Dear Michael,

I have been trying to buy a property for some time but property just seems to keep on getting more expensive.  I have finally found a flat that I like and it seemed much cheaper than other properties like it but I now understand that the property is leasehold.  What does this mean and is this something I should be worried about?

There are a number of structures for the ownership and control of land that include a lease as part of the structure, but generally leasehold means that the land underlying the property belongs to another person.  There are areas of Auckland where leasehold is quite common such as the land owned by the Cornwall Park Trust Board around One Tree Hill and much of the reclaimed land on the Auckland waterfront.

When a property is leasehold this means that in addition to any mortgage payments you will also have to make rental payments to the owner of the land.  Because you will pay less for leasehold property you may find that even when you add in the rental payments you are still paying less for the property than you would have to if you bought it outright.  You may end up living in a better property and in a better location than you would be able to afford if the property were not leasehold.  This is an important consideration when houses are not very affordable as they are at the moment.

However, there are downsides to leasehold property.  If money was not a concern most people would prefer to own the property outright as a fee simple title rather than a leasehold where there is an ongoing obligation to pay rent.  This may affect the liquidity of the property, how easy and how quickly you can sell the property and this can have a direct effect on the sale price.

Usually when you buy residential property you expect there to be some capital gain, but often a lot of the increase in value is related to the increase in the value of the land rather than the buildings on the land.

When you buy a leasehold property the rental may seem minimal but you need to consider when the rent is reviewed and how often it is reviewed.  If there is a long period between rent reviews (such as 10 years) then when the rent is reviewed it may be hard to afford this rent immediately after then renewal date, although over the term of the lease it may average out to be more reasonable.

There have been instances when people have walked away from a leasehold property (or sold it for $1 reserve) when they are unable to pay the reviewed rental.

There may be opportunities to freehold the property.  The Cornwall Park Trust have sold some of their underlying freehold titles to leasehold owners from time to time when they want to access some capital.  You may not have any control over whether you get the option to freehold the property and you would need to be in a financial position to take the option if it was offered.

There are both pros and cons of buying leasehold property.  But to proceed confidently you need to have a clear understanding of the underlying lease.