What is Leasehold Reversion?
In leasehold property, "reversion" refers to the landlord's future right to take back full ownership of a property once a lease expires. Simply put, when your lease term ends, the property automatically returns back or "reverts" to the landlord.
A Simple Example
Imagine you have a flat on a 99-year lease. At the end of those 99 years, if the lease hasn't been extended or the freehold purchased, the flat returns to the landlord’s complete ownership. The landlord’s right to regain the property at the lease’s end is called the reversion.
Why Does Reversion Matter?
Landlords value their reversion because it represents a significant future financial benefit. Even though the landlord can't use the property immediately, knowing they will regain it eventually means the property still has a real monetary value today—this is known as "reversionary interest."
When you extend your lease, you're effectively delaying the landlord getting back ownership of the property. The landlord must be compensated for this delay, and this compensation forms a key part of the premium (price) you pay during lease extensions or enfranchisement.
How Does Reversion Affect Leaseholders?
The shorter the remaining lease, the higher the reversionary value becomes. This is because the landlord is closer to regaining the property, increasing their interest's current value. Consequently, short leases typically mean higher premiums for lease extensions.
For example:
- A lease with 80 years remaining means the landlord's reversion is relatively distant, reducing the premium.
- A lease with only 10 years left greatly increases the reversion’s value, making extensions considerably more expensive.
Historical Context of "Reversion"
The concept of reversion has roots going back centuries, derived from medieval property law where land would return—or "revert"—to a lord after a lease or tenancy ended. The term comes from the Latin "reverti," meaning "to return," clearly illustrating the landlord's future right to reclaim the property.
In Summary
Understanding reversion means recognizing that the landlord's right to reclaim the property after the lease expires has real value, known as reversionary interest. The shorter your lease becomes, the greater this value, directly influencing the cost of extending your lease. This is one of the reasons why the sooner you extend your lease the less it costs.
