A long leasehold contract (also known as a lease) allows a leaseholder (also known as the lessee or tenant) the exclusive possession of the land and the property on it for a fixed term. The freeholder (also known as the landlord) is the outright owner of the leasehold property.
The freeholder leases the property to the leaseholder. The leaseholder typically lives in the property and has a right to use it in accordance with the terms (known as clauses or lease covenants) set out in the lease. If these rules are broken, there can be a risk of a leaseholder losing their property.
Buying a leasehold home? What you need to know
The lease contract sets out the terms of the lease which include the rights and obligations of the leaseholder and the freeholder. Leases can be long documents as they attempt to cover the rights and responsibilities of the freeholder and the leaseholder.
The lease will normally contain the names of the original leaseholder and freeholder and its terms will apply to all future leaseholders and freeholders of the property. Once the contract has been entered into, the terms can usually only be changed by formal agreement between both parties.
Length of lease
A typical long leasehold term is 99, 125 or 999 years. However, a lease can be any length, particularly for previously owned properties.
The term starts when the freeholder creates the lease and is not reset when the property is sold by one leaseholder to another. The lease reduces in length as the years go by.
Typically, mortgage lenders are less likely to provide mortgages to the leaseholder (for example, when re-mortgaging), or to people who want to buy the property from the leaseholder, where the lease has less than 80 years remaining.
When the lease term ends, the leaseholder’s interest ends and the freeholder will have the right to occupy the land and any property on it.
If certain conditions are met, there will often be a statutory right for a leaseholder to extend a lease. This will normally involve a costly charge, which will increase significantly if the lease has 80 years or less remaining.
A lease typically contains a range of charges a leaseholder needs to pay every year. The most common charges are:
- Ground rent
- Services charges
- Administration charges (including permission fees for example to sublet or make alterations to the property)
Ask the estate agent or the developer for a breakdown of these charges, whether they will increase per year and by how much.
Ground rent is a fee you must pay to your freeholder if required by clauses in the lease, which will normally be the case for long leases. It is usually paid to the freeholder annually. The lease should have a clause which outlines the amount, and whether this will increase in future.
For some, the amount may be a fixed and nominal sum (known as a peppercorn), which could be as low as £10 a year with some leases, particularly ex local authority leases. For others, the amount may increase over time. For example, the ground rent might double at fixed intervals, such as every 25 years or it might increase based on an index such as the Retail Price Index (RPI).
The amount of ground rent, and whether it increases, may make lenders less likely to provide mortgages to leaseholders to secure a leasehold property. Find out more about Ground rent.
Service charges are charges the leaseholder pays the freeholder to cover the costs of providing services to a building, and sometimes amenities and areas around the building. The lease should have a clause which outlines what the charge covers and when it will be payable.
These charges may include maintenance and repairs, building insurance and cleaning shared areas. Find out more about Service charges.
A leaseholder may also be required to pay the freeholder administration charges in certain circumstances. An administration charge is a charge that relates to one or more of the following:
- The grant of approval under a lease, or an application for a grant of approval (sometimes called a permission fee) usually to do something to the property.
- The supply of documents from the freeholder to the leaseholder.
- Failure by the leaseholder to make any lease payment due.
- A breach by a leaseholder of an obligation in the lease.
In most cases, the lease sets out the amount of the administration charge and when it’s due. Some leases may state a fixed amount, others require the leaseholder to pay a ‘reasonable’ amount, and there may be other variations. You should be aware that an administration fee might be payable in certain other circumstances too, even if it’s not set out in the lease. Administration charges are only payable when the freeholder issues a formal demand.
One type of administration charge is a permission fee (also known as a consent fee).
A lease usually contains an agreement in which the leaseholder needs to receive permission from the freeholder to do certain things, for example:
- sublet the property
- renovate the property, or make alterations
- own a pet
The wording used to describe permission fees will vary from lease to lease and could require you to pay a set amount, a ‘reasonable amount’ or something else. In some instances, the lease may state that permission is required from the freeholder but may not specify a fee. This doesn’t mean that a fee definitely won’t be charged, because in certain circumstances the freeholder may ask for a charge as a condition of providing permission for a request.
Own a leasehold home? Here’s what you need to know
Purchasing a leasehold home
It’s important that you have key information early in the process, before committing to the purchase, so you can decide if a home is right for you.
To start, make sure you understand the difference between a freehold and a leasehold home.
When searching for or visiting a leasehold property for the first time, request advice from the estate agent, developer or freeholder on:
- The number of years remaining on the lease term (this can affect your ability to get a mortgage or the cost of extending the lease).
- The annual ground rent, whether it increases, the frequency of the increase and the method of the increase.
- The current service charge, what this covers and (for previously owned properties) at least the previous two years’ charges so you can see how costs change year-on-year.
- Whether any major works have been recently completed or are anticipated for which you may be asked to pay towards.
- Whether there are any restrictions on how you use the property or charges for certain activities – owning a pet or changing your boiler for example.
