Leasehold vs Freehold
Leasehold and freehold are two major terms that puzzle most property buyers. What are they? Are there any legal obligations associated with these two words that you need to know? What are their differences? And, above all, is there one that’s better than the other? Well, in this post, you will learn much about the main differences, pros and cons linked to leasehold and freehold. So, keep glued to the end.
The primary difference between leasehold and freehold properties comes down to control and land ownership. As a freehold homeowner, you can do what you want with it as long as you adhere to the local planning guidelines. On the other hand, if you have a leasehold property, the government gives you a tenure of 99 years, which is extendable to 999 years if you wish, but you must pay the lease extension fee.
What is Freehold?
If you have a freehold property, it means you are getting the property’s outright ownership plus the land on which it rests. The best thing about this type of property ownership is that there are no time restrictions on how you can own the properties. They are yours until the day you opt to sell them to other people. In general, you own the property and the land for an unlimited period.
Rights and Responsibilities of Freehold Property Owners
As a ‘freeholder,’ you may not face some misunderstandings linked to leasehold properties. For leaseholders, for instance, there are issues over who handles repairs and who owns various property parts. On the other hand, freeholders are complete owners, and they are responsible for repairs and maintenances.
Freeholders have the right to adjust and repair properties as they want. However, all modifications done on these properties must follow the local council’s rules and guidelines. Other than this, owners can pick the desired improvements.
There are exceptional benefits that you will enjoy as a freeholder. So, let’s go through both pros and cons to find out whether being a freeholder fits you most.
- You can modify the property as much as you want, provided the modifications confines with the local authority’s laws
- You are the sole proprietorship
- It’s a long-term investment
- You will not pay ground rent
- You will not worry about the lease running out
- You have to manage the lands and properties’ maintenance and functioning.
- Purchasing freehold property is somewhat costlier than buying a leasehold property.
- You must be a responsible property owner. For instance, if you are extremely noisy, the property falls into disrepair, or your debris becomes a nuisance, your neighbours are financially and legally obligated to take action.
Buying a Property’s Freehold
If you wish, you can ask a freeholder owner to sell you the freehold. The law, however, requires owners to give all leaseholders refusal to acquire the freehold should they wish to sell it. Another drawback you may encounter when acquiring freehold to your property is that you must involve the neighbours. The current law demands that at least half of the leaseholders in the flat must join hands to buy the freehold.
In the end, you and other occupants would own the building’s freehold together. Usually, this is achieved by registering a limited company controlled and owned by the flat owners. You can set ground shops and control your destinies after you jointly own the freehold. The good thing about this ownership is that you can prolong the lease and only pay for legal fees.
Is it Possible to Buy a Flat’s Freehold?
If you have a group of leaseholders and wish to buy the freehold, here are the requirements you need to follow:
- The building must contain at least two flats.
- Leaseholders who have long leases must own at least 2/3 of the flats.
- Over 25% of the freehold building shouldn’t be used for non-residential purposes, like offices and shops.
- At least ½ the number of the flat leaseholders must be willing to acquire the freehold’s share.
As you can see, you don’t necessarily need to have all flat owners on board, but only a half of them. If the building has two flats, then both leaseholders should be willing to acquire the freehold.
What are the Pros of Having a Flat’s Freehold?
- Free lease extensions of up to 999 years. You will only pay legal fees.
- There is no ground rent.
- You control service charges.
- Few limitations.
- It adds value to your property.
What is Leasehold?
For leasehold property, it means you own it for a specific period as agreed upon with the freeholder. The property and land’s ownership will return to the freeholder unless you extend the lease. Most maisonettes and flats are leasehold owned. In such a situation, you own property in the building but don’t have any ownership of the building that hosts it. If you buy the houses sold as leaseholds, it means you will own the property, but not the land on which the house rests on.
How Long is a Leasehold?
The current leases can range between 99 and 125 years up to 999 years. A lease with a time length of 999 years is almost similar to a freehold, and there are pros that you will enjoy if you choose this type of lease. Short leases are hectic. For example, if you consider a lease of fewer than 80 years, selling the property can be a tiring and complicated process.
What is Different about Leasehold Properties?
While some are houses, most leasehold properties in the market are flats. When it comes to leasehold, it’s worth noting that you don’t own the surrounding land on which it rests on. Still, you do not own communal areas, like the building structure, hall, and stairs if it’s flat. You will pay ground rent to the freehold owner. Thus, you should inquire much about this fee and how it’s projected to rise in the future.
