The landlords’ guide to leasehold and Airbnb – and how to maximise your profits

Landlords have not faced the easiest time over the past few years. Increased regulation and a loss of tax exemptions have made it harder to make a return, despite a rise in demand from tenants. 

There could be some good news, however. Despite owning their properties, many landlords are leaseholders and are therefore limited with what changes they can make, but under reforms tabled by the Government it may soon become easier to buy the freehold or extend the lease. 

Telegraph Money takes a look at whether landlords could benefit by investing in these changes.

What is leasehold and freehold?

Owning a property as a leaseholder means that the ultimate right of ownership remains with the freeholder, who may have put conditions on your ownership. 

Leasehold agreements usually run for terms of 99, 125 or in some cases 999 years. Terms start when the freeholder creates the lease and it runs down as time passes. 

Often, leasehold properties will lose their value as the time left on the lease decreases. 

A two-bedroom leasehold flat listed for sale in Victoria, central London, recently went viral online after readers noticed that its short 28-year lease had been described as “intriguing”. The asking price was £450,000.

Leases may also include conditions such as having to pay the freeholder annual ground rent, service charges or administration charges. 

The freeholder is generally responsible for maintaining the land, building and any common parts with other owners. They are also responsible for maintaining relationships with the local community. 

As such, whether or not you can let out a leasehold property you own depends on your leasehold agreement. Some leases may not allow you to rent out the property, or will require you to get the permission of the freeholder before doing so, in clauses known as “restrictive covenants”. 

This won’t change, despite Secretary of State Michael Gove saying he is confident the legislation will pass in this parliamentary session. The bill bans leaseholds on new homes but not flats, despite pressure from outside and inside the Conservative party for it to go further. However, it will make it easier for homeowners to extend their leasehold. 

Assuming you are allowed to rent out your property as a leaseholder, there are a few things you should think about.

Should you extend your lease?

The first question to look at is whether it is worth extending your lease. Doing so is likely to increase your property’s value, so it could be a shrewd move if you are thinking of joining the significant number of landlords leaving the sector. 

A quarter of landlords are planning to sell up in the next 12 months, according to Simply Business’ landlord report. 

Dr Mark Andrew, senior lecturer at Bayes Business School, said that while extending a lease isn’t guaranteed to boost a property’s value, there is a case for suggesting it could.

“We argue there is an incentive to realise the boost in the value as a reduction in the premium,” he said. 

However, it is not a cost-free process. Currently leaseholders extending their lease need to pay both their legal fees and those of the freeholder. 

Darlington-based landlord Chris Hawkins extended the lease on one of his flats 10 years ago after the freehold was sold and the new landlord said they would double the ground rent. 

“I think it cost overall about £17,000 at the time, and the flat had a value of about £100,000 – so I am guessing the lease was close to the 80-year point.” 

He said all but two of his six rental properties are leasehold, with terms of over 100 years. As he and his wife are both in their seventies, they are happy to leave them as they are. 

“The main reason for extending the lease is turning ground rent that could go up into a peppercorn payment. It’s basically a lump sum replacement for ground rent,” he added. 

Under UK law you have the right to extend the lease on a long lease property once you have owned it for two years, regardless of whether you live in the property or rent it out. 

The right allows you to add 90 years on to what’s left of the lease at “peppercorn rent”, meaning no ground rent is paid.

When should you extend the lease? 

Generally, it is advised to extend a lease before it drops to 80 years or below. Once it is less than that, the cost of the extension – known as the premium – increases due to an additional premium called “marriage value”. 

This is the amount of extra value that the lease extension is calculated to add to the property.

Furthermore, once a lease falls under 80 years it is designated as a short lease and unlikely to be attractive to buyers. 

It may also be valuable to extend your lease ahead of, or at the time of, remortgaging a property. There are two reasons for this, said David Hollingworth, broker at L&C Mortgages. 

The first is that most lenders require a minimum lease term of around 70 to 80 years in order to mortgage a property. So, if your lease is nearing that term length you may struggle to be approved for a loan.

The second is that remortgaging may provide a way to finance the lease extension, or even purchase the freehold. 

“If you have equity in the property, and if you have adequate rental income, that would support an increased borrowing once you have assessed the cost of extending the lease,” said Mr Hollingworth. 

What about buying the freehold? 

If the freeholder is considering selling up, under law the leaseholder has the right of first refusal. But is it the right decision for you?

To answer that, you’ll firstly need to work out whether or not you are in a position to acquire the freehold. 

If you own a flat, buying the freehold isn’t necessarily something you can do by yourself; you may need to get your neighbours involved.

The law allows at least half of the leaseholders to come together to buy the freehold of the block from the freeholder. It is not easy, although the Government has tabled reforms to make it easier to both buy the freehold of a property and extend a lease. 

As with buying any property, purchasing the freehold means covering the costs of legal fees, valuations, and stamp duty to be paid on properties with a value of over £125,000. 

You can also get a mortgage to cover the purchase, similar to buying a property. 

Like extending a lease, it becomes much more expensive to buy a freehold when the lease gets to around 80 years. 

While it is rarer, you may own a leasehold house which could provide more opportunities if you purchase the freehold. 

The Chancellor recently revealed plans to introduce a permitted development right that allows the conversion of a house into two flats without permission, as long as the exterior is not affected. 

For landlords, the option to convert a buy-to-let property into two flats could be an opportunity to increase their income and provide much-needed rental accommodation in areas of high demand.

The average achieved rent on a two bedroom flat is £1,218 according to estate agency Connells Group, compared to £1,785 for a four-bed house.

By converting a house into two two-bed flats a landlord could increase their rental income by £651 a month, or £7,812 a year.

As a leaseholder you may be prevented from carrying out the work, but as a freeholder you can make the changes. 

Once the conversion is completed, you also then have the option to sell one flat to cash in on any equity while keeping the other as a rental property. 

The average price of a terraced house in August 2023 was £239,118, according to the Land Registry. For a flat or maisonette the average was £232,926. 

As a result, a landlord looking to sell could increase the amount they make by over 90pc if they convert their property into two flats before selling.

You could even sell the property as leasehold, if you wish to retain some control. 

What are the rules about Airbnb?

Airbnb may seem like a good solution if your lease doesn’t allow the property to operate as a full-time rental, but there may still be restrictions on whether you can host short-term lets. 

For example, many leases contain a restriction on doing anything that will cause a nuisance to your neighbours. There is little doubt that running an Airbnb risks unruly guests who could be an issue for others, and would therefore contravene the terms of the agreement. 

There may also be covenants against using the property for business purposes, against sharing the property, renting it out for less than six months at a time, or ensuring it is only used as a private residence – all of which could rule out casual lettings.

While some property owners may decide to do it anyway and hope they don’t get caught, it’s a risky business.

Law firm Brady Solicitors says that freeholders are increasingly aware of websites such as Airbnb for subletting properties, and are prepared to take action against leaseholders for breaching the terms of their lease. In the worst cases, you could be deemed to have broken the terms of the contract, and may lose the property.

However, the covenants may be able to be interpreted in different ways, which could give you an opening – even if they seem prohibitive at first glance. 

For instance, perhaps you could demonstrate how you’d take steps to ensure no nuisance would be caused to your neighbours, and therefore get around that particular restriction. Other rules, unfortunately, may be fairly ironclad.

Terms can vary widely between leasehold agreements, so you’ll need to get familiar with your own. Grappling with the wording can be tricky, and it’s usually best to seek the help of a lawyer who’ll be better able to spot any wiggle room.