Leasehold v Freehold
Buying a new home is an important commitment, and it is not one that you should ever take lightly. However, it is also not something anyone should go into without professional advice.
Having a deposit saved up, looking at what you can afford and knowing what type of property you want ahead of time will help when buying a house.
Knowing the difference between a freehold property and a leasehold property is also essential as it can affect which ones you will be looking at as a whole.
You need to decide if you want to look at leasehold properties or freehold properties to make house hunting easier.
What is a Freehold?
Freehold means you buy not only the house but also the land it sits on. Freehold property is when someone has outright ownership.
You own it and handle the maintenance. If you want to extend, change, or renovate the property, the only obstacle is the relevant planning and building permissions.
You may come across a concept known as Share of Freehold, which means you are a leaseholder who is a Leasehold company director.
This is primarily the case when buying a flat, as you do not own the entire property, only a part of it. You will then enter into what is known as a ‘Share of Freehold’ agreement with the other flat owners.
What are the Benefits of a Freehold?
When you own a Freehold, you own it outright you own the land and any building that sits on it. Therefore, you have control over the property and land and do not need to worry about your Lease ending.
What is a Leasehold?
As the name suggests, you own your home for a specific tenure of years, but you do not own the land itself.
Block of flats are usually sold on a long lease, and leasehold flats are generally more expensive to run than freehold properties.
This means you must pay a ground rent, which generally is a small amount. However, it can be increased at any time. New legislation is being progressed to reduce Leasehold ground rents. This could mean in the future; the ground rent could either be zero or a tiny, fixed rate.
When the lease expires, the ownership of the property goes back to the Freeholder. Leaseholders agreements are generally 99 years or 125 years, with some extending to 999 years.
If you like a Leasehold property, it is essential to know the expired term of the lease, as this will affect you when securing a mortgage.
Banks won’t lend money if less than 50 years are remaining on the lease after the mortgage lending period. For this reason, it is recommended not to buy a Leasehold property that has less than 80 years left.
If the Leasehold you are looking at has less than 80 years, you can see options for renegotiating with the freehold owner to extend the Leasehold to its total amount or even longer.
Leasehold properties can be commercial or residential, and when it comes to residential property, leasehold dwellings can be Houses or a bungalow. It can be any type of residential property.
What are the Benefits of a Leasehold property?
Leaseholders do not have to repair the outside, right of way access, or maintenance of the property itself. Leaseholders are only responsible for the interior of your property. During the Leasehold, you can sell your home as usual.
What are the Downsides of a Leasehold property?
You will need to keep to the rules set out by your Freeholder, which includes ground rent. The service charge is collected to deal with the upkeep of the building and common areas.
When the Leasehold tenancy ends, the leaseholders’ entire property reverts to the Freeholder, so even if you technically own the building during the Leasehold, you do not once the lease term ends.
It is not easy to sell on and recoup your investment cost once the tenancy nears 80 years or less. However, with a freehold, you can sell for market value or even rent the property out.
Lease Extensions Help
When the lease term of, say, a leasehold house nears its full term, the tenant will need to approach the Freeholder to negotiate lease extensions.
You should seek legal advice from a solicitor when dealing with lease extensions. Things like lease term, annual ground rent, annual service charges and maintenance costs are all points to consider in negotiations.
You should check the new proposed lease documents and review the details very carefully before you make a decision and purchase an extension.
Some large blocks of flats have a management company that deals with building insurance and maintenance of the exterior of the block of flats, including the common communal areas, lifts and stairwells.
You can use a lease calculator, which will give you a rough guide of the cost to renew your leasehold flat. However, be careful lease calculators are a rough guide only.
To get an accurate valuation, you should instruct a surveyor that the (RICS) Royal Institute of Chartered Surveyors regulates.
It is well worth paying the valuation fee rather than assuming a fair price for a lease extension.
Once you have a surveyor’s report on the valuation, you can then decide on what you want to offer for the lease extension.
There is an increasing trend for Leaseholds – particularly in shared ownership schemes, so it is essential to ensure you know whether the property you are interested in is Freehold or Leasehold before you buy!
What is Peppercorn Rent?
Under Section 166 of the Commonhold and Leasehold Reform Act 2002, a leasehold owner will not be liable to make any payments for ground rent unless they are served with legal notice in the prescribed format.
Can I change my lease from ground rent to peppercorn?
Yes, it is, but not until the leaseholder wants to extend or vary his lease. Under the Leasehold Reform, Housing and Urban Development Act 1993, a leaseholder can legally obtain a lease extension of ninety years. And be entitled to a peppercorn ground rent provided they have lived in the property for two or more years.
Author: Peter Ross peter@thebla.co.uk
Date: 24th of November 2021
Our top read blogs:
Government Introduces New Bill & Code To Help Resolve Pandemic-Related Commercial Rent Arrears
Purple Bricks – Should i use PurpleBricks?
