease will impose an obligation on a landlord to enforce covenants against one tenant if requested to do so by another. Very few, if any, mortgage lenders will lend money on freehold flats.
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