Leasehold Property.

Original Article
May 17th, 2019


Image shows block of flats

Leasehold properties are coming under increasing scrutiny and a recent report from NAEA Propertymark found that 94% of leasehold homeowners regret buying a leasehold property. There remain, however, many areas where leasehold properties account for a significant proportion of the housing stock and this is unlikely to change any time soon. So, what do you need to know about leasehold properties?

Property law – a quick revision
The law relating to property in England and Wales has its roots in the medieval period and is a product of the feudal system. The terminology we find in modern leases (‘Tenant’, ‘tenancy’ etc.) date back to the ‘tenants in chief’, those loyal chief supporters of the king who were rewarded for their loyalty with parcels of land in exchange for military service. The Crown was at the top of the food chain and still holds some land, for example the foreshore, as an entitlement dating back this far.

This medieval system also gave rise to the principle of classifying an entitlement to land in terms of a period of time during which it could be ‘enjoyed’. Where land might have been granted as a reward for personal services it might have only been granted for the lifetime of that person and on their death, it would revert back to the ownership of the original grantor. Thus, it was a ‘life estate’.  But the transaction could be more complicated, and the grant might include the lifetime of the children or even grandchildren of the original grantee. If the grant could be passed on indefinitely then it became a fee simple – ‘fee’ denoting that it was inheritable and ‘Simple’ denoting that it was not limited in any way.
 Today we do not talk about fee simple but normally refer to ‘Freehold’; however, it is worth remembering that as well as a fee simple estate there was also the fee tail estate, when transfer (by inheritance or otherwise) was limited

to lineal descendants (“heirs of the body” or “heirs of the blood”) of the first person to whom the estate was given. There were also freehold estates not of inheritance, such as an estate for life.

Leases grew up outside the feudal system but followed the useful concept of classifying the interest in land for a period of time. So, land might have been let to a farmer on a yearly farming lease.

The concept of ‘estates’ rather than ‘ownership’ also emerged since a number of parties could have had an ‘interest’ in the same bit of land. Imagine the following:

A has a yearly farming lease from B

B has a life interest in the land granted to him by C

In the event of B’s death the land reverts to C

C has a lineal interest in the land for as long as he has direct descendants – a fee tail – granted by D. When his lineage dies out it reverts to D.

Each of these ‘interests in the land’ or ‘estates’ could co-exist and could be treated as the object of property since they could be sold, mortgaged, reached by creditors etc.

All of this was tidied up by the Law of Property Act 1925 which determined that only estates ‘fee simple absolute in possession’ and ‘a term of years absolute’ were capable of subsisting or of being conveyed or created at law.

It is worth noting that when you buy a house you are registered as the proprietor of the ‘fee simple absolute in possession’ if it is freehold or ‘legal term absolute’ if it is leasehold.

Freehold Estates
Today we use the term freehold as the common ownership of ‘real property’ or land and all immovable structures attached to that land.  For an estate to be a freehold, it must possess two qualities, namely:

  1. immobility (property must be land or some interest issuing out of or annexed to land)
  2. ownership of it must be of an indeterminate duration. If the time of ownership can be fixed and determined it follows that it cannot be a freehold.

Other Interests in Land

A wide range of additional legal and ‘equitable’ interests in land is recognised today. Leases and mortgages are legal interests and restrictive covenants are an example of an equitable interest.

Definitions of a Lease 

A lease is a way of granting a person rights to the ‘enjoyment’ of land for a specified period. The practical point about leases is that they have always been thought of along commercial lines – such as a farm or shop where a business can be carried out. As such they were recognised in the Law of Property Act 1925.

There are arrangements where tenancies can exist where either party can terminate them at any time. These are tenancies at will but are not covered here.

The fundamental components of a lease are:

  • the interest is transferable
  • they should have a certain beginning and end
  • the tenant enjoys ‘exclusive possession’
  • while a regular payment of rent is normally associated with a tenancy this is not essential for a lease to be valid. Leases can be granted in return for a capital sum, though in such circumstances a nominal ‘peppercorn’ rent is usually included.

Residential Leases

Residential leases are commonly ‘ground leases’ where the interest in the property is granted for a long period of time usually at a very secure, low ‘ground rent’ because the tenant has paid a significant premium for the lease in the first place. Of course, the issue with leases is that time ticks down on them!

The important issue that valuers need to be aware of is the length of the term remaining on any ground lease and lenders’ attitudes to that term. Some lenders, within their criteria, state they are able to lend on properties where the remaining period on the lease stretches to 30 or even 25 years beyond the end of the mortgage term. So, for example, on a mortgage with a 25-year term, a lender’s criteria might only require a leasehold property to have 50 years remaining on the lease.

But valuers also need to be aware that there can be a disparity between the appetite that lenders express for leasehold properties with short leases in their lending criteria, and the actual guidance notes they provide for surveyors.

Usually, within their guidance notes, lenders will also stipulate to surveyors valuing a property that the property should be readily resaleable and this effectively increases the minimum period remaining on a lease to at least 80 years, because of something known as marriage value.

Normally a lease would come to an end at the stated end of the tenancy, but Parliament has intervened on a number of occasions to amend the ways leases work for ‘the greater good.’