- Leasehold properties face low risks, and this makes them incredibly cheap
- Property insurance has to be arranged by the freeholder
- The freeholder has to fund for repair and maintenance in the building
- Any repairs in the communal areas must be maintained by the freeholder
There are unique benefits enjoyed by flat owners when they continue with leasehold structure. For instance, flat owners can combine to purchase the freehold on their flat and give themselves a lease of 999 years. Though this long lease makes them seem like freehold, it comes with the occupants’ rights and responsibilities, such as funding repairs and adhering to a particular behaviour. This type of ownership has freehold perks combined with a couple of leasehold perks.
- You pay grant rent and service charges
- Pets may not be allowed on the premises
- When changing the property, the freeholder has to authorise you. Besides, you must pay hefty fees
- It’s hard to operate a business from home
- You are renting the property at the freeholder’s mercy
- Sub-letting the property is impossible
- You can hardly sell a property with few remaining lease years
- Conveyancing costs are high when buying a leasehold
The leading risk that comes with acquiring a leasehold is that the freeholder may attempt to scam you. Recently, property owners have met crooked freeholders who double the ground rent every 10 years. With this, you will pay much more money for the property, in addition to making it hard to sell the property.
Buying a Leasehold
Merely put, buying a leasehold shows you are taking over a lease from the former owner. Thus, you have to consider the following before making the ultimate decision:
- The number of years left on the lease
- How the lease’s length may impact the property resale value and chances of getting a mortgage
- How you will manage service charges and other related expenses, such as future increases included in the contract
Extending Lease Length
If the lease has 80 years left on it and you have been the property owner for no less than two years, you have the right to prolong it. You should always consider stretching it as soon as possible to avoid paying high costs that arise if you wait for it to run down. When prolonging a lease, you typically extend it by 90 years. For instance, if you have 75 years left and extend it, the new lease will be 165 years.
Extending a lease will cost you 50% of what is regarded as the property ‘marriage value.’ In simple terms, it’s the additional value gained by the property following lease extension. Here are some of the factors that affect the extension cost:
- Enhancements made to the property
- The current ground rent that you pay
- Your property’s current worth
The costs also include the following:
- Property valuation
- Stamp duty if the extension fees are over £125,000
- Legal fees
- Land registry update expenses
Leasehold Service Charges
In addition to paying your monthly mortgage repayments after buying a leasehold property, you have to pay for service charges. For those that have a leasehold flat, they need to renumerate a specific service charge to the managing company or landlord to maintain the building’s communal areas. The charged fee caters for the expenses of supplying essential services to the property.
Though some leases contain fixed service charges, which tenants have to pay yearly, most leases incorporate variable service charges, which freeholder estimates every year. With the variable service charges, freeholders can raise the expenses to finance a substantial one-off fee.
What’s the Cost of a Service Charge?
Prior to buying a leasehold property, it would be helpful if you evaluate the charged service fee. The lease contains information about the service charge you have to pay yearly. Remember that service charge varies significantly, and there is no a one-size-fits-all fee.
How Frequently Will You Pay for the Service Charge?
You will pay for this charge either yearly or two times in a year, either in advance or in arrears. The amount to pay differs, but the freehold owner must give you a statement showing the charge distribution at the end of the year. If the freeholder spends less than the collected service fee amount, the lease terms may make you eligible for a refund.
Sinking Fund Overview
Sinking or reserve fund takes care of costly and large-scale works that the building demands. Only a handful of leasehold properties contain this type of fund. The others that do not have demands the leaseholders to chip in when performing major structural works.
An Overview of Ground Rent?
Simply put, ground rent is typically a token paid to freeholders for renting the land which the property rests on. This fee is often paid yearly, and it can either be fixed or rise over the years.
After extending your lease, your freeholder will reduce the ground rent to zero. Generally, ground rent isn’t a massive concern for most leaseholders. It only needs to be doubtful for the new-build homes that see ground rent increase over a period.
New Government Strategies to Overhaul Leasehold Industry
Over the last few years, the UK government has been examining the leasehold industry and is now finalising enacting laws to solve some of the problems this sector encounters. As of now, here are the projected changes:
- Property owners will not sell new built properties as leasehold apart from unique circumstances.
- The government will invent a new calculator for setting the prices for leaseholders to buy the freehold or prolong the lease. The leaseholder must give discounts for the enhancements made to the building.
- Leaseholders will have the ability to prolong the existing leases by 990 years. After freehold purchase or lease extension, ground rent ceases to exist.
- There will be an introduction of a ‘Commonhold Council’ comprising of industry representatives and leasehold groups. The organisation’s main objective is to prepare the market to create a commonhold working strategy for flats.
