The difference between buying freehold & leasehold
Buying a property can be very daunting. Our guide to buying property explained the process in detail and this article will focus on the difference between buying a freehold and buying a leasehold.
Freehold and leasehold are two very different legal forms of home ownership and it's important that you understand the difference between the two. Otherwise you could end up with a landlord by accident, instead of owning the property outright.
The fundamental difference
The vast majority of home buyers will be looking to own the freehold of a property. Owning the freehold means that you will be the outright owner of the property and the land will be registered to you as the "freeholder". A leasehold is where you purchase a lease to a property from the freeholder and a leasehold is commonly bought for 90 – 120 years but can be shorter. The freeholder is sometimes referred to as the landlord and remains the outright owner of the property and land throughout the duration of the lease.
If you're not in a position to buy the freehold to a property then it may be more beneficial to purchase a leasehold property instead of renting. Buying a leasehold is cheaper than buying the freehold, it's more secure than renting and there's more value in buying a leasehold compared to renting. This is because you can buy and sell leasehold property in a way that is similar to the freehold market and you may have the opportunity to buy the freehold to the property in the future.
The leaseholder's responsibilities
If you decide to purchase a leasehold you will be required to sign a contract with the freeholder which will stipulate the length of the lease, the legal rights and the responsibilities of both parties. Usually, unless you have claimed the "right to manage", the freeholder will be responsible for the maintenance of the exterior walls and roof but this can also extend into areas such as the main entrance, hall and staircase. If you do claim your "right to manage", you will then take over some or all of the maintenance responsibilities from the freeholder. However, you are likely to need permission from the freeholder in order to undertake any major development work to the property.
In terms of fees, as well as the leasehold purchasing price, the freeholder is likely to request that you pay an annual "ground rent" which is usually a low figure and can be seen as rent. Additionally, the leaseholder is likely to be required to pay any maintenance fees, an annual service charge and a share of the building's insurance. Responsibilities like these will be outlined in the contract, which may also contain other restrictions such as a ban on subletting or owning a pet.
Tension between freeholders and leaseholders is common so it is important that you understand the situation before you commit to purchasing a leasehold. However, some situations don't arise until you are living in the property and there are a few common causes of contention. Leaseholders often think that the freeholder is over charging for ground rent and service charges but unfortunately there is very little that can be done once the contract has been signed. Similarly, complaints from leaseholders regarding the standards of the freeholder's property maintenance are very common. Conversely, freeholders commonly complain that the leaseholder has breached the terms of the lease by conducting property development projects without asking them for permission, or accuse the leaseholder of simply making too much noise.
The leasehold's value
The value of a leasehold is usually dependent on the property itself and most importantly the length of the lease. The lease length will be stipulated by a number of years and once these years run out the freeholder will regain the use of the property. The shorter the lease the less it is worth and a lease with zero years is worthless. Therefore it is in your best interest to seek the longest lease possible as the value of a long lease will remain fairly stable.
If you are looking to buy a leasehold it is advisable to pursue leases with a length of at least 90 years. Leases below the 90 year threshold can quickly become problematic because once the lease has less than 80 years the value can be considerably affected even if the value of property is on the rise. If you choose to resell, the knock-on effect of the declining value will mean that fewer people will be interested in buying it and mortgage companies will be less likely to lend money to the people who are interested which will greatly restrict your chances of selling. If you do decide to sell you have to remember that you are selling the length of time left on your lease.
Extending the lease
If you are planning to buy or have already purchased a leasehold property you might have the legal right, due to a series of government acts, to extend your lease if you meet the requirements. To extend your lease you must have owned the leasehold for a minimum of 2 years and the length of the original lease usually has to be longer than 21 years. The original length of the lease will be the amount of time on the lease when you purchased it. If you meet these requirements you should have the legal right to extend your lease by 90 years in addition to the time currently left on your lease. This can also provide a good opportunity to renegotiate the terms of the lease with the freeholder.
A leasehold can be bought for a house or a flat but when extending a lease the costs for each property type will be different. If you are leasing a flat you will have to pay when extending your lease. Therefore, if you are interested in buying a leasehold that is listed with a short lease you may want to try and negotiate a longer lease before committing. You should consider this if the current lease is less than 80 years long. If you are leasing a house, there shouldn't be a cost associated with a lease extension but be aware that your ground rent may increase.
Once you have informed your landlord that you have the right to extend your lease they might accept your extension but it is more likely that they will wish to negotiate the lease extension. In the likely event that they do want to negotiate the lease extension it is advisable that you seek professional help from an experienced legal team because this is a very specialist legal topic and the situation can be very different for each lease. For example, if you are a leaseholder of a room within a house your property may be classed as a flat even though it is within a house. Additionally, if the freeholder rejects your request to extend the length of your lease you will be able to challenge them in court.
Purchasing the freehold
Once you've bought your leasehold, you might be concerned about the freeholder changing his mind about leasing the property to you and deciding to sell the property instead. In this scenario, the freeholder will have to offer the leaseholder(s) the opportunity to buy the property first before placing it on the market. This is because by law you have a right of first refusal. Therefore your freeholder must give you notice of their intentions and allow you time to consider buying the freehold for the property.
Additionally, you can approach your landlord about purchasing the property at any time and you may even have the right to buy your house or your flat's freehold. However, the legal process is not only very complicated but the rules in place are different depending on your property type. The legal process involved with buying the freehold on a leasehold property is called 'leasehold enfranchisement' and it's not recommended that you undertake the process on your own. The services of an experienced and knowledgeable professional legal team will be invaluable during this process because the laws in this area are so complex and the value of owning the freehold will far outweigh the legal costs.
Another variation of a freehold ownership is a commonhold. In a building of multiple occupancy there might be several leaseholders and a commonhold is where these individual leaseholders purchase the freehold to the flat they are leasing within the building.
To combat the issue of maintaining the shared areas of the property, such as the outside space, staircases and porch, the commonholders form a company which they all own, called a commonhold association. This jointly owned company becomes responsible for the maintenance of all shared areas of the property and hopefully reduces the chance of one individual taking control, but conflicts can still arise. This is probably why the occurrence of commonhold ownership is rare.
Rollingsons enfranchisement team is experienced with this specialist legal area and can advise both lessees and freeholders on all aspects of the process. For more information or to arrange an initial consultation, please contact us on 0207 7611 4848.