Leasehold vs Freehold

According to The Department for Communities and Local Government (DCLG) statistics, there were 4 million residential leasehold dwellings in England in the private sector in 2014-15 and of these 1.2 million were leasehold houses. With so much recent media publicity surrounding leaseholds, here is what you need to know about Leaseholds and Freeholds!

Leasehold

The majority of properties are either freehold or leasehold.  Leasehold is a method of owning property by lease (usually a flat) this is likely to be the case even if you have a share in the building's freehold.

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Characteristics of Leasehold Property

  • You don’t own the land – you lease the land for a period of time. At the end of that time, it reverts back to the freeholder if you don’t renew
  • Typically lease terms are anything from 100 to 999 years
  • You pay ground rent every year as payment for the lease
  • The lease has conditions about what you can and can’t do
  • Most common for flats, increasingly new build houses too

Before you buy, get your solicitor to look over the lease agreement in detail it is important that you check the following;

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  • Length of remaining lease term
  • The cost of Ground rent, and if it increases after a period of time at what rate?
  • Any restrictions – i.e. not being able to sublet
  • How service charges are calculated and paid
  • Who is responsible for minor repair and major works
  • How repairs are paid for
  • When the freeholder's permission is needed for alterations
  • Who is responsible for arranging buildings insurance

 

How to extend a lease

Lease extensions are always possible and follow a set formula – however, they get more expensive when it gets below 80 years– (marriage value).  If the leasehold has less than 60 years left it becomes more difficult to obtain a mortgage.

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  • Get a specialist valuer to value the extension and a solicitor to serve notice on the landlord, offering terms and how much is required to pay. The landlord has 2 months to respond, either accepting or stating their own terms.
  • After 2 months either party can apply to the tribunal for decision Wait for tribunal decision, which is final. This can take a year or more from start to finish by the time you’ve waited for various deadlines.
  • If negotiations fail, you can take up the dispute with the Leasehold Valuation Tribunal (LVT). In cases where you feel your service charges are unreasonable, your buildings insurance is overpriced or the quality of services provided by the managing agent is poor, the LVT can arbitrate.
  • Leaseholders can also go to the LVT if they want to extend their lease, or want to buy the freehold but aren’t able to agree on a price with the existing freeholder.

 

Freehold

The other form of ownership is freehold. This is where you own the building and the land it stands on outright. It is your name in the land registry as “freeholder”, owning the “title absolute”.

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  • Won’t have to pay annual ground rent
  • You don’t have a freeholder failing to maintain the building to a good standard or charging too much for it
  • You have responsibility for maintaining the fabric of the building – the roof and the outside walls
  • Whole houses are normally sold freehold – however, there is an increasing trend for leasehold houses, so check before you buy

The advantage of owning property freehold, or having a share in the freehold of a property, is that you are either totally in control or have a vote in what happens with the building and in the latter case any repairs or service charges. Leaseholds are not necessarily a bad way to own a property but stories abound of homeowners hit with big repair bills and high service charges that they struggle to challenge.

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However, this trend is starting to change following the recent backlash against developers such as Taylor Wimpey who have recently agreed on a £130m deal to help distressed leaseholders. The communities secretary, Sajid Javid, recently announced plans to “ban new-build houses being sold as leasehold as well as restricting ground rents to as low as zero”. New legislation will close loopholes and protect buyers, some of whom have faced repossession orders after failing to keep up with ground rent increases. The government also plans to change the rules on help-to-buy equity loans so that the scheme can only be used to support new build houses on “acceptable terms”.

 

Glossary

Freehold - Permanent and absolute tenure of land or property with freedom to dispose of it at will

Ground Rent - Rent paid under the terms of a lease by the owner of a building to the owner of the land on which it is built.

Leasehold - The holding of property by lease.

Leasehold Valuation Tribunal (LVT) - Effectively an informal 'Property Court' designed to settle disputes between leaseholders and freeholders.

Marriage Value - When you extend a lease that has less than 80 years to run, there is an additional fee to be paid to the landlord called a Marriage Fee.

Premium - The payment by the leaseholder to the freeholder when the lease is extended (or Enfranchised) is the Premium.

Revert/Reversion - When a lease comes to a natural end, e.g. after 99/125 years, ownership of the property reverts back to the landlord.

Service Charge - A charge made for maintenance on a property which has been leased.

Title Absolute - Gives the right of ownership to the owner, and cannot be disputed or challenged by anyone else.

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