- On new retirement buildings, ground rent is projected to be set to zero.
Leaseholder Rights and How to Complain
While you might have gone through all the lease terms in detail prior to moving in, there are still a couple of instances where you might run into problems. Several things can initiate a dispute with your freeholder, and you have options to complain about all or most of them.
You are entitled to information about the paid insurance, the freeholder’s name, address, and service charge, as a leaseholder. What’s more, you should be consulted about various repairs and challenge mysterious charges.
Commonly, causes of disagreement come from high property insurance costs, increased administration and service charges, breach of the lease terms, poor freeholder management and being denied a chance to extend or buy the freehold.
Some freeholders appoint managing agents to act on their behalf, so you should be well-informed about them. Unless the problem is directly linked to the managing agents, please make it a habit to complain to the freeholder from the word go.
Which Steps Should Complainants Follow?
1. Talk to Other Leaseholders
If you live in a block of flats or an estate, other leaseholders may have met the same problems as yours. As a result, it would be wise to have an informal and in-person conversation with the neighbours. This way, you can make your case much more potent to the freeholder by combining your efforts. Else, they will inform you if they got a successful solution.
2. Try to Contact the Freeholder Directly and Resolve the Issues
You can solve minor problems by writing or having face-to-face meetings with the freeholder, primarily individuals. For investment company freeholders, there are high chances they a management company that represents them. In such a situation, contact the contracted company.
3. Get in Touch with the Tenants’ Association
If there is a tenants’ association, the freeholder has to contact them regarding long-term and significant work changes. The association should also be in a position to guide leaseholders in their disputes.
4. Settle the Dispute via a Mediation Service
You can choose to engage an impartial and independent mediator to act as a ‘third party’ between the freeholder and you to try and manage the situation without forwarding it to a tribunal. Though not legally valuable, it’s essential to opt for this technique first. At the very least, a company that provides mediation services will have an accountant, surveyor and solicitor.
5. Use Tribunal
Once you exhaust the strategies mentioned above without success, you can move to the First-Tier Tribunal (FTT). As an unbiased tribunal, FTT will cautiously listen to the two parties before giving a verdict.
6. Appeal if You are Displeased with the Verdict
You can appeal to an Upper Tribunal if you are unhappy with the verdict. The only drawback is that you have to ask for permission from FTT to appeal, and you have about 28 days to do so after the verdict.
Which is Better, Leasehold or Freehold?
Often, most buyers prefer freehold properties because their prices increase more progressively than leasehold properties. Additionally, it’s easier and faster to receive a mortgage against freehold properties than leasehold ones. What’s more, if you invest in leasehold properties, the land’s ownership remains with the developer who acquired it to build a project or a local government that constructed flats on it. Let’s get into detail to let you make a well-informed decision when deciding the one to pick
From the word go, freehold is costlier than leasehold. At the same time, freehold suite houses as opposed to flats, which is perhaps one reason it’s pricey. All in all, you need to perform a long-term comparison because freehold may be expensive when buying while leasehold incorporates recurring service charges, ground charges and other expenses. Also, you might need to pay for a lease extension.
Freehold allows you to be the king or queen of your property, meaning you can virtually do anything you want to the building. When it comes to leasehold properties, you can refurbish or repaint them, but there are some restrictions you have to follow when making changes.
Freehold property is yours until you decide to let it go. With leasehold properties, their value declines with the decrease in lease years, and this makes it hard when you try to sell. Although there is the option of renewing the lease, the procedure may cost you up to 20% of your property’s value.
Just like renting, with leasehold property, the freeholder will arrange and perform property maintenance works. Nonetheless, leaseholders may end up paying for these repairs through the service charge. With freehold, you are responsible for all repairs on your premises. So, if you fail to repair your roof during the summer, you will deal with a considerable problem alone when the winter comes knocking.
Leasehold properties offer some benefits if you are living in a block. For example, some flats will offer a gym, parking, custodian, and access to communal areas. Well, these are some of the things you will be paying for with your ground rent and other expenses. They come in handy, especially for those living in the cities. Freeholders, on the other hand, do not enjoy most of these benefits.
A Word About ‘leasehold’ Scandal
Over the last few years, there have been problems with new-build homes, which made prospective home buyers debate on leasehold scandal. Back then, people sold new houses as leaseholds, while the law required flats only to be sold as leaseholds. Due to this, the government banned the sale of the present new-build properties as leasehold, which means you can only sell them as freehold. However, there are exempted scenarios where you can sell them as leasehold.