How does leasehold system work?

[Biohyt]

Hi everyone,

I want to lease a property for my small business, but I am confused about the leasehold system.

As you know, both residential and commercial properties are divided as: leasehold and freehold.
I get the idea for freehold; buying everything including the land. Whereas for leasehold properties, the land belongs to the landlord and the lessee pays for the ground rent + service charges.

Properties costing about 200k, which are advertised to leave an annual income of 15k rent, only have £200 per year ground rent and annual service charge of £2000. So why landlords dont rent the properties themselves to earn this money themselves ?
And, who are these landlords ? Just random people who make a living by earning £2200 per year to make sure the property has all the maintenance, while the lessee earns 15k rent ? I dont get the mentality.

Thanks

 

[MBE2017]

I think you are very confused.

The landlords rent properties, they get paid the rent, plus ground rent, service charges etc on leasehold properties, so in your example they would make £17200 pa. The tenant/lessee in your example pays those fees, they don’t make money on the property at all.

 

[WaveJumper]

What @MBE2017 said above and look out for all those clauses in a lease relating to repairs and maintenance. Hopefully you have read some of the threads on this forum relating to issues people have with the mind field of commercial leases because they never got PROPER LEGAL ADVICE now I know you are not going to fall into that trap are you?

 

[fisicx]

…and the lessee pays for the ground rent + service charge

And rent to the landlord. And insurance and utilities and probably some maintenance. Plus anything else detailed in the lease.

 

[Newchodge]

Hi everyone,

I want to lease a property for my small business, but I am confused about the leasehold system.

As you know, both residential and commercial properties are divided as: leasehold and freehold.
I get the idea for freehold; buying everything including the land. Whereas for leasehold properties, the land belongs to the landlord and the lessee pays for the ground rent + service charges.

Properties costing about 200k, which are advertised to leave an annual income of 15k rent, only have £200 per year ground rent and annual service charge of £2000. So why landlords dont rent the properties themselves to earn this money themselves ?
And, who are these landlords ? Just random people who make a living by earning £2200 per year to make sure the property has all the maintenance, while the lessee earns 15k rent ? I dont get the mentality.

Thanks

I think you are confusing leasehold, where the freeholder receives ground rent and, possibly, service charges, from the leaseholder, (a freehold is where the King owns the land but receives nothing for it; with a lease. The lease is an agreement between the landlord and the tenant under which the tenant pays the cost of everything. A lease has nothing to do with leasehold

 

[Biohyt]

Thank you all for your answers. But I still dont understand the logic to be honest.

@MBE2017 @Newchodge Yes the landlords get paid the rent, plus ground rent, service charges etc. However, the properties have a leasing period of more than 100 or even up to 900 years (very common in the UK, especially for residential areas). So when 200k is divided by 999, it reduces the earnings of the landlord to about 200 per year. So, in this example, with only £200 ground rent, £2000 service charge and £200 rental income. Briefly, if I lease a property for 200.000, and rent it out for 15.000, the landlord only earns about £2500 per year.

I dont get the logic of why the landlords doesnt rent the property themselves. and earn the rental income directly.

@WaveJumper not falling. Thank you for your reply. I just dont understand the logic of leaseholds.

 

[Newchodge]

Briefly, if I lease a property for 200.000, and rent it out for 15.000, the landlord only earns about £2500 per year.

You are not leasing a property for 200,000. You are buying it.

 

[Biohyt]

@Newchodge Yes. You are right, my wordıng was wrong.
Consider I am buying a property (which is advertised as a leasehold for 999 years lets say...)
Why landlords wouldnt like to rent the rooms on the property themselves?
It obviously doesnt make anyone to earn good income (200,000 / 999 is roughly 200 per year).
Where is the logic in this ?
Thank you

 

[Newchodge]

@Newchodge Yes. You are right, my wordıng was wrong.
Consider I am buying a property (which is advertised as a leasehold for 999 years lets say...)
Why landlords wouldnt like to rent the rooms on the property themselves?
It obviously doesnt make anyone to earn good income (200,000 / 999 is roughly 200 per year).
Where is the logic in this ?
Thank you

You are right. Your wording is wrong. No one is renting the property to anyone. It is being sold.

 

[Biohyt]

@Newchodge Its being sold for 999 years.
Imagine, while I will rent the rooms and earn a rental income of 15.000 per year, the landlord will only earn service charges etc, and a funny £200 per year from the 200.000 I gave to purchase the house.

I honestly dont understand why anyone would prefer to follow this route rather than renting the rooms to tenants themselves.

