What is leasehold land? | Addland
- The main benefit of leasing land rather than taking outright ownership is in avoiding a larger capital investment.
- Leasehold land is a common model used by local authorities and other organisations to provide affordable housing.
- While it may seem initially that purchasing leasehold land offers less security than freehold, this is not necessarily the case.
Leasehold land and freehold land. Do you know what the difference is? If you’re looking to purchase a piece of land it’s vital you understand on what basis you’re buying, as it can affect your rights in all sorts of ways.
In this guide, we'll be focussing on leasehold land. We’ll explore what it is and whether it might be the right option for you.
What do we mean by the term leasehold land?
In the case of leasehold land, the buyer does not become the outright owner. Instead, the buyer buys exclusive permission to use the land for a period of time. A piece of land's ownership history, as well as its current tenure (i.e. freehold vs leasehold) are all included in its title deeds, a copy of which is normally held by HM Land Registry.
The lease lengths can vary wildly. Some may be for a 50-year period, a 90-year period or even a 999-year period, depending on the original lease and when it was drawn up. When the time limit on the lease comes to an end, it can usually be extended, but this may incur legal costs.
There are pros and cons to the purchase of leasehold land. In specific situations, such as the creation of affordable housing in inner cities, it can be of great benefit.
Where did the idea of leasehold land come from?
The idea of owning land and leasing it to others is not a new one. It can be seen in the history books as far back as the Norman conquest, although it would have looked very different to how it does today.
The leasehold land model as we know it dates back to when the ‘landed gentry’ owned huge swathes of land or vast country estates, offering long-term agreements to those wanting to farm or live on the land. In the UK some of the biggest landowners were (and still are) The Crown and the Church, with many long leases sold to allow building of both commercial and residential property.
Large landowners would grant long leases to developers allowing them to develop the land. Those landowners would then share in the income that was eventually received from any buildings erected. Still to this day, areas of London, including Regent Street and the areas around many of the royal parks, are built on leasehold land owned by The Crown.
It’s only been since the Second World War, when local authorities were looking to help rebuild their cities and communities, and create affordable housing in a difficult economic period, that this leasehold land model started to make sense.
It allows much needed affordable housing developments to be financed and built without the crippling up-front costs associated with land purchase. And what’s more, it sees a steady stream of income coming back into the public coffers over the longer term.
Is leasing land a good idea?
As the freeholder, the owner of the land will need to pay the costs of purchasing the land. This could be a large sum. If you don’t have available capital to invest, leasing can be a good route to gaining the right to use the land for whatever you wish at a fraction of the initial cost.
Leasehold land offers more security than you might think. In most cases, a leasehold agreement offers the same level of security as freehold. The contract you sign to purchase the lease will state the specific period of time for which the land is leased to you. During this period, no one can take away the land from you for any reason.
If you build a house on the land you will have the same rights over it as you would were the land freehold. You will be able to renovate, extend or change it, sell it on or rent it out without first seeking approval from the landowner. What’s more, if you die, the ground lease can be passed on via your will.
You will be able to use your land however you want, depending on the terms of the lease and subject to local planning permission. Most agreements will allow you to erect a dwelling or commercial structure, build something for the good of the community, or work from the land as you need to.
Once the lease period is over, you should have the right to renew your agreement, via a lease extension, and continue with the arrangement you had. And it will continue to be the duty of the owner to maintain the land that he has leased, covering maintenance costs, service charges, administration charges etc.
And meeting the purchase price should not be an issue, there are many mortgage lenders that will be happy to help you finance the purchase as long as the lease term remaining is adequate.
Who does leasehold suit?
Leasing land works especially well in some scenarios. If, for example, a landowner wants to retain ownership of a package of land but not develop it themselves, they could enter into a land lease contract with a developer. This would put the onus on the developer to build and sell one or more homes, while the freeholder retains ownership of the land.
In this case, the owner would enjoy a steady income stream from ground rent charges and other maintenance fees.
Due to the expense and length of time it takes before a return on investment is seen, it can be particularly hard for smaller private developers to acquire good plots of land to build on, especially in more expensive areas such as inner cities.
If developers who aren’t cash rich find it difficult to secure finance to fund the up-front purchase of a piece of land, the opportunity to lease and pay back across time, finally passing those ongoing costs to buyers, is a tempting one.
The leaseholding model offers the opportunity for councils, charities, housing cooperatives and Community Land Trusts (CLTs) - a form of community ownership - to come together and help people on lower incomes to build their own homes. All by reducing or removing the need to find the up-front capital to purchase land.
Are there any downsides?
While you may find it beneficial to avoid the high cost of purchase initially, paying annual ground rent charges can also be painful in the long run. These charges are liable to rise in line with the local market rate for land, and you may have little control over the increase.
When you purchase leasehold land in the first place it’s important to check how long is remaining on the lease. Extensions not only require time and effort, but they are likely to incur legal fees.
What’s more, there is a risk your extension request could be denied. The landowner may not want to extend the lease, perhaps preferring to develop the land or use it personally in some way. If you’ve invested money to make the land fit for purpose this could be difficult.
As a leaseholder rather than a freeholder you will not have overall control of what you can do with or on the land. Be sure to investigate what you are and aren’t allowed to do according to the terms of your lease.
Rest assured, many of these risks can be mitigated by doing your research and seeking expert legal advice up front.
What happens at the end of a lease?
At the end of a lease, where no extension has been agreed, the landowner will have the right to take possession of the land and everything that has been built on it. Ownership is legally transferred.
Interestingly in many places in Europe – where leasehold is a popular method for councils to own and lease out land and property - this right of repossession doesn’t exist in the same way. If the lease is not to be extended, the council will usually agree to pay the outgoing leaseholder the property valuation of any building that has been constructed on the land.
Is leaseholding the right model for you? Addland can help you find leasehold land for sale In the UK, saving you time by giving you all the information you need in one place. And with data from HM Land Registry and Ordnance Survey, covering considerations from flood zones to AONBs, we can help you build a complete picture of the land you’re looking to purchase.
Addland makes it easy to Find, Research, Buy or Sell land. Start your land journey today.
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