When we talk about ‘owning’ property in England and Wales we have to consider the two main types of interest in land that exist – freehold and leasehold.
A freehold interest in land is the most common interest that can be held. In reality, it means the outright ownership of land or property for an unlimited period and applies to the majority of houses. You own the land and the buildings on it.
In contrast, a leasehold interest is a temporary right to occupy land or property. In this instance however, a “temporary” right can actually be for decades. The owner of the freehold interest in a property (‘Landlord/Lessor) may grant a lease of all or part of it to another (‘Tenant/Lessee’), thus creating a relationship between the parties of Lessor and Lessee. Most flats in England and Wales are held with a leasehold interest and the Office for National Statistics states that the latest figures available show a total of 4.3 leasehold dwellings in England (2016 to 2017).
The lease sets out the rights and obligations of both the Lessor and Lessee. Most leases are lengthy and complicated documents A lease will be for a fixed term, although the length of the lease will vary. There was a time when 125 years was the norm but recently, there are leases for 999 years. The longer the lease, the greater value is attached to the land and property.
With leasehold titles, the basic principle is that it will give the Lessee the right to occupy the property for the period specified in the lease. The lease will normally specify that the Lessor will have to allow the Lessee to have ‘quiet enjoyment’ of the property provided that the Lessee in turn observes their duties under the lease. The most important duty is of course the payment of ground rent and service charges.
What happens then when the period specified in the lease comes to an end? Effectively, when a lease comes to an end the Lessee no longer has a right to occupy the property and has to give back possession to the Lessor. In reality, the majority of Lessees will apply to extend the lease long before the lease actually expires. As a general rule, lenders are reluctant to lend on leasehold purchases where the lease term remaining for the property is below 80 years.
In summary, a freehold property will maintain its value in line with the property market and will increase in value when house prices increase. A leasehold interest is a diminishing asset, however. At the beginning of a long lease there will be little difference in value between a freehold and a leasehold property. As the lease gets shorter, the leasehold property reduces in value. At first the reduction is quite small, but as the lease gets shorter, the value begins to fall more rapidly. For example, a flat with a 50 year lease will only be worth about 70% of what an identical flat with a 99 year lease would be worth.