[As a parallel example, in Singapore HDB flats are 99 years lease. Once the lease expires, the Singapore government (the “freeholder”) takes back the land (and property). Freehold lands have a theoretical perpetual term. In Singapore, the owner of the property owns the freehold land as well.]

However things are slightly different in England as the freeholder may not be the government. In fact, I was told that 80% of the freeholders belong to the English Aristocracy. The aristocracy in United Kingdom “refers to the descendant of one of approximately 7,000 families with hereditary titles, usually still in procession of considerable wealth, though not necessary so.” [Source: http://en.wikipedia.org/wiki/Aristocracy].

The lease is a legal contract between the freeholder and the leaseholder. It explains the rights and responsibilities both parties have and will normally explain:

• how much ground rent have to pay [more on this later ] and when
• how any service charges are calculated (and how they are paid)
• whether service charges and/or ground rent can be increased and, if so, how
• what repairs the leaseholder are responsible for
• how repairs to the structure and shared areas of the building are arranged and paid for
• who is responsible for arranging (and paying for) buildings insurance
• whether the leaseholder have to get the freeholder's permission if you want to rent out your home or make alterations
• How many years the lease gives the right for the leaseholder to stay (usually 99 years)

Ground Rent: This is the rent – usually paid annually – by the leaseholder to the freeholder. Should the ground rent not be paid, the freeholder has the right to take possession of the property in extreme cases.

[Source: http://england.shelter.org.uk/advice/advice-2920.cfm]

Note: Ground Rent and property rents are not the same.

As the lease decreases as the years past, the value of the property decreases in value as well. It is possible for the leaseholder and freeholder to negotiate for extension of the lease. For example, if the lease is now 50 years, it is possible for both parties to negotiate to extend back to a 99 years term. Why would they do this? For the leaseholder, extension of the property adds value to the property (price appreciation). Moreover, banks are not keen to provide mortgage loans for lease below 50 years. Without mortgage loan, buyers have to buy such properties using cash. In other words, the demand for property that has less than 50 years lease are much less than those with longer lease. There is much incentive for leaseholder to extend their lease. For freeholders, they would ask for a lump sum payment for such extension of lease. This means money to earn for the freeholders. This amount is calculated – among other things – based on the market value of the surrounding properties as well.

On greater analysis, one would realized that the shorter the lease the lower the property price for the leaseholder and it also means a greater cost for lease extension. On the other side of the fence, the shorter the lease the more valuable the land is to the freeholder. This is because the freeholder is expected to receive a larger cash payment should the lease be extended. Should the lease be “expired” because it was not extended, the freeholder has the right to possess the entire property. This phenomenon is known as reversionary value. Reversionary value is the increasing capital value as a result of the approaching date after which the leaseholder loses the right to occupy the property.

A few things to understand is this, if you are the freeholder you will notice that:

• The Ground Rent is a perpetual income which its value and any upward revision is dependent on the leasehold agreement;
• The Ground Rent is not dependent on the property market (because it is not about property rent) and it has to be paid regardless of the market sentiment and economic situation;
• If the lease agreement stipulate that the freeholder is responsible for repairs and maintenance, this is a potential to earn a profit for providing these;
• If the lease agreement stipulate that the freeholder is responsible in securing insurance for the property, it means potential to earn a profit through commissions; and
• most importantly having the reversionary value increasing in capital value as the leaseholder losses the right to occupy the property

It is not good to be the leaseholder but it is sure good to be the freeholder! 80% of the freeholders are aristocrats. Who are the remaining 20%? Are they individuals? Or are they institutions? Is it possible to benefit like freeholders at an affordable cost?