CHAPTER ONE – INTRODUCTION
To begin with one should keep in mind that this book only deals with leasehold property. If you own the freehold, it means that you own the building and the land it stands on outright, in perpetuity. It is your name in the land registry as “freeholder”, owning the “title absolute”, well most of the time but those exceptions to this rule are for another time. Some of the perceived advantages of owning a freehold as opposed to leasehold are:
You won’t have to pay annual ground rent
You don’t have a freeholder either failing to maintain the building, or charging large amounts for it
The responsibility for maintaining the building rests with you as the freeholder
Houses tend to be freehold although as always there are some exceptions
So, what is leasehold? Leasehold means that you just have a lease from the freeholder (sometimes called the landlord) to use the home for many years. The leases are usually long term – often 90 years or 120 years and as high as 999 years – but can be short, such as 40 years.
A lease gives the leasehold owner a contract with the freeholder, which sets down the legal rights and responsibilities of each party
The freeholder will normally be responsible for maintaining the building, such as the communal areas, 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. Conveniently this is dealt with later in this book.
Leaseholders normally pay an annual “ground rent” to the freeholder
Leaseholders will have to obtain permission for any majors works done to the property
Leaseholders may face other restrictions, such as not owning pets or subletting
If leaseholders don’t fulfil the terms of the lease – for example, by not paying the fees – then the lease can become forfeit. This is a rare occurrence and many things prevent this happening in practice (mortgage lenders for a start tend to pay any arrears on items if there is a possibility that the lease could be forfeited to make sure that the security of their mortgage remains intact.
On this basis you may wonder why anyone would not buy freehold. Well practical reasons prevent the sale of everything as freehold. If you own a penthouse apartment at the top of a large block of flats, then if you own the freehold to just the same how would you have access to the same? Who would maintain the communal areas? How would it be insured? How would the owner of the shiny penthouse make sure that the other apartment owners did not do something that would affect the integrity or security of their property?
Leasehold solves this situation by allowing the owners in the block to have reciprocal rights/protections in place. The freehold acts more like a “wrapper” which contains all the leasehold properties within it.
As time goes by then a lease term decreases. As sure as night follows day, if you have something that is valid for a period of years then the same decreases in the amount of term remaining over time. As you would expect as the lease term gets shorter then this quite naturally influences the value of the lease itself. The shorter the lease the less likely it is to be attractive to buyers and mortgage lenders. Therefore, as the lease gets shorter the value gets lower.
The next chapter will consider the options regarding a lease extension that will become necessary at some point in the future if you don’t want to be left with an asset that will revert to the freeholder at the end of the term. There is obviously a cost to the same and that can be affected by many factors which we will consider is some detail.
In addition, there are other considerations about leasehold property that I have touched upon above that we need to consider. If the terms of the lease are becoming short, then there remains the possibility that the leaseholders may wish to purchase the freehold. This will allow them to extend the lease on their terms at a lower cost. However, there will be a cost to purchasing the freehold. In addition, the freeholder may be doing something that the leaseholders disagree with or worse not doing anything at all, so they consider purchasing the freehold themselves then.
Another alternative is to form a Right to Manage Company to deal with the day to day management of the property without having to go to the cost of purchasing the freehold. Again, this is something we will consider later in this book.
We will have a look at a third way, an alternative to freehold and leasehold known as commonhold. This book will be another addition therefore to the pile of books regarding commonhold which will mean that there is one more book added to the list to outnumber the number of text books on commonhold compared to commonhold properties themselves.
The majority of the advice in this book relates to assisting lawyers in acting for the leaseholder or leaseholders in relation to the statutory (and non-statutory options) available to them. However, it seems only right to consider matters from the perspective of a freeholder including the options and rights that they have.
Well let’s get started with looking at lease extensions, it will be enthralling…