What is the Difference Between Freehold and Leasehold?
Whether you are using bridging loans in London or anywhere in the UK, it usually involves purchasing some kind of property and understanding the difference between the freehold and leasehold of the property is key. It greatly affects your rights over a property, and for many makes the difference between taking or leaving a property.
For one, first time buyers who are unaware of the in-and-outs of a leasehold contract can find themselves facing large expenses and regretting their choice down the line. We explore the advantages and disadvantages of freehold and leasehold below.
Freehold – owns the property, can make changes at their own will, is responsible for maintaining the land, collects lucrative ground rent, could be a proprietor or management company. Common for most homes in the UK (unless shared-ownership).
Leasehold – based on owning a lease agreement for 99 or 999 years. Despite owning a flat or maisonette, you still have to pay ground rent, service charges and ask for permission to add changes or have pets in the estate. Need to pay to extend lease agreement.
What is leasehold?
Leasehold properties and the land they stand on are owned by a landlord, also known as the ‘freeholder’. When you buy a leasehold property, you own the property, but only for a defined time period set out with the freeholder. Leases are usually long term and can range from 90 years to as much as 999 years. Some can be as short as 40 years.
When a property’s lease ends the freeholder regains ownership of the property, unless the leaseholder extends the lease, which we will cover in more detail later in this article.
What you need to know about leasehold properties:
The leaseholder and freeholder draw up a contract that explains the legal rights and responsibilities of both parties. This usually includes:
The freeholder is usually responsible for maintaining the exterior of the property such as the roof and outside walls. Some leaseholders may request their ‘right to manage’, in order to assume this responsibility instead.
Leaseholders pay a yearly ground rent to the freeholder, which can either be a fixed charge or increases over time. In the past leasehold properties had ground rent fees as low as £10. Alas, today, ground rent fees currently average at £371 a year for a new build property and £327 for properties built prior to 2016, according to Direct Line for Business.
Ground rent fees are not usually a concern amongst new homebuyers. However, some developers of new-build homes have been inserting clauses into leasehold contracts setting the ground rent to double every decade. This meant thousands of cases where the ground rent would soon spiral to extortionate levels. A ground rent of £300 a year could cost £2,400 a year in 30 years, or an astonishing £9.8m after 150 years.
While this may not be an issue for you as a new owner who would like to sell within ten years, these kinds of clauses make it difficult – if not impossible – to sell a property. Buyers are likely to be adverse to scheduled increases, whereas lenders will need to consider these exponentially growing costs into any potential buyer’s mortgage application.
Since this ground rent scandal surfaced and in effort to combat this extortion, the government has proposed a complete ban on new houses sold as leasehold, and to reduce ground rents to zero.
In the meantime, if you fail to pay the ground rent, a landlord could take you to Court to recover the debt. In severe cases, the landlord could attempt to recover possession of the property. They can only do this, however, if the amount outstanding is £350 or more and you have been in arrears for three years or more.
To eliminate your ground rent…
You can abolish your ground rent fees by extending your lease under the Leasehold Reform Act 1993. This is known as ‘peppercorn rent’.
Owning a leasehold property also means you need to pay a yearly service charge to the landlord or management company for the general maintenance, insurance and repairs on the property. This can add a hefty amount to your yearly expenses. A third of management companies have increased their service charges over the last two years, increasing the average cost to £1,683 a year.
Service charge typically covers the cost of heating, lifts, lighting and cleaning of common areas. It may also be used to create a fund for larger one-off expenses, such a roof replacement or refurbishing a lift.
Although some older properties command a fixed yearly service charge, most newer leases have a variable service charge, which changes depending on the size of the property and the costs estimated by the freeholder each year.
Permission for building work
Leaseholders need to obtain permission for any major building work on the property – and this can come at a large cost too. Some buyers are charged £100 by the freeholder for a mere response to their letters, and as high as £2,500 for permission to build a conservatory. And that’s on-top of the fees needed to obtain planning permission from the local council!
This one is dependent on the freeholder. But depending on the contract, leaseholders can face other restrictions, including not owning pets, no smoking or subletting the property. Failing to fulfil the terms of the lease can result in the lease becoming forfeit.
Why is the length of the lease important?
Properties with short leases can be difficult to sell. The longer the lease, the easier it will be to sell the property on.
What is freehold?
Owning the freehold of a property means ownership of the property and land on which it stands with no limit to the period of ownership. Buyers typically go for freehold as it has many benefits, namely avoiding paying thousands to the landlord and having the freedom to initiate building work without delays from the freeholder.
When buying a freehold property, you can benefit from:
- Zero annual ground rent
- Zero service charge
- Zero chance of over-billing on maintenance fees from the freeholder
- No delayed maintenance
- You have responsibility for maintaining the building exterior (roof and outside walls)
- You don’t have to request permission before doing building work
Now that we’ve delved into the unpleasant details of a leasehold contract, freehold sounds like a pretty good deal. Of course, some people still opt to buy their property on leasehold. In that case, to improve your chances of selling the property in the future and to avoid those increasingly high maintenance and garden rent fees, you could buy the freehold of the property.
How to buy the freehold on a leasehold property
As a leaseholder, you may be able to gain freeholder status by buying the property outright. This is called ‘enfranchisement’. Although the process can involve complex legal procedures and may be costly, it can be immensely beneficial to you as a homeowner.
The ability to buy the property outright depends on whether you own a house or flat and it will be important to seek professional advice and assistance. The HomeOwners Alliance is a good source of guidance in this area.