Market Insight

Long leaseholds – it doesn’t have to be a deal breaker

December 14, 2017

There has been a lot of press coverage this year about the rise in the number of new residential builds that are being sold as leaseholds, in many cases unbeknown to the purchasers.

Known as the ‘ground rent scandal’ this has resulted in many homeowners facing the prospect of having to pay huge sums to extend leases for the land on which their properties have been built.

As a result, the Government proposed a ban on new-build houses being sold as leasehold. But the ground rent scandal doesn’t just affect residential properties, it affects commercial property too.

Whether you’re a business seeking new premises, or an investor looking for the next opportunity, what should you know signing on the dotted line?

Freehold Vs Leasehold

It all comes down to understanding the difference between freehold ownership of a property, and leasehold.

Freehold ownership essentially means that you own both the property and the land that it is built on, outright.

However, leasehold ownership means that whilst you might have exclusive possession of the premises for a fixed or periodic term, you don’t own the land on which it is built – this can be owned by a completely different third party.

Whilst the idea of buying a property but not actually owning the land it’s built on sounds a bit crazy, it’s actually quite common – and has become all the more so in recent years.

There are a number of pros and cons, but if entering into a long leasehold, you must understand the key parties of the transaction.

In the case of commercial properties, this can often be a local authority which, over the years, has ‘sold’ their land for development, whilst retaining leasehold ownership.

A matter of due diligence

Long leaseholds shouldn’t necessarily put you off buying a property, so long as you know what you are entering into, and have sought the right professional advice to secure your position.

For example, landlords can sometimes charge a premium for extending the lease, so it’s prudent to explore this before committing to anything.

There may also be a ‘ground rent’ associated with the leasehold of the land, which you would need to pay to the freeholder.

Usually these are a Peppercorn (nil), but sometimes there is a cost and this needs to be factored into your budget and the affordability of the property.

Think about whether third party leaseholder is a reputable organisation? And what could happen if they go on to sell the leasehold – how could this affect you in the future? How does leasehold affect your lending position with your bank?

Generally, a lease will be for a fixed term i.e. 99 years – 125 years. When this gets down to 70 years, the lease becomes less valuable and you may struggle to raise finance as the banks are wary of lending money against leases lower than 70 years.

It would therefore be prudent to seek to extend your lease as part of the purchasing process, getting professional advice from lawyers and property advisers to secure your position in this regard.

Not a deal breaker

Although the issue of ground rent has been quite topical and has been reported on with rather a negative slant in the press because of the unexpected consequences for many homeowners, when it comes to investing in a commercial or residential property, it doesn’t have to be a deal breaker.

You just need to ensure that you get the right professional advice, from property experts who know the market and can negotiate the best possible outcome for you.

For help and advice in relation to your property acquisition needs, don’t hesitate to get in touch.