A lease is a contractual document between the lessee and lessor for the use and enjoyment of an asset, usually property.
Residential leases can be short term leases, typically assured shorthold tenancies of 6 months or a year or long leases where the leaseholder is effectively the owner of the property. On this page we focus on long residential leases.
A long residential lease requires the lessee (also known as tenant) to pay a ground rent, which is some cases can effectively be nothing (a peppercorn) or in more modern developments can be upwards of £500.00 a year to the lessor (the landlord/owner).
The term of the lease refers to the length of it and usually a lease of 21 years or more is considered a long lease. Most flats and apartments are not freeholds but long term leasehold of between 99 to 125 years. Unlike freehold, leasehold does not give you full ownership rights but with long leases the difference is in some respects academic, the value is in the leasehold rather than freehold interest; it rather provides you with the right to occupy the premises for a specific period of time. As the time on the lease expires it will slowly start decreasing in value. It should be noted however, that with the vast majority of leases they can be extended so that the property never reverts back to the freeholder i.e the lease does not expire.
How is the value of a residential lease affected with time?
Usually, a long residential lease of between 99 to 125 years will keep its value for around 20 years. Once it hits the level of 80 unexpired years, the value will start slowly decreasing and the leasholder should look to extend the lease back up to a longer length.
If there are less than 70 unexpired years lenders will not be as willing to provide a mortgage. At that point, the cost of extending the lease is higher also due to a technical legal issue known as “marriage value”. It can be difficult to sell a leasehold property with less than 70 years unexpired. With less than 50 unexpired years, you will be very unlikely to find a buyer and probably the only purchasers interested will be either property investors or cash buyers.
What are the advantages of residential leases?
The advantage as a long term tenant is that a residential lease is almost like a freehold because the length of the lease may often be longer than the tenant’s own length of life. Also the freehold owner will be responsible for repairs, management and maintenance of the entire property (i.e. block of apartments). Furthermore, when a landlord decides to sell the property, he or she is legally required to offer the tenant an option to buy the freehold before it is offered to anyone else. Even if you cannot afford to buy the freehold due to its price, the landlord will not be able to sell the property for anything less than the price that he offered to you. If within the 12 months of offering you the property, the landlord reduces the price of the property he or she will need to inform you and offer a further chance to purchase at the reduced price.
Can I extend my residential lease?
When a long lease approaches 70-80 years left, many leaseholders may wish to renew or extend their lease to ensure that it does not significantly decrease in value. To extend your lease you will need to serve a notice stating your full name and address along with further information about your eligibility to extension, the price that you offer and details of the current lease (such as ground rent). Providing that the landlord (either freehold owner or higher leaseholder) agrees, the lease will be renewed for further 90 years at a zero ground rate. The procedure is complex and there are pitfalls for the unwary so it’s important to get legal advice before you start the process.
