Freehold vs Leasehold: an introduction

29/04/2019

Whether you are buying a freehold or leasehold property is fundamental to the process of owning property in England and Wales. There is a lack of understanding, generally, about the differences between these and this article aims to provide an introduction. Please note that different rules apply in Scotland and Northern Ireland.

Freehold

The owner of a freehold property owns the land on which the property stands. This is generally the type of ownership that applies to houses, whether they are detached, semi-detached or terraced. The ownership lasts forever, is not subject to any rent and can be sold at will.

However take care – there has recently been something of a scandal in the news following some newly built houses being sold on a long-leasehold basis rather than as freeholds. The scandal arose particularly because of the way that the ground rents included in these leases was set to increase very quickly, making some properties unsellable. Overall, the number of houses dealt with in this way is relatively low. Your solicitor will check this for you and advise on any such implications.

Leasehold

This is where the owner of the property has a lease of it, granted for a certain number of years. This is normally how flats are owned. Typically, residential leases are granted for 99, 125, 500 or 999 years. In other words, a lease gives the owner the right to live in the property for that number of years after which the property must be handed back to the owner of the freehold land.

The buyer of a leasehold property will have to pay a “premium” for the lease, i.e. its market value, and a “ground rent” for each year of the term, which can range from £1 a year to several hundreds of pounds. The property, usually a flat, can then be sold numerous times during the lease term for whatever it is worth at the time.

The term of the lease, i.e. how many years remaining, is crucial in determining how much the flat is worth. From a tenant’s or buyer’s point of view, it is best to get as long a lease as possible as the value of a lease will drop as the term becomes shorter. Leases with remaining terms of 80 years or less can be difficult to mortgage (and therefore to sell) as banks will want to know that they would be able to sell the property should they need to repossess it if the mortgage is not paid. It is possible to agree a lease extension with the landlord, at a cost, which requires specialist legal and valuation advice.

'Service charge'

Normally, for a block of flats and any grounds and shared areas, the tenants all pay towards the maintenance through a “service charge”. Often the landlord (i.e. the person or company who owns the freehold) will sub-contract the management responsibilities to a management company who is then responsible for arranging the maintenance – everything from trimming hedges to repairing the roof.

'Share of freehold'

It is possible for the owners of flats to “enfranchise”, i.e. together to buy the freehold from the landlord. As joint owners of the freehold, the tenants would then own their flats on a “share of freehold” basis. The advantage of this is that the tenants are able to take control of the building away from the landlord, which may sometimes be preferable. However, this is a complex process that requires specialist legal and valuation advice.

Conclusion

It is critical to make sure that you understand the nature of the property that you are considering. We will advise you on this as part of our title investigation. In this article we have aimed to give you some useful background to consider and we are happy to discuss any particular transaction with you in more detail.

The Ministry of Housing, Communities and Local Government is currently consulting on increasing the use of the “commonhold” system of ownership, which is primarily intended to benefit the occupiers of blocks of flats with shared services. It is intended as an alternative to leasehold ownership, and we will report further on that in a future news item.

Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of advice. Please note: this article only applies to England and Wales as property in Scotland and Northern Ireland is subject to different rules.