Both leasehold and freehold are ways you can own a property and it is important to know the difference because it affects your ownership and the future sale of your home.
Leasehold and freehold are principally different forms of legal ownership. If you own the freehold, it means you own both the building and the land it is built upon. Leasehold means you merely have a lease from the freeholder (owner of the building) to use the home for a specified number of years. We discuss the advantages and disadvantages of both leasehold and freehold in more detail below.
The property will be registered in your name at the Land Registry, which means you own the “absolute title” as the freeholder. If you buy a freehold property, you own and are responsible for the maintenance of your own property and the land upon which it is built.
Houses are generally sold as freehold, although there is a trend developing for new builds on housing estates to be sold as leasehold. Therefore, it important to find out whether this applies to any new property you are considering buying, and if so, understand the legal implications of such ownership.
The benefits of buying a freehold property are:
Leases are generally long term, often over 90 or around 120 years, and sometimes as long as 999 years. However, if the lease has been run down and not extended, they can be as short as 40 years or less. In the case of a short lease, you may find it difficult to secure a mortgage without first extending it. This is because once a lease ticks down to zero, the property reverts to the freeholder, which renders it worthless to a lender.
The leaseholder has a contract with the building and landowner, known as the freeholder (or landlord), which sets out the legal rights and responsibilities of both parties. The freeholder is typically responsible for maintaining the common areas of the building, such as the entrance, staircase and lifts, as well as the building itself and the grounds surrounding it. Some buildings have leaseholders who have claimed their “right to manage”, and if so, maintenance is their responsibility as a collective.
Leaseholders will pay maintenance fees, annual service charges and a share of the building’s insurance. They will also have to pay an annual ground rent to the freeholder. Fees are a common source of contention, with one in four leaseholders believing their landlord is overcharging, but not being able to do much about it. Ground rents tend to come in at around £100-£250 per year, and even on apartments with basic facilities, annual charges can easily reach more than £1,000 per year.
Leaseholders also often complain their landlord does not maintain or repair the building to a sufficiently high standard or keep common areas in good shape. One in four leaseholders complain of a lack of control surrounding what works are undertaken, and nearly one in five have had problems getting essential work done.
If leaseholders plan to undertake major works on their property, they will have to get permission from the freeholder or their managing agents. And may face other restrictions such as not subletting or owning pets. Freeholders often have the complaint that leaseholders breach the terms of their lease by being too noisy or failing to obtain permission for building works.
If leaseholders fail to honour the terms of the lease, for example, by not paying their fees, then the lease can become forfeit, which means the property reverts to the freeholder.
Anything of 90 years or fewer can become problematic for leaseholders. So if you are looking at properties that fit into this category, you should approach them with care, because it can significantly affect the value of the property. If you have a short lease, a property can decline in value even if property prices in the area are rising. This will probably lead to fewer people wanting to buy it when you put it in the market to sell. As stated above, mortgage providers are going to be extremely reluctant to lend on shorter leases.
Government legislation has recently given leaseholders protection against short leases. This gives them the right to extend their lease or buy the property. However, this can be particularly expensive. The law is different depending on whether it is an apartment or house.
After informing a landlord they qualify for the right to extend the lease, the freeholder can either accept or reject the offer or negotiate new terms. If they reject the offer, it can be challenged in court.
You should get specialist professional help when extending a lease. If you live in a converted house, for example, the rules for extending a lease on an apartment may apply instead.
You may want to exercise the right to buy your apartment or house outright, so that you own the freehold. This is known as “enfranchisement.” The law surrounding this depends on whether you have a house or an apartment.
You could also buy the freehold with the other leaseholders living in a block of flats, for example. This can be achieved if at least half the leaseholders agree to buy a share. To buy the freehold, every leaseholder will need to serve a Section 13 Notice on the freeholder.
Commonhold can be a substitute for long-term leasehold. Leasehold owners can form a commonhold association, which owns the building, land, and common areas and is responsible for the maintenance, management, servicing and repair of the estate. As with leasehold, each individual leaseholder is responsible for their own property, but unlike leaseholds, there is no time placed on how long you can own the property. Anyone owning a freehold in the building or estate is entitled to take part in the running of the commonhold association.
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Both leasehold and freehold are ways you can own a property and it is important to know the difference because it affects your ownership and the future sale of your home. Leasehold and freehold are principally different forms of legal ownership. If you own the freehold, it means you own both the building and the […]...