How To Check When Leasehold Expires: And What Happens Next?
When it comes to housing, most people assume that they have two general options: rent or buy. But there is a third option. Leasehold. Think of it as a bit of a hybrid of renting and owning. You will likely have a standard one- or two-year lease with a typical rental. With a leasehold option, your contract lasts for at least 40 years – and can extend to 999 years! To put it quite bluntly: when signing your name to the dotted line on a leasehold, you are in it for the long haul!
But what happens when a leasehold expires?
This can be a complex topic, so let’s start at the beginning. In this guide, we will discuss the ins and outs of leaseholds, including the pros and cons of choosing this method, how to tell how long is left on the contract and what happens when the leasehold expires.
What Is a Leasehold?
Before we go into the issue of what happens when a leasehold expires, let’s back up and clarify the terms we are using. When you purchase a freehold, you own the property solely and exclusive. You have all of the joys of ownership, including paying to maintain it! Once you have paid off your mortgage, you own the house and any property it sits on free and clear. In theory (and, perhaps, in practice), you could own the property in perpetuity, passing it on to heirs and so on.
With a leasehold, you still purchase the property but you have a landlord. In effect, you own the house for a fixed period as specified by the lease. You never actually own the property on which it sits. When a leasehold expires, ownership reverts to the landowner. There is also the issue of ground rent, which we will cover in our Pros and Cons section of this guide.
Pros and Cons of Buying a Leasehold Property
As with any decision in life – particularly one as important as where you live, how you will pay for it and what it means for your future – it is important to weigh the pros and cons of a leasehold versus a freehold.
Benefits of a Leasehold
While you may be turned off by the thought of not owning the land on which “your” house sits, and by paying ground rent as well, there are some key advantages to a leasehold. These include:
- Lower cost. Most often, a leasehold property is less expensive than a freehold. They are nearly 30% cheaper. When you are on a tight budget or are saving for other goals, this may be a viable solution for you, all factors considered.
- The freeholder – i.e. the party that owns the property – is typically responsible for maintenance in communal areas. For example, if you leasehold a flat, they would be responsible for taking care of the entryway, corridors, garden, etc.
- The freeholder is also usually responsible for the maintenance of the building and structure. For example, if the roof were to need repairing, they would be footing the bill.
- Arranging building insurance also falls on the shoulders of the freeholder.
There is some flexibility in terms of lease periods. Say you and other flat owners on your block want to buy the freehold. You can join forces, as it were, and then grant yourself a 999-year lease. For all reasonable intents and purposes, this means you essentially “own” the property. Maybe not to the strictest letter of the law, but on a practical level, you do not have to leave if you do not wish to – unless you have an unusually long lifespan!
More on this last point: with a leasehold term of 999 years, is this just as good as a freehold? Well, as discussed, it can be in many ways. However, you will also have certain rights and responsibilities as a resident. For example, there may be restrictions around noise (e.g. there are quiet hours) or other so-called antisocial behaviour. All in all, though, it is worth examining as an option and as an alternative to pricier freeholds.
It is just as critical that you also examine the disadvantages of a leasehold. What are the cons?
- You must pay ground rent to the freeholder. Ground rent is a regular payment made by you to the owner of the property. This is not the same as regular rent or the monthly payment for living on the property. It is over and above that as you are leasing the structure and the land on which it sits separately. So, essentially, you are going to make repayments on the leasehold and pay ground rent.
How much? Well… the short answer is “As much as the freeholder decides.” Typically, it is between £500 and £1000, depending on the area. It should be spelt out in your lease as to how much payments are and when they will be paid. They may also have language in the lease outlining how much they can increase ground rent and when.
- You likely have to pay an annual service charge set as a flat fee. This is not the same as ground rent. This is intended to cover costs associated with maintenance of communal areas, garden/landscaping maintenance, onsite facilities (e.g fitness centre, pool), etc.
- There may be restrictions in terms of what you can do to the property. For example, if you wanted to make changes (anything from knocking down a wall to creating open space or expanding), you’re likely out of luck. Check your lease for specifics.
- You’re not the only one asking “what happens to leasehold property when the lease expires?”. Potential buyers/leases want to know this as well. The fact is that the property may drop in value as the expiration date nears.
What Happens When a Leasehold Property Expires?
Let’s dig more into the topic of what happens when a leasehold expires in the UK.
As discussed, you know that a property’s value can decrease as the lease gets shorter. But what happens after a leasehold expires? In this case, the freeholder resumes full ownership of both the land and the building. What if you have paid off your mortgage and own the property (i.e. the house)? Surely you must retain some rights? No. Even if you “own” the property outright, you have no legal rights to it after the lease expires.
Determining what happens if the leasehold expires is of the utmost importance for those interested in purchasing such a property – as well as those who may be coming to the end of their contracted term. If you find yourself in the potential buyer category, what should you know about going forward? If in the latter position, are there any steps you can take?
If you are interested in or currently occupying a leasehold property, what happens when the lease expires is critical. You need to ensure that you are making a sound financial decision – one that suits your needs today and will not derail your plans. The first step is determining how much of the lease is left.
This should be detailed on your lease document, which will tell you how many years are left on the leasehold and should also tell you when the lease started. As a buyer, this information should be provided to you expediently either directly to you or your solicitor or the conveyancer, who is acting on your behalf.
In general, a sound lease length is at least 90 years. It sounds like an unfathomable period – but a few decades matter in terms of value. For example, if there are fewer than 70 years left on the lease period, it may be exceedingly challenging to get a mortgage and/or to sell the property when you want.
Whether you find yourself wanting to buy or are currently in a leasehold with a shorter lease period, it is important to negotiate an extension with the freeholder. You have the right to do this if you have owned the leasehold for two years or more AND if the lease has fewer than 80 years remaining on it. Do this as soon as possible as you will find that the shorter the amount of time until the expiration date, the more costly it will be.
Most often, you can get an extension of 90 years. If, for example, you have 75 years left on the lease and gain an extension, your new term would be 165 years.
As you weigh the pros and cons we mentioned earlier, keep this one in mind under the “disadvantage” column: you will have to pay to extend the lease. This is usually 50% of the “marriage value” of the property. Marriage value is the extra value gained through a longer lease. Essentially, you pay about 50% of the extra resale value you would hypothetically gain.
Extensions may also cost more or less depending on how much the property is worth, whether you have made any improvements and how much you currently pay in ground rent. You must also factor in property valuation, legal fees, Land Registry update fees and Stamp Duty (if the extension costs over £125,000).
Understanding what happens when a leasehold property lease expires is of the utmost importance in safeguarding your financial situation.
What Happens When Leasehold Expires UK: Resources to Consult
Whether potential leasehold buyer, current leasehold buyer or freeholder, you should take advantage of resources that can help provide information and guidance. These include:
- Your conveyancer or solicitor. They will be able to give you education and advice targeted to your specific needs, knowing your situation, finances and short- and long-term goals.
- Unbiased.co.uk. This site serves to match people just like you with qualified experts who can help.
- Gov.co.uk. Here you will find information on leaseholds versus freeholds, rights, responsibilities and factors to consider.
- The Land Registry. If you do not have a copy of your lease, you may order one from the Land Registry online or through the post.
What if the leasehold expires?
Asking yourself this when you’re too far into a situation to take steps that are advantageous and cost-effective for you is not optimal by any means. When in a leasehold, what happens when the lease expires can impact your future. Find out sooner rather than later – and determine how you can best position yourself for success.