Why Leases Are For a Set Number of Years?
“Freehold Property” and “Leasehold Property” are the two common terms of real estate that you must have encountered while buying any property. The basic meaning of this term, or how the former refers to this Freehold term, is properties that are “free of hold” by any third party or entity. Leasehold properties are leased for a certain period, e.g 99, 125 or even 999 years from the time of construction.
But, why is there an unusual number of years? Why 99 years? Or, What happens to the property at the end of the lease? Who receives ownership after the lease is over? Or what are renewal conditions applicable in all these situations?
Someone who buys a leasehold residential or commercial property will own the property only for a set period of years, after which the property is returned to the landowner. The buyer of the leasehold property is expected to pay fixed ground rents to the landowner. Under certain circumstances the lease can be extended after the lease period is over.
What happens upon the expiry of the lease?
The property is returned to the freeholder or the next entity up the chain of ownership (e.g headlessee).
The XX-year lease concept
The lease begins with the date the property is handed over to the leasehold purchaser. The lease is based on an agreement contained within a document. The developer is then allowed to build and sell residential or business premises. These properties will be owned by the buyers only for XX years (e.g 99, 125, 999) and after the end of lease duration the landowner can claim back ownership. In addition, the landowners get ground rent in accordance with the lease agreement every year for the duration of the lease.
The lease contract contains both the lessor’s and lessee’s rights and obligations in respect of property occupancy, in exchange for a specified rental charge. The terms and conditions are all contained in the Agreement, such as the nature of rights, leasing periods, leasing rights, conditional clauses, the termination clause, etc., All these are essential for sustaining any lease and dealing with any dispute concerning the lease in future.
The purpose of setting a fixed term time is to control both the use and the transfer of land. This period was viewed in earlier days as a safe interval, as it covers the leaseholder’s lifespan. It was also considered as a reasonable length of time to protect the owner’s ownership.
Some facts about leasehold property
- The length of a lease can be extended by paying a premium to the freeholder.
- Developers tend to favour developing flats on a leasehold land because the expense of these plots is cheaper than freehold properties.
- Banks do not like to finance the purchase of a leasehold property, particularly if the remaining lease period is under 70 years. As the lease approaches the end of the lease period the value of such properties also falls.
Buying an old leasehold property
Leasehold properties are always more affordable than freehold property and may be purchased as an investment.
The shorter the remaining time of the lease the cheaper the property is to purchase compared to similar properties with longer lease lengths remaining. However, a payment (premium) must be paid to the freeholder in order to extend the lease and this amount varies widely depending upon location, type of property, how many years remaining and ground rents payable.
For properties with less than 70 years remaining it is very difficult to get mortgages from banks and so it is usually necessary to extend the lease before you can get a mortgage.
If you are selling a short lease property you will most likely only be able to attract cash buyers for this reason and so you will be forced to sell it for less.