Home Buying Guide: Article Five – ‘Freehold or leasehold’?

When you decide to buy a property, you are inundated with information from many different angles, much of which may be new to you. One of the pieces of information you will note detailed next to the description of a property is normally either the term ‘freehold’ or the term ‘leasehold’.

Whilst not necessarily the most enticing part of the property description, it is an essential part to note and will likely sway your choice depending upon your wishes. This article, therefore, informs you about what each term means, the potential advantages and disadvantages of each type of property and offers some useful tips to aid a smooth road to purchase your property.

What is meant by a property being Freehold or Leasehold?

Freehold:

The majority of properties are freehold. In fact, the Government have committed to ensuring that soon all new houses will be freehold (with specific exemptions). Freehold means that when you purchase the property you are purchasing the entire land it is built on and that you fully own the property. Therefore, it is your name which appears in the land registry as the owner.

Leasehold:

Leasehold means that you own the property for the length of your lease agreement after which the property is then owned by the landlord again. If the property is a flat you own the actual flat during this time but do not have rights to the building as such and if your property is a house you own the actual house during this time but not the land it is built on. Effectively you are using the landlord’s home for a specified amount of time.

Owning a share of a freehold:

This is where you own part of the freehold with your landlord. However, you do so alongside other leaseholders and only providing at least half of the leaseholders within the property are willing to. This process is carried out through filling in what is known as a ‘Section 13 Notice’. Often those involved will either find their own managing agent for their share of the building or form a company to act as this.

What are some of the advantages of each?

Freehold:

You have the satisfaction of knowing that you own the land as well as the property
You are the sole owner (or joint where you chose to purchase jointly)
There is no need to be in communication with a landlord. Disputes are commonplace between leaseholders and their landlords.
There is no requirement to pay ground rent, services or any other associated fees
No weight on your shoulder in terms of a lease running out

Leasehold:

Whilst your leasehold agreement will be for a fixed period you can ask the leaseholder to extend this at any time. An extension can be for as long as 99 years provided you have owned the property for a minimum of two years and are a qualifying tenant*

There are laws protecting leaseholders in terms of the lease being too short. You do not bear the direct responsibility of building and land maintenance

*If the initial lease agreement spanned at least 21 years the leaseholder is normally considered a qualifying tenant

Owning a share of the freehold:

You have the satisfaction of knowing you fully own part of your home
You are in more control of your home
If you wish to extend your lease you are normally able to for up to 999 years

What are the disadvantages of each?

Freehold:

You are required to maintain the property and land, therefore, there is a need to budget for this. For example, the fabric of the building (roof and external walls) is your responsibility.

Leasehold:

You will need to factor into your budget services charges and other associated costs. However, you should note that the Government have committed to ensuring that soon ground rent associated with leases is reduced to virtually nothing and where a leaseholder wants to negotiate ground rent charges, property developers will be responsible for their legal costs.
If you wish to extend your lease there is a charge associated with this
Restrictions may be applied by your landlord to the property such as, for example, no pets allowed or no subletting

Did you know?

You may have also heard of a ‘commonhold property’. Owing in a commonhold property means that you effectively are a freehold owner. You own your flat and all owners own the common areas jointly. These properties are owned by a Commonhold Association which is a company which owns the building which comprises of every flat owner in the building. The concept of commonhold is supposed to aid avoiding some of the not so appealing aspects of a standard leasehold. There are only around 15 to 20 of these in existence in the UK. The land is known as a ‘freehold estate in common land’.
It is sometimes possible to buy your leasehold so that you become a freehold owner. This process is called enfranchisement.
If your property is in a block of flats and your landlord decides to sell the property, as a leaseholder you have the right to buy it over any third party. However, at least half of the occupants must also want to buy and you must accept the offer within two months. If you do not accept, the property cannot be sold to a third party for any less than the offer made to you within a period of 12 months of that offer.
Leaseholders do have rights! You can ask your landlord for evidence of what the service charges you are paying had been spent on, plus if she is carrying out work which incurs a cost on your behalf of over £100 she must consult you. The latter also applies where work carried out may last more than a year and where it will cost a total of over £250.
The Government will be ensuring that when a leasehold property is sold, leasehold information must be given to the buyer within 15 days of the sale and the fee for doing so must be no more than £200+VAT.

Our helpful tips

It is important when purchasing a leasehold property to make yourself aware of the years left on the lease in advance of your purchase. Is it sufficient for your needs? Will it affect your chance of being granted a mortgage on the property? When you wish to sell, how will the value be affected by this? These are all pertinent questions you should ask yourself when deciding whether to buy a leasehold.
The general rule for obtaining a mortgage on a leasehold property is that the leasehold must have around 25-30 years remaining on it after the length of the period of your lease agreement
Where a leasehold period is not as long as you wish it to be it is worth raising this before any purchase in an attempt to negotiate. If a lease of a property is less than 80 years the selling potential may be affected due to the general mortgage rule.
A Leasehold Valuation Tribunal can help you should if you and your landlord are not able to reach an agreement on the cost of extending the lease agreement. If your offer of extending your lease is rejected by your landlord you can challenge this in court.

Summary

Although when buying a property your mind may initially be on location, size and the general aesthetics, it is important that you do also note the type of property in terms of freehold or leasehold. Although not necessarily the most interesting part about the property, this article proves that it is a hugely significant feature of the property.

It would appear that purchasing a freehold has the most freedom and benefits if you really want to own your property, but of course, we all have our individual requirements and motives when purchasing so a leasehold might suit some better. Whichever you go for, ensure you are fully aware of what each term means, as well as your rights when purchasing that type of property.

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