- Whether there are requirements for gaining permission, for example to sublet or alter the property, and whether fees will be charged for doing so.
- Whether ground rent payments are up to date and who collects them.
- Who the freeholder is and, if there is one, which managing agent they use for the property.
- Which insurance company will insure the building and what the annual insurance amount is. This may be addressed in the service charges information.
- Whether the freeholder has agreed to, or intends to, sell the freehold (especially for new build properties).
Once you have engaged a conveyancing solicitor, ask them for thorough advice on the:
- Nature of the leasehold ownership.
- Terms and conditions of the lease.
- Potential fees and charges under the lease.
You can also ask to see a copy of the lease so you can check the answers given and/or ask your conveyancing solicitor to help you confirm these. For example, the lease will show you its start date, which will assist with confirming the information provided on the length remaining on the term.
Owning a leasehold home
If you have purchased a leasehold home, it’s important you look out for a number of things.
Demands for ground rent
Legally, ground rent only becomes payable where the lease requires it and the freeholder issues a formal demand. The demand should contain a payment date that is at least 30 days, and no more than 60 days, from the date it is given. Demands will usually represent an annual payment, however freeholders are entitled to make a backdated demand for up to 6 years of unpaid ground rent.
Demands for service charges
Service charges are only legally payable where the lease requires it and the freeholder issues a formal demand. The lease should outline what can be charged for, the expenditure must be reasonably incurred and it must be for work and services of a reasonable standard.
Your freeholder should provide a record of accounts at the end of the year which details how service charges are spent. If this is not provided, you can write to your freeholder or managing agent to request this.
Check the record of accounts to ensure you are charged correctly for all service charges. Also check to see if you have been overcharged or been charged for elements that should be covered by other charges.
Demands for administration charges
The lease will usually outline which administration charges are payable in different circumstances, for example a charge to sublet your property. These charges are only payable when the freeholder issues a formal demand.
If a specific administration charge is not included in the lease, you might still have to pay a fee to the freeholder to complete the task. For example, some freeholders may charge a fee to answer questions or provide documentation.
The charge must be a reasonable amount. If the charge is fixed by the lease, the clause must be reasonable.
If you have doubts about a fee you have been charged for, you can dispute a charge.
Some leases may say that the lease will be “forfeited” in certain circumstances, for example, if a clause in the lease is breached or ground rent is unpaid for a certain length of time. Forfeiture means the lease can be terminated and the property will revert to the freeholder.
Legally, the lease of a residential property can only be forfeited by a Court Order. Forfeiture is very serious, so the Court will usually give you the opportunity to put things right for example, by paying any unpaid ground rent, before making an order for forfeiture.
If something goes wrong
Disputing a charge
If you think you have been charged incorrectly, or that a charge is potentially unfair, you should raise this directly with your freeholder or management company first. Keeping good records of all documents related to your property will help you in evidencing why you think there is a problem with a charge.
If you are dissatisfied with your freeholder’s response and feel that you need to escalate your concerns, you may be able to apply to a Tribunal such as the First-Tier Tribunal (Property Chamber) in England, the Leasehold Valuation Tribunal in Wales or the County Court.
These applications will often require fees to be paid to the tribunal or court, as well as any legal costs you might incur. There is also a risk that you might have to pay the costs of the freeholder and/or management company. This should all be considered as part of making the decision to bring a challenge.
Applying to the Tribunal
The Tribunal, and in some cases the County Court, has the power to make a ruling as to whether a charge is payable, if it was reasonably incurred, and if it is of a reasonable amount.
Be aware that if you make an admission (admit) that a charge is payable, then you cannot make an application to a Tribunal to dispute that charge.
Making a payment is not automatically considered an admission, but it is best to clarify in writing that you do not admit it is payable when you make the payment. For more information and example templates you can use, visit the Leasehold Advisory Service.
Typically, evidence will need to be shown when applying to a Tribunal to dispute a leasehold charge. This can include:
- A quote to demonstrate what the charge should be.
- Or correspondence between the freeholder and leaseholder explaining how much work would cost or how long it would take.
Costs to dispute a charge
Leasehold disputes can often involve a fee for an application. If your case has a hearing, you may be charged a hearing fee. You may also be required to pay the freeholder’s costs if you are unsuccessful in the tribunal or court.
Some leases have clauses that say that the leaseholder has to pay the freeholder’s costs even if the freeholder loses, so check that you don’t have this term in your lease and seek advice if you are unsure.
Disputing a leasehold charge and applying for a Tribunal are both time consuming processes and can often be costly. There is no guarantee of success.
- If you are living in the UK, Leasehold property, UK will have further information.
- If you are living in Wales, Leasehold guide, Wales will have further information.
- Read more about Competition and Markets Authoritys’ (CMA) leasehold case work.
Please note: Guidance from the CMA is not legal advice. This guidance is brought to you by the CMA in association with the Leasehold Advisory Service.
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