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The difference between freehold and leasehold

This is a guest post from Urban Sales and Lettings.

The majority of properties in England and Wales are either freehold or leasehold. Houses are generally freehold whereas flats are more likely to be bought as leasehold. These two options have their differences but their meanings are not always fully understood.

freeholdIn order to grasp the differences, first a history lesson. In the Middle Ages, when a landowner (freeholder) allowed one or more individuals to use their land for a fixed period of time, the land became leasehold. This leasehold could also include buildings and the individual who was occupying the land would have to pay the landowner rent to enable them to use it. Lords would own the land and the individuals who occupied the land were known as vassals, which used to be essential to the feudal hierarchy.

Now we have entered the 21st Century, over two million people have purchased a leasehold flat and the system has not altered much at all. The individual is now known as a tenant and when a leasehold flat is purchased, it effectively means that they own the right to occupy the flat for a set period of time. The buyer is granted the right to take up residency in the property for the amount of years which is stated on the lease. The term of the lease can vary with the standard amount of time being 99 years, however 999 year leases are gradually becoming more common and during this time, the flat can be sold at the leaseholder’s discretion.

The majority of leasehold properties are flats and whilst buying the leasehold is usually a more reasonable price, there are other fees to take into account. An annual service charge which covers maintenance, repairs, gardening of grounds and cleaning of common areas will be payable to the freeholder, as will a ground rent which will be paid yearly. Before buying a leasehold property, it is advised that the buyer’s solicitor verifies the lease and ensures that no ground rent is outstanding from the current owner as the buyer could be liable for up to six years worth of arrears. Service charge arrears are however non transferable between buyers/sellers.

The lease will outline who is responsible for the repairing and maintaining certain parts of the property. These should be read and fully understood as the lease may also state restrictions on the buyer such as limitations on noise level or a constraint on decoration. There are advantages of owning a leasehold flat - a £200,000 leasehold flat will be bigger than the equivalent of a freehold house based on square footage.

Mostly, security will be higher as main door entry codes are common on apartment blocks. When buying a leasehold flat, it is not recommended that a purchase is made on a lease which has 60 years or less as banks are unlikely to finance a property with a lease as short as this. Once the lease has expired, the property will once again become the possession of the freeholder.

Buying a freehold property

house in silhouettePurchasing a property which is freehold means that the buyer is the sole owner and is fully responsible for the maintenance and repairs of the property. The buyer is purchasing the outright ownership of the property and the land on which it stands; they also have the right to take up permanent residence for as long as they wish to do so. The freeholder is entitled to make any modifications to the property providing that these adjustments are within the law and planning restrictions. If the property is a listed building, any structural changes may also need permission. Similarly, properties which are new builds may need permission from the original developer should the freeholder wish to make any structural conversions, which is known as a restrictive covenant.

A phrase that is widely known but not commonly understood is a flying freehold. This is when part of the freehold property intrudes or overhangs onto land which is not owned by that property. An example of this is where a balcony overhangs onto a neighbouring property’s land or, in a semi detached freehold property, a room is located over a communal passage way. The owner of the property which the flying freehold belongs to, must gain permission from the neighbouring property’s owner should they wish to gain access for repair purposes. It is somewhat of a grey area in legislation and these issues are known as title defects. Due to this access restriction, mortgage lenders are reluctant to finance purchases such as these and it is recommended that advice is obtained from a solicitor and the flying freehold is researched thoroughly.

Share of freehold

An alternative to buying a leasehold or freehold property is purchasing a share of the freehold. This also means that the purchaser will own the property outright (more often than not, the property will be a flat). Effectively, this is achieved by all of the leaseholders who are occupying the building purchasing the entire freehold from the freeholder; this will mean that the purchasers will each own a share of the freehold. The flat will still theoretically be owned as a leasehold property but the freehold organisation is able to grant long length leases, such as 999 years with a minimal ground rent.

When purchasing such a property, it should be understood that maintenance and repairs of the common areas such as the walls, roof, stairs and hallways are the responsibility of the appointed shared freeholders. This is a procedure which is set to outline the obligations of freeholders and their duty towards communal areas of the property. A managing agent can be assigned if the flat owners do not wish to take on this extra work.

Leasehold properties can be more expensive than share of the freehold properties in the long run as freeholders are able to negotiate better service fees from building insurance, cleaners and they are also able to instruct cheaper workman for repairs than the owner of a leasehold property would. The price of such a property may well be more expensive than a leasehold property but this difference will normally be relatively small. The price difference will be reflected by the remaining length of the lease and dilapidation will also be taken into account on a leasehold property.

Commonhold

In 2004, a new idea was introduced under the title of commonhold. This is an idea which is typically found within units and flats. It is when a block of flats is mutually owned by a group of people and there is not one individual responsible for usual landlord obligations. However, a “freehold owner” is in place which will be a company known as a commonhold association. If an individual purchases a flat under this agreement, they will automatically become part of this association. This company is the “individual” which will be responsible for the maintenance of communal areas in the building. There are many advantages of owning a commonhold property. There is no set time period of habitation within the property as the purchaser will be one of the freeholders, any alterations regarding the building itself will be decided mutually between the property owners and all documentation will be standardised within the common hold property sector with no input given from unauthorised persons. Properties which are common hold will very rarely decrease in value, unlike leasehold properties. Leaseholders are able to switch to commonhold combining that each leaseholder has agreed to purchase the freehold together with each individual needing to agree to convert to commonhold.

With these numerous options, buying a property can prove a daunting task. It is always recommended that sufficient research is carried out before exchanging contracts and instructing a solicitor is advisable as they will be able to guide you through the process with ease.

Written by http://www.urbansalesandlettings.co.uk/ selling and letting property online