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Here’s a closer look at freehold vs leasehold. Browse the homes for sale on one of the big property portals and you’re seeing one of the great divides in British property in all its glory.
Everything you see, from the one-bedroom flat to the most sumptuous footballer’s mansion, is most likely one of two things; a freehold property or leasehold property. Let’s explore the difference.
The difference between leasehold and freehold
So, what is a freehold property and what is a leasehold?
Leasehold meaning
A leasehold property means the property sits on land owned by a separate freeholder. A common example of a leasehold property is a flat within a shared apartment block.
The leasehold homeowner is required to pay an annual ground rent charge to ensure the property remains theirs. When the lease expires, ownership of the property goes back to the freeholder.
A leasehold property can be sold without the freeholder’s permission, but to change the terms and conditions of the lease, or to extend it, requires their agreement, usually at a price. If you own a leasehold property, you can buy the freehold, perhaps with your neighbours.
How long is the lease?
The length of the lease varies, some common ones include 99, 125, 500 and 999 years.
Freehold meaning
Meanwhile, a freehold property is one in which both the property and the land are owned outright, without a time limit.
If you buy a freehold property with a mortgage, the lender keeps this deed until you’ve paid off your loan.
There’s no ground rent or service charges, all the responsibility of maintaining the property will be yours.
Freehold vs leasehold: Which is more popular?
Within England, government research shows that approximately 20% of homes are leasehold, while the remainder is freehold.
Two-thirds of leasehold properties are apartments and the rest are houses, while freehold properties are almost always houses.
The cost of a leasehold
Even though you can pay a lot of money for a leasehold property, there are ongoing costs during its lease. These will vary depending on the terms of the lease.
Ground rent
The most common cost of a leasehold property is the ground rent, which is usually a small amount of money of between £50 and £100 a year paid to the freeholder. Some unscrupulous freeholders write clauses into leases that ramp up the ground rent as time advances, so be aware!
Sinking funds
Freeholders and their managing agents, particularly in a block of flats, will ask their leaseholders to pay into a sinking fund, which is like a savings fund to pay for major items such as a new roof.
Service charges
Leaseholders may also be asked to pay a service charge, which will be for the upkeep of the common areas such as the corridors, or the maintenance of facilities such as a garden.
Lease extensions
As a lease runs out of time, ideally before it hits 80 years or under left to run, most leaseholders will extend their leases with the cooperation of their freeholder. Although, they need to have owned the leasehold property for at least two years to do so.
The cooperation of the freeholder comes at a price and as a rule of thumb, lease extension costs are approximately 10% of the property’s value. If you leave it until it’s under 60 years left to run, which is called a short lease, then leasehold extension costs can run even higher.
Lease length is also important if you want to remortgage a leasehold property or sell it – both are difficult and expensive if there are fewer than 70 years left to go.
Leaseholders must sometimes also pay their freeholder a portion of the extra value created by extending the lease, which is known as marriage value.
Buying a leasehold property
Some difficulties can arise if the lease has less than 50 years on it, as lenders like there to be at least 50 years remaining (so 75 in total). Extending the lease when it drops below 80 years tends to be significantly more money. Below 60 and it might be un-remortgageable and difficult to sell.
Under the 1993 Leasehold Reform Act, most leaseholders are legally entitled to a 90-year lease extension at a fair price. But, before buying, you should ensure your property won’t decrease in value. You solicitor should provide guidance here. Is this somewhere you see yourself living for the long term?
Know your rights as a leaseholder
While there are charges and costs involved with being a leaseholder, but you also have rights, including:
· Knowing the name and address of the freeholder
· Getting information about service charges, insurance and running costs
· Being consulted about maintenance work
What does commonhold mean?
This is a relatively new type of ownership introduced during the early noughties that enables leaseholders to own a ‘share of the freehold’ within a building.
This is usually achieved by (a required) majority of leaseholders banding together and buying the freehold. This kind of ownership enables leaseholders to control and manage the building they live in and the costs of running it.
But, commonhold apartments aren’t found for sale that often.
Leasehold houses [new builds]
Over the years, many new build houses have been sold as leasehold properties rather than freehold ones.
Often the people buying the houses didn’t realise this because they didn’t know how to ask the right questions, only to find out afterwards they didn’t own their homes in the way they had expected.
They have also faced unfair additional ground rent and service charges, and the changes they could make to their homes have been either restricted or expensive to get permission for.
Some newbuild developers exploited ground rent to make money – known as the leasehold scandal. After building and selling leasehold properties, they have in the past inserted clauses into the leases than enabled the ground rent to be increased every year far beyond the usual annual £50-£100. This has left some leaseholders with bills of several thousand pounds a year.
Length of the lease: This is often an initial period of 99 or 125 years but can be less if the lease has not been renewed recently. This is usually reflected in the sale price of the property.
Ground rent: The amount of rent the leaseholder must pay to the freeholder. This may be charged monthly or annually, and failure to pay may result in court action and possible extra charges that will be detailed in your leasehold document.
Obligations: These are the responsibilities of both the freeholder and the leaseholder with regards to the property and the building/common areas.
Rent increases: Details of any increases in the ground rent the leaseholder can expect, showing how much and how often those increases will happen.
Regional differences
Most of these rules and laws governing freehold, leasehold and commonhold properties detailed here apply to England and Wales.
But, in Northern Ireland and Scotland, some of them are different. For example, in Scotland apartment blocks are run by the leaseholders in a way that’s much closer to the English and Welsh common holder system described above.
So, it may be worth consulting a local property expert if you’re buying a home in Scotland or Northern Ireland.
(Source: moveiq)
(Photo credit: Foxtons)
Do you need some right property buying advice?
Whether you’re buying a leasehold or a freehold – you’ll need expert advice. The world of property can be a minefield!
At BC Property UK, we help clients to link up with professional conveyancing solicitors, feel free to contact us for more details.
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