Whether you’re about to climb the first rung of the property ladder, or just thinking about an addition to your property portfolio, it’s important to be fully versed in the differences between leasehold and freehold properties.
You may have a general idea of what a leasehold is, but do you understand the legalities? Have you weighed up what buying a leasehold property may mean for your finances now and in the future?
At EastHaus, we have an in depth knowledge of both freehold and leasehold properties having bought, sold and owned them ourselves.
Freehold and leasehold properties are the two main ways of owning property in England and Wales. Freehold is typically for houses and flats are normally leasehold.
Quite simply, when you buy a freehold property you own both the building and the land on which it sits. A leasehold on the other hand, means that you have purchased the legal right to live or occupy a property for a certain number of years.
A brand new lease can range from 99 to 999 years in length. This will then decrease every year. When a lease ends, the property is returned to the freeholder unless you renew or extend the lease.
The lease is an agreement between you (the leaseholder) and your landlord (the freeholder). It sets out detailed terms and conditions regarding your right to occupy a property as well as your responsibilities towards it. This will also include details about outside areas which you may have sole or shared access to or use of, such as a garden or balcony, pathways and parking.
If you own a freehold property, you are responsible for its upkeep and maintenance. However, when you own a leasehold property, the landlord (also known as the freeholder) will have certain legal duties towards you, the leaseholder. These duties can include maintenance of communal areas and providing buildings insurance which will both be charged to you via a monthly or annual service charge.
The lease will also set out details such as whether you are allowed to keep pets and what you need to do if you want to undertake any restructuring or improvements to the property.
When buying a leasehold property we recommend you take the time to sit down with your solicitor and run through the terms of the lease with you in detail.
While leasehold houses are not as common as leasehold flats, they do exist. Leasehold houses are becoming more common in new housing developments. Leasehold houses are generally sold with extremely long leases, often 999 years or more and whereas this means you will never need to extend the lease, there are still associated service charges with it and the possibility that the ground rent can increase annually. If you are considering buying a newly built house, do check whether it is being sold as freehold or leasehold and ensure you seek advice from your solicitor as to the potential implications.
You can ask the landlord to sell you the freehold at any time. However, there are different legal processes depending on whether you own a house or a flat.
We would always recommend seeking legal advice from a solicitor or lawyer well versed in dealing with leasehold properties.
Buying a freehold is governed by the Leasehold Reform Act 1967. For more detailed information, check out this useful guide.
If you live in a flat, the freehold relates to the entire building. So, to be able to purchase the freehold from the owner / freeholder, you can’t just buy the part that relates to your own flat, you need to buy the entire building and to do this, you need to have a certain percentage of the other flat owners that are willing to buy into it too. This is called collective enfranchisement. Once you successfully purchased the freehold between you, you will then be in control of how the building is run including length of lease term, insurance and maintenance of communal areas.
Again, it is important to do your research when considering buying the freehold of your property
A lease extension is when you pay the freeholder a sum of money in order to increase the number of years left on your lease. This is often a straight forward exercise. A lease extension valuation will give you an idea as to the cost, your solicitor would then negotiate that cost with the freeholder/landlord on your behalf. If you are not able to mutually agree a lease extension cost with your landlord, you would then need to go down the statutory route. For more detailed information on the process of lease extensions visit the Leasehold Advisory Service.
The law gives you, as the leaseholder a right to extend your lease (subject to you having owned it for two years). However, you could extend your lease as soon as you complete on your property if the previous owner serves a Section 42 Notice for you in between exchange and completion. Essentially, this allows you to apply for a lease extension immediately rather than waiting 2 years to do so. Again, we advise that you discuss this potential option and its legalities with your solicitor.
When buying leasehold property on a shorter lease i.e. less than 80 years, you may wish to check what the minimum term the lender will agree the financing for. Click here to see a list of different lenders criteria.
These are some of the most common terms you will need to know when buying a leasehold flat.
Lessor: The landlord/freeholder
Leesee: you, the leaseholder
Ground rent: This is an annual tenancy charge paid to the freeholder. Not all leases require the leaseholder to pay ground rent.
Service charge: This is the charge paid to the freeholder as a contribution towards the running of the building to include maintenance and repair charges, cleaning and upkeep of communal areas and other general maintenance.
Reserve or sinking fund: This is a sum of money usually paid alongside the service charge, that the landlord will hold in case of any future works to the building, for example window replacements or lift repair. Some buildings do not have a sinking fund and so any works needed are charged as and when they happen.
Managing agent: If your landlord or freeholder hires a management company or agent, they will look after the building and organise the maintenance, repairs and cleaning. Instructions are given by the freeholder to the managing agent.
Right to vary a lease: If a leaseholder wants to change the terms of the lease, they have the right to vary. This must be done through the appropriate channels and can require an application to a Tribunal who will make the final decision.
Right to Manage: This gives leaseholders the statutory right to take over the management of their property from the landlord.
Do your research. How long is the lease you are buying? What are the service charge and ground rent charges? Is there a sinking or reserve fund? Who is the freeholder and the managing agent? Are there any covenants or things you should be aware of within the lease?
And most importantly, get a good legal adviser. A solicitor with an expert knowledge of leasehold properties will be the key to making a good property investment.
For more information on how to buy a property you can view our help guide here.