The landmark legislation for changing residential leases was the Leasehold Reform Act 1967. For the first time in English law, a qualifying leaseholder of a house was given the right to purchase the freehold (through a process that is now commonly known as ‘enfranchisement’) and also the right to an extended lease 50 years longer than the current term. That original legislation has since been amended on a number of subsequent occasions. 

The effects of the subsequent reforms have amended the original 67 Act as follows:

(a) originally there were exclusions to the 67 Act of higher value properties but now all houses held on qualifying leases can enfranchise,

(b) the original qualifying rules have been amended. 

It is very important to note that as more house leases became enfranchiseable, the valuation bases changed in a way that favoured landlords, notably the inclusion of ‘marriage value’. 

A flat with a long lease is worth more than a flat with a short lease and the marriage value is the increase in the total value of the property after a lease extension. Under the Leasehold Reform, Housing and Urban Development Act 1993 (one of the pieces of legislation amending the original 67 Act) a leaseholder has to effectively pay compensation to a freeholder if the lease drops below 80 years and so when the lease is extended, the leaseholder has to share 50% of the increase in value with the freeholder, which could run into many thousands of pounds.

Another amendment to the 67 Act was in Part 2 of the Commonhold and Leasehold Reform Act 2002. This act served to simplify the marriage value so in all cases any marriage value is shared 50:50 except where the term of the current lease exceeds 80 years, in which case the marriage value is treated as nil. But the right to an extended lease only applies if the original qualifying conditions apply (e.g. rateable value, low rent test and so on). In other words, the reforms that have allowed more houses to qualify for enfranchisement have not included the right to an extended lease.

This means that a surveyor who is valuing a property with a short lease approaching 80 years remaining, needs to factor in the potential impact on the value of the property should it fall below 80 years. In fact, a leaseholder has to own the property for at least two years before they are able to extend the lease, which effectively shifts this deadline to 82 years and so many lenders will start to ask more questions if a lease drops below 85 years.

This means that it can be harder to get a mortgage on a property with a lease of less than 85 years and so developing a specialist knowledge in lease extensions can help surveyors to help their clients by creating an asset that will meet the criteria required to make a property readily resaleable.

Further Amendments?

The Law Commission has recently closed a consultation on its proposals for the reform of leasehold enfranchisement and is aiming to publish its final report and assist with the implementation of its recommendations later this year. So, what changes can we expect?

The consultation makes provisional proposals for reform that are designed to further simplify and reduce the costs of acquiring a freehold or extended lease, provide a better deal for leaseholders by making enfranchisement easier, quicker and more cost effective, as well as reforming the existing rights of leaseholders. Here’s a summary of some of the key proposals for the different groups that will be impacted by the reforms:

Leaseholders of flats

•          One regime for both houses and flats, reducing complexity and costs.

•          Prescribed forms for making and responding to any enfranchisement claim, making mistakes less likely to occur, preventing unnecessary costs and landlords taking advantage of leaseholders’ mistakes.

•          The use of Tribunal to settle disputes and process claims in the case of missing landlords.

•          Leaseholders no longer required to pay their landlord’s non-litigation costs or the introduction of controlled costs.

•          No minimum period of lease ownership before the leaseholder of a flat can bring a claim, reducing delay and costs for leaseholders.

•          A new right to participate in an earlier collective freehold acquisition, stopping leaseholders from being locked out of ownership.

Leaseholders of houses

•          One regime for both houses and flats, reducing complexity and costs.

•          No minimum period of lease ownership before a leaseholder of a house can bring a claim, reducing delay and costs for leaseholders.

•          Leaseholders of houses able to extend their lease for a longer period, at a nominal rent and no limit on the number of extensions.

•          A right for all leaseholders on an estate (whether they own a flat or house) to join together to acquire the freehold to the whole estate.

•          Common procedure for dealing with missing landlords, ensuring leaseholders can exercise rights and save costs.

•          The use of Tribunal to settle disputes.

•          Leaseholders no longer required to pay their landlord’s non-litigation costs or the introduction of controlled costs.


•          One regime for both houses and flats, reducing complexity and costs.

•          A 25% limit to apply to all freehold acquisition claims, allowing landlords to retain buildings with substantial commercial use.

•          A power to require contributions to be made after the freehold is acquired, allowing estates to continue to be maintained.

•          A single procedure to apply to any enfranchisement claim, reducing complexity, confusion and costs for all parties.

•          Prescribed forms for making and responding to any enfranchisement claim, making mistakes less likely to occur.

It is anticipated that many of these proposals will be implemented, so stay alert to changes to leasehold enfranchisement that could impact your clients. And, if you think this is something that could have a significant impact on your business, it might be worth considering partnering with a chartered surveyor that specialises in lease extensions so that you can make the most of the opportunity presented by the new rules.

At Arnold & Baldwin, we provide a free online calculator that estimates the cost of extending a lease

Comments from Fiona Haggett BSc (Hons) FRICS:

From a lender perspective, leasehold properties are becoming an increasing concern. Whether it is the impact of the diminishing term on value, the cost to the customer of extending this term, or the increasingly diverse and imaginative range of onerous lease clauses that are emerging, leasehold properties are steadily becoming a specialist valuation area. As an industry, we need to develop our knowledge and skills around leasehold valuation if we are to advise our clients correctly and prevent huge future losses.