Buying a House > Freehold vs Leasehold

There are two main types of property ownership in England or Wales: freehold and leasehold. And, with buying a property being such an big decision, it’s important to understand the difference before signing the dotted line. Here’s a quick primer so that you know where you stand.

Freehold Property

Someone who owns the freehold of a property owns the property and the land it stands on. If you buy a freehold, you’re responsible for maintaining your property and land, so you’ll need to make sure you budget for these costs.

As a freeholder, you don’t have to worry about a lease running out – because you own the property outright. You aren’t subject to tenant liability or answerable to a landlord. And you don;t have to pay ground rent, service charges or any other landlord charges.

Leasehold Property

The principal difference between freehold and leasehold is that, as a leaseholder, you do not own the land the property is built on.

You are essentially renting the property from the freeholder (AKA landlord – the property and land owner) for a guaranteed number of years, decades or centuries. With a leasehold, you own the property and its land for the length of your lease agreement with the freeholder. When the lease ends, ownership returns to the freeholder – unless you can extend the lease (more on this below in Leaseholder Rights and Responsibilities).

Getting a Mortgage on a Leasehold Property

You may not feel this affects you, particularly if you have a long lease. But lease length is more important than you think. Getting a mortgage on a leasehold can be difficult if the lease length is shorter than 80 years because lenders may see the property as difficult to sell. This is something to bear in mind even if you are able to get a mortgage to buy the property. It may make things difficult when you want to sell, or affect the resale value.

Commonhold Property

There is a rarer type of property ownership called ‘commonhold’. This is in some sense a cross between a freehold and a leasehold, and it’s designed to help flat owners get full ownership of their property.

As part of a commonhold arrangement, the collective leaseholders within a multi-occupancy building come together to form a company, known as a Commonhold Association, in order to purchase the freehold for the building. Everyone in the building then owns part of the freehold, with collective responsibility for communal areas.

Leaseholder Responsibilities

When you buy a leasehold property, you take over the lease from the previous. So it’s important to understand exactly what you can and cannot do as the leaseholder. As the old house-hunting adage goes, livability is just as important as lendability!

Day-to-day impacts that come from owning a leasehold include:

  1. Service Charges: this covers the cost of the ongoing upkeep of the property provided by the landlord
  2. Ground Rent: this differs from normal rent as it technically is only for the ground your property is built on, not the property itself. The sum and the due date should be specified by the lease.
  3. Major Works: this refers to repair, maintenance or improvement to your building towards which you are bound to contribute by the terms of your lease
  4. Buildings Insurance: typically, the landlord will arrange for buildings insurance for the property (not contents insurance). This then charged to leaseholders as a service charge.
  5. Admin Charges: this reimburses the landlord for processing costs incurred, for example when pursuing an unpaid sum due to them

You will very likely need your landlord’s permission before you make any changes to the property itself, such as building an extension or even owning a pet. However, this cuts both ways. The landlord must consult you:

  • About any building work costing more than £250
  • If they plan on doing any work lasting more than a year
  • Before doing any work costing you over £100 a year

You can always ask to see a summary of what the service charges are being spent on, how the service charges have been calculated and any supporting paperwork – such as receipts for work done.

Leaseholder Rights

There are benefits from the leasehold arrangement as well. Usually, the landlord will take care of upkeep for the external parts of the property, such as stairwells (in blocks of flats), exterior walls and roofs. This does not however include your “demised premises”, that is, the interior part of the property you actually inhabit. Check the terms of your lease for a precise definition of these terms.

Your freeholder may appoint a managing agent to manage the property on their behalf. This person will manage the property within the agreed terms of the lease. Their services will be included in your service charge, so you don’t need to worry about extra costs.

Management of your Leasehold

If you believe that your lease is subject to bad management, like unfair costs and breach of lease agreements, then you do have a right to appoint a new manager. But to exercise this right, you must be able to prove bad management.

Additionally, you have a personal Right to Manage (RTM) – introduced as part of the Commonhold and Leasehold Reform Act 2002. This lets leaseholders take on responsibility for the management of their property themselves without proving bad management or needing the landlord’s permission. To do this, they must set up a right to manage company.

While it is relatively simple to set up a right to manage company, this will vest you with very real responsibilities. Plus there are certain criteria that need to be met in order qualify. For this reason, self-management of your leasehold is not always the best option. In any case, we recommend that you check the Leasehold Advisory Services Right to Manage Guide before proceeding.

Extending your Lease

Once you’ve owned your home for 2 years, you have the right to extend your lease by 90 years, provided you are a qualifying tenant. Usually, you will be a qualifying tenant if your original lease was for more than 21 years.

You can ask the landlord to extend the lease at any time. They will charge for extending the lease and the cost will depend on the property. If you and the freeholder can’t agree on the cost of extending the lease, you can appeal to the Leasehold Valuation Tribunal – but you might need to hire a solicitor and surveyor, which will of course increase costs.

An alternative to extending your lease is to buy out the landlord. This means that you become the freeholder for the property, effectively owning it indefinitely.

Leaseholders have a legal right to acquire the freeholder of their property – assuming certain criteria are met. You may let your landlord know you want to purchase at any time. However, they are not obligated to sell to you unless you go through the formal procedure. This isn’t always straightforward however, so it is recommendable to enlist an experienced solicitor and surveyor.

In addition, you generally have a right of first refusal. So, if the landlord wishes to sell the freehold to the property, they will have to offer it to you first.

Leasehold Scandals

In principle, there is nothing wrong with buying a property on a leasehold basis. Indeed, as we have outlined above, this can be advantageous in plenty of situations. However, the terms of leases can be unfair – and home buyers do not always receive the best advice.

If you are going ahead with a leasehold purchase, be sure to check the terms and conditions carefully. Certain unscrupulous housing developers have been know to work terms into their leases permitting the doubling of ground rent every ten years, for instance.

In December 2017, the government announced a raft of measures to address the scandal around “fleeceholds”. These included:

  • A ban on leases for new-build properties
  • Ensuring ground rents on new long-lease houses and flats are set at zero (i.e. that they are not charged)
  • Working to help existing leaseholders buy their freeholds or extend their leases quicker, cheaper and easier

For those who have already been caught out by “fleeceholds”, the Government has yet to announce any form of redress. For more information on the new measures, visit Gov.uk.

 


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