 

[Newchodge]

@Newchodge Its being sold for 999 years.
Imagine, while I will rent the rooms and earn a rental income of 15.000 per year, the landlord will only earn service charges etc, and a funny £200 per year from the 200.000 I gave to purchase the house.

I honestly dont understand why anyone would prefer to follow this route rather than renting the rooms to tenants themselves.

Most people don't expect to collect rent for 999 years.

A developer buys a site and builds 20 houses on it. All are leasehold and the developer owns the freehold, usually this is done to maintain control over the fabric of the estate. Every house cost 100,000 to build, including the cost of the land. The developer has spent 2,000,000. The houses are sold for 300,000 each. The developer has made a profit of 4,000,000. In addition they will receive an annual income from ground rent and, possibly, service charges.

 

[fisicx]

@Biohyt That’s not how it works. The freeholder gets the £200,000 plus ground rent and service charge. If you then want to rent the property that’s up to you. Many freeholders aren’t interested in collecting rent, they want the cash which they then invest in other projects.

 

[Biohyt]

@Newchodge Thank you very much. This was the explanation I needed as I seriously didnt understand the mentality. Now I understand.

I guess the developer firms dont want to deal with renting rooms one by one to tenants, or perhaps in order to sell the houses to buyers, the developers naturally have to make sure buyers are making profit.
@fisicx Yes, thanks very much. I couldnt understand this logic previously.

Cheers

 

[UKSBD]

Something else to consider is that there are multiple different people/businesses in the equation

An investment company buys the land, a development company develops the land, a building company buiilds on the land, a landlord buys the property, a person rents of the landlord.

in mass building, the investment, development, building companies may all be in the same ownership of a holding company

 

[ecommerce84]

What you’re describing is what you’ll often see in apartment blocks, (and more recently in some housing estates) and it’s for the reasons @Newchodge describes as there may be areas that will require ongoing maintenance that won’t be adopted by the council (parks and green spaces in housing estates and stairs or elevators in apartment blocks)

A 999 year lease is as close as you’ll get to purchasing the property, so someone who owns and lives in a leasehold apartment is effectively an owner occupier rather than a renter.

 

[WaveJumper]

An owner occupier that has no control over realising any value out of said building, which is in nearly all cases an appreciating asset for the landlord / owners

 

[MBE2017]

@Biohyt That’s not how it works. The freeholder gets the £200,000 plus ground rent and service charge. If you then want to rent the property that’s up to you. Many freeholders aren’t interested in collecting rent, they want the cash which they then invest in other projects.

Not necessarily correct, to rent the property out, you need the freeholders permission. If purchased on a mortgage, you also need the mortgage companies permission.

 

[fisicx]

Not necessarily correct, to rent the property out, you need the freeholders permission.

Is that correct? Nothing in our lease says we need permission to let.

 

[MBE2017]

Is that correct? Nothing in our lease says we need permission to let.

Commercial subletting What is it how does it work and can I do it

In this article, Commercial Property Solicitor Richard Ramshaw looks at subletting. He outlines what it is, how it works and whether you can sublet your property.

www.frettens.co.uk

On residential properties you would be in the realms of sub letting, which is illegal.

 

[Newchodge]

Commercial subletting What is it how does it work and can I do it

In this article, Commercial Property Solicitor Richard Ramshaw looks at subletting. He outlines what it is, how it works and whether you can sublet your property.

www.frettens.co.uk

On residential properties you would be in the realms of sub letting, which is illegal.

We're not looking at a tenant with a tenancy. We are looking at someone who owns the proprty on a 999 year leasehold. Some leaseholds have restrictions, but many don't.

 

[Newchodge]

An owner occupier that has no control over realising any value out of said building, which is in nearly all cases an appreciating asset for the landlord / owners

I don't think there is usually much problem seeling a property on a 950 year leasehold.

 

[MBE2017]

I don't think there is usually much problem seeling a property on a 950 year leasehold.

Still comes down to mortgage conditions.

 

[Newchodge]

Still comes down to mortgage conditions.

Oh yes.

 

[fisicx]

Not necessarily correct, to rent the property out, you need the freeholders permission.

Just checked. You need to inform the freeholder, you don't need to get permission. Unless the lease has a clause preventing you letting a residential property.

 

[MBE2017]

Just checked. You need to inform the freeholder, you don't need to get permission. Unless the lease has a clause preventing you letting a residential property.

Basically the same thing, the point is, mortgages and other instruments, rental agreements, head leases etc can all effect the ability to let a property.