If you purchase the freehold of a property, you are buying it outright, including the land the property stands on. If you purchase a leasehold, you are only buying the right to live in the property for the length of the lease. The land the property stands on (and the surrounding building if your home is a flat) will be owned by a separate freeholder (your landlord). While the majority of flats in the UK are offered on a leasehold basis, there has been growing concern over the exploitative practices associated with the leasehold market, particularly where newbuild houses have been offered on a leasehold basis. The government are planning widespread reforms.
There are a number of differences between freehold and leasehold properties and, due to the increasingly poor reputation of the latter, it is important to understand how they differ and what changes could be on the horizon for the leasehold market.
What is the difference between freehold and leasehold?
Ground Rent Charges
When owning the leasehold to a property, you will be required to pay ground rent charges. Historically, these were nominal annual fees of around £100 or less, but it is becoming increasingly common for the cost of ground rent to rise far above this amount, particularly for owners of freehold houses.
In recent years, developers have been selling new build houses on a leasehold basis with ground rent charges of hundreds of pounds. It has even become common for developers to include a clause in the lease that allows ground rent to double at fixed intervals (sometimes as often as every 10 years), causing the charges to grow to thousands of pounds within just a few decades.
Fortunately, the Government plans to bring an end to this pattern, as responses to recent Government consultations found that there was no benefit to ground rent charges other than to provide an ongoing revenue stream for developers. Therefore, ground rents for existing leasehold properties could be capped at £10 per year and ground rent charges for all new leaseholds could be limited to a peppercorn (no financial value). The Government also plans to ban the sale of new leasehold houses altogether. If these reforms happen this should mean that leaseholders entering the market should soon be able to feel confident about the affordability of their lease.
If you own a freehold property, you will not have to pay ground rent. However, there could be other charges built into your ownership, such as rentcharges or charges for the maintenance of communal areas on an estate.
Leasehold tenants can be charged for the upkeep of the property and communal areas which can often include fees for cleaning halls and stairways in apartment buildings, maintaining communal gardens and making repairs to the exterior and structure of the building.
The details of service charges and what they do or do not cover should be included in the terms of a lease, so they should be considered before buying a leasehold property. In many instances, the service charges attached to a leasehold property can have an impact on its affordability, so they should not be overlooked.
Freehold properties can also be subject to “service charges” (sometimes called rentcharges). These are payments some freeholders have to make to maintain local amenities such as roads and parks. These kinds of charges are rare but are becoming more common as new build estates have planning requirements for the maintenance of shared services. In some cases these charges could make the property more difficult to sell or get a mortgage on, so it is important to consult a solicitor before buying a property subject to a rentcharge.
When you purchase a leasehold property, you are normally buying the time left on the existing lease rather than starting a new lease. As the length of a lease decreases, the value of the property may also decrease. Therefore, most leaseholders have the legal right to extend their lease after 2 years of ownership, but there are exclusions to this.
Unfortunately, the leasehold extension process is not necessarily straightforward, particularly if there are 80 years or less remaining on your lease. If this is the case, then extending the lease can prove to be very expensive.
The government is exploring ways to improve the extension process with the goal of making the process quicker and more cost-effective. However, they have yet to propose any solid plans.
If you own a freehold, you own the property “in perpetuity”. This means your ownership will only end if you die, sell or transfer away the property and you will never need to extend your ownership.
Like lease extension, leaseholders can acquire the legal right to buy the freehold to their home through a process called leasehold enfranchisement. There are 2 types of leasehold enfranchisement:
- Collective enfranchisement – this is where the owners of flats come together to buy the freehold to their shared building
- Freehold purchase of a house – this is where the owners of a leasehold house purchase the freehold to their home from the existing freeholder
For many flat owners, lease extension is simpler and more cost-effective than leasehold enfranchisement. However, it is usually advisable for all leasehold house owners to consider purchasing the freehold.
Commonhold acts as an alternative to leasehold. A commonhold owner owns their property outright with the rest of the building or estate within the commonhold. For example, a block of flats can be owned and managed through a commonhold association.
While there are many benefits to commonhold ownership, this form of ownership has failed to take-off and there are very few blocks of commonhold ownership in the UK. As a result, the Law Commission has proposed reforms to overhaul the commonhold tenure to make it more attractive for developers, home owners and other stakeholders.
New leasehold houses
The sale of new leasehold houses rose from 7% in 1995 to 15% in 2016, indicating that there has been a growing number of developers who have used new build leasehold houses to provide themselves with a revenue stream. While leasehold may still be a suitable tenure for flats, there is rarely a valid reason to sell a new house as leasehold and this can demonstrate that developers are not acting in the best interests of leaseholders.
Freehold houses do not have these ground rent issues, so the government has suggested a ban on the sale of new leasehold houses other than in certain circumstances, such as shared ownership properties, to prevent homeowners from being trapped in exploitative leasehold arrangements.
Freehold ownership is not without its issues, however. Experts suggest that developers are increasingly using estate rentcharges (a sort of service charge) in anticipation of the leasehold house ban to replace their lucrative ground rent income stream. There is no indication yet whether the government will move to ban rentcharges.
What rights do you have if you own a leasehold?
If you are concerned about buying a leasehold property, it is worth considering the fact that you are not legally required to pay anything that isn’t specified in your lease and there are certain key rights that leaseholders can exercise to save them money where necessary.
The right to extend your lease
If you have lived in a leasehold property for at least 2 years, you will normally have the right to extend your lease. For a flat you can extend it by 90 years or more and for a house you can extend it by 50 years or more.
When you extend your lease using the formal statutory method, the ground rent will automatically fall to a peppercorn (no financial value).
The right to manage
The right to manage describes leaseholders’ entitlement to take over the management of their flat building. The Law Commission has proposed that simplifying the current rules concerning the right to manage process would help leaseholders improve their environment however they see fit.
The right of first refusal to buy the freehold
If you live in a leasehold property, you will usually have the right of first refusal. This will mean that, if your landlord wishes to sell the freehold on your leasehold property, they must offer it to you (and the other tenants) before selling it on.
The right to leasehold enfranchisement
If you own a leasehold flat, so long as 50% of qualifying tenants within a building participate, you and your fellow leasehold tenants may be able to force the freeholder to sell you the freehold to a property at a fair market rate.
If you own a leasehold house, you can also acquire the legal right to buy the freehold to your home. If you use the formal statutory method of enfranchisement, the freeholder cannot usually refuse to sell for a fair market premium.
Get advice on Leasehold and Freehold Property Transactions
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