When we talk about “owning” property in England and Wales we have to consider the two main types of interest in land that exist, which are freehold and leasehold.
The freehold interest in land (sometimes referred to in legal terms as The Fee Simple Absolute in Possession) is the most complete interest that can be held in England and Wales, as all land is technically held subject to the Crown. In practice it means the outright ownership of land or property for an unlimited period and applies to the majority of houses.
A leasehold interest is, on the other hand, a temporary right to occupy land or property. A person who owns the freehold interest in a property may grant a lease on it to another person. This creates a relationship of Landlord and Tenant (or Lessor and Lessee). The lease will be a lengthy, written, legal document based on property and contractual law which sets out the rights and obligations of both the Landlord (Lessor) and Tenant (Lessee). Most flats in England and Wales are held on leases.
A lease will be for a fixed term. Historically most flat leases were typically for 99 years, although more recent leases are often for 125 years. Occasionally leases are granted for 999 years (often somewhat misleadingly termed a “virtual freehold”).
Although the lease on any property will be a complex document, the basic principle is that it will give the Tenant (Lessee) the right to occupy the property for the period specified in the lease. The lease will normally specify that the Landlord (Lessor) will have to allow the Tenant (Lessee) “quiet enjoyment” of the property provided that the Tenant (Lessee) in turn observes their duties under the lease. The principal duty normally being to pay the rent specified in the lease to the Landlord (Lessor).
The rent payable under a long residential lease will normally be quite modest (often between £50 and £250 a year) and reflects the fact that the lessee will usually be responsible for paying all the costs in connection with the maintenance and repair of the flat and will have also paid a considerable sum to purchase the lease in the first place.
We have said that a leasehold interest is a temporary right to occupy the property, albeit that this “temporary” right may last for many decades. It is this temporary nature that sets leasehold and freehold interests apart, as a freehold interest is permanent.
What happens then when the period specified in the lease comes to an end? Effectively, when a lease comes to an end the Tenant (Lessee) no longer has a right to occupy the property and has to give back possession to the Landlord (Lessor). The lease will usually include a clause which states that the Tenant (Lessee) will “quietly yield up possession” on the termination of the lease. In reality a Lesee will start the process of extending their lease well before it expires.
This means that we have to look at the value of freehold and leasehold property slightly differently. A freehold property will always maintain its value when the property market remains even and will increase in value when house prices price. A leasehold interest is a diminishing asset, however. At the beginning of a long lease there will be little difference in value between a freehold and a leasehold property. As the lease gets shorter, the leasehold property reduces in value. At first the reduction is quite small, but as the lease gets shorter and shorter the value begins to fall more rapidly. For example, a flat with a 50 year lease will only be worth about 70-75% of what an identical flat with a 999 year lease would be worth.