There are two primary forms of homeownership in the UK; freehold and leasehold. If you are looking to buy and house or a flat, it is essential to understand the difference.
In this article, we look at the difference between freehold and leasehold and some of the things you should look out for if you are buying a leasehold property.
What is a freehold?
Purchasing a freehold property gives the buyer sole ownership of both the building and the land it stands on.
Most houses we sell in Wimbledon, Wimbledon Village, Coombe Hill, Kingston Hill and elsewhere in South West London are freehold.
Benefits of freehold
Owners of freehold homes can make any alterations they wish to the property – as long as they adhere to planning regulations or, if required, obtain Listing Building Consent.
There are no ground rent or service charges to pay, and freeholders are not reliant on anyone else to maintain the building.
What is a leasehold?
With a leasehold, the purchaser owns the property for the period specified in the lease agreement. When the lease ends, ownership reverts to the freeholder.
Although leaseholders own the property’s internal space, fittings, floor and walls, they do not own the land the flat sits on or the fabric of the building, including the roof and external walls.
Most flats and apartments are sold as leasehold.
What to consider when buying a leasehold property
Leasehold properties are a common form of ownership, so there is no need to be put off a purchase. However, there are some things you should bear in mind.
Length of the lease
Lease length can vary dramatically, so this is the first question you should ask about the property before deciding it’s the one for you.
A flat’s original lease length is likely to be a long period – often 99 years or 125 years and can be as high as 999 years. As time passes, the period remaining on the lease decreases, so older properties may have much shorter leases.
Ownership of a leasehold home will revert to the freeholder once the lease runs out. Leases with 80 years or fewer are considered short. Anyone buying a flat with a short lease will find it harder to obtain a mortgage. If you are a cash buyer, you may find it challenging to sell the property on, should you wish to.
If you’ve set your heart on a flat with a short lease, you shouldn’t write it off entirely. New government reforms announced in January 2021 make it cheaper and more accessible for leaseholders to extend their lease. You can also make it a condition of sale that the vendors begin this process for you to inherit.
Extending the lease
Most leaseholders extend their lease long before it reaches zero years. Extending a lease can be a complex legal process. The cost is decided by negotiation between the leaseholder and the freeholder and depends on the property’s value.
New government legislation gives leaseholder the right to extend their lease by up to 990 years at zero ground rent. The reforms include set calculation rates to ensure lease extensions are fairer, cheaper and more transparent.
Read more about the costs and process for extending a lease.
Leasehold service charges
To cover the costs of maintaining the building’s structure and the shared areas of the development, the landlord or managing agent will impose a service charge.
While fees vary depending on the size of the development, some service charges include contributions to a reserve or sinking fund that is used to cover large one-off bills.
Ground rent is the fee payable to the landlord on an annual or half-yearly basis. While it is usually a token payment in the region of £200 or £300 a year, some landlords can charge thousands of pounds each year.
Beware that the landlords of many new-build developments are now inserting clauses into the leases, allowing for dramatic increases in pay ground rent. However, the government is looking to curb this practice.
It is prevalent for disputes between leaseholders and freeholders to arise. The most common complaint is that the freeholder does not maintain the building to a sufficiently high standard and overcharges for service charge and ground rent.
Before you buy a leasehold property, try to find out as much as possible about the managing agents either by speaking to the current residents or internet searches.
Owning a share of freehold
Some flats are sold as share of freehold. This means that you own your property’s leasehold plus a share of the company that owns the freehold. This gives leaseholders more control over their home and gives them the right to extend their lease by up to 999 years.
You can buy the freehold from the landlord as long as at least half of the other leaseholders in the block agree. With the other leaseholders, you will need to serve notice on the landlord. This can be a complicated legal procedure, and buying the freehold can be expensive.
Commonhold is an alternative form of property ownership promoted by anti-leasehold campaigners. The building and land is divided into units (i.e. flats) and common parts. There is a registered title with the Land Registry for each of the units and one for the common parts.
Therefore, the flat owner will own the freehold of the unit, so there will be no time restrictions as there are with leasehold agreements. The freehold of the common parts is owned by a commonhold association that will manage the building’s common elements. Unit owners have a right to be members of the commonhold association.
At the moment, commonhold lacks popularity with only 15-20 existing in the UK.
If you have any questions or if you are looking to buy, sell, rent or let a property in the Wimbledon area, contact us today.