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    Home > News > London Property – Why do I buy Leasehold and what is it?

    London Property – Why do I buy Leasehold and what is it?

    Tuesday, April 7, 2020

    Overseas investors buying property in any major city, be it New York or London will almost invariably buy flats or apartments. This is driven by pricing and ease of management. Houses in big cities are expensive. A nice house in Central London will put you back over £5 million. Apartments cost less than one fifth of that, get better yield and are far easier to manage and maintain, so they become the investors choice.

    Whether in Sydney, New York or London, the investor buying a flat has the same problem in respect of title. Title in a block of 100 flats has to be divided up so that the buyer of one flat gets “clean” title to that flat itself.

    In Sydney they have a system called “strata title”. This simply divides the block of flats into 100 different titles of ownership.

    In London history has developed a similar system evolving out of Freehold/leasehold title. In the end it has exactly the same effect as in Sydney or New York, it divides title so that ownership is “clean“.

    Freehold is simply title to the land and buildings sitting on it. Freehold title is conveyed by solicitors from seller to buyer and the new “title” is registered at the UK land office. It is a very simple title that can be explored back several hundred years as the ownership passed from one person to another.

    When buildings are to be divided for multiple ownership, leasehold was invented as a simple way to divide a building into separate flats.

    The Freeholder (owner) issued a leasehold for any number of years to individual flats in the building. The flat owner then became the leaseholder. This buyer of the flat would pay a capital sum of money to buy the leasehold and then would pay a small annual rent to the Freeholder for the duration of the leasehold. This annual rent is known as “Ground Rent”. It is a small sum of money, typically £300/£400 p.a. on a £500,00 flat in London.

    With a building containing 100 flats, 100 leasehold titles would be created and sold to the leaseholders (buyers) which would leave some complications. Lifts, corridors, stair wells, landscaped gardens, roof tops and basements are typically known as the “common parts” of this building. These common parts remain in the ownership of the Freeholder, however the Freeholder is required to “manage” them and hence the annual ground rent.

    Where Freehold/Leasehold starts to become more complex and important to any buyers of London flats is in the area of “Length of Lease”.

    Leases under 100 years duration are known as “short leases” and we will leave these for the moment as any investor should be wary of short leases due to substantial variances in pricing as leases shorten in length. Leave the “short lease” market to the professionals.

    Looking at long leases’, these are anywhere from 100 to 999 years in length and this is the area of leasehold any investor will normally be dealing with.

    The rule of thumb that I have always used with leasehold is have enough time for you to own it, your children to own it and the next buyer to own it. This takes you to roughly 100 years so anything 100 years+ is OK to buy. However I would take one step further for security, and make the limit 250 years.

    Most developers of “new build” stock in Central London issue leases of 250 years plus and the 250 years has become a bit of a standard now among developers.

    With GIHLondon we try to take a step further and offer leases of 999 years or 999 years and a share of freehold to buyers. These are the most secure leases it is possible to obtain in London.

    Another more recent complication on Freehold/Leasehold has arisen in the last decade. This is to the advantage of all buyers. It is the possibility of buying out the freehold by leaseholders.

    New legislation has now made it possible for leaseholders to gather together and force the Freeholder to sell to them: (this becomes critical if a lease drops to 80 years or less as getting any extension might cost vast sums of money).
    Generally there is no real reason to do it. Any leaseholder of 250 years plus is not going to gain much, if anything, by buying out the freehold. However there may be circumstances where it needs to be explored – bad management of common parts (lifts are often an issue), the ability to obtain planning or the ability to stop planning that might hurt the value of the leaseholder flat.

    Having a share of the freehold gives Freeholders much more control over the building, services still have to be paid for but there is a commonality of need shared by all the leaseholders.

     

    The simple guide for leaseholders buying out the freehold is:

    • There must be at least two flats in the building

    • Lease must be 21 years+

    • 50% of the leaseholders must take part in the “buy out”.

     

    It does get more complicated but the above boxes have to be ticked in the first instance.

    If leaseholders do wish to continue with a buyout of the freehold, it is best to initially see if the above boxes are ticked, then approach a firm of solicitors to deal with all the detail as a “claim notice” has to then be issued telling the freeholder. It can then take at least four months to move forward. If there are challenges back from the freeholder then the whole case can go before the “First-tier tribunal” who will make a judgement. As the legislation favours the leaseholders, as long as they are patient, they will invariably win.

    For the bulk of investors buying out freehold is unlikely to ever be an issue but it is always nice to know that one can actually have some control over the Freeholder.

    By sticking to leases of 250 years plus any overseas buyers will be in safe territory.

    To find projects that fit these criteria, view our developments

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