Freehold vs leasehold
If you own the freehold to your home, it means that you own the building and the land it sits on. If your property is leasehold, you own the property but not the building or land and must pay ground rent to the freeholder.
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What does leasehold mean?
You are purchasing a lease from the freeholder for the right to live in the property for a set number of years. You won't technically own the property outright, the freeholder (or landlord) will continue to own the property and the ground it sits on. Leasehold is commonplace when buying a flat or apartment as it sits within a larger building.
The number of leasehold houses has however grown in recent years, especially with new builds that are sold directly through the developer. In July 2017, the Government vowed to put an end to poor leasehold practices by promising to ban the sale of new-build leasehold houses (although this is yet to become UK law). If you’re buying in Scotland, this is not an issue as leaseholds were abolished in 2004.
Thousands of homeowners are stuck in leasehold houses they cannot afford to continue living in and cannot sell. We surveyed over 1,000 people who bought a leasehold house to explore the extent of the scandal which has left thousands of Brits trapped in leases leases with third parties.
What is ground rent?
This is a sum of money paid every year to the freeholder, it can be either at a fixed rate or escalating rate. Fixed rates stay the same for the duration of a lease, whilst escalating rates can see fees double after a fixed period—sometimes as often as every five years.
Our research into leasehold houses found that ground rent was one of the main dissatisfactions among leaseholders, Almost half of the leaseholders we surveyed were unaware that their ground rent could increase when they purchased the property.
It is vital that you get all the detail about the ground rent to avoid any unexpected costs in the future. Your agent, conveyancer or solicitor should be able to advise if there is a rent review clause in your lease and outline what it would mean to you. The costs of the ground rent may be negotiable so make sure to check this with your agent or the developer if you are buying a new build.
Maintenance and service charges
This helps to pay for the upkeep and maintenance of communal areas. Within a block of flats, they would pay for the internal and external maintenance of communal areas such as gardens, hallways, elevators and building insurance.
The fee payable is usually fixed but can change year on year. Make sure you ask your conveyancer or solicitor to fully explain all charges, and enquire as to whether the lease administrator has any plans for works that you will be responsible to pay for.
Check the terms on your lease for any restrictions about what you can do in the property. For example, in a flat, you may not be allowed to have pets or hang your washing out over the balcony.
There may also be things that you need to ask the freeholders permission for, such as building projects like an extension or loft conversion. When asking for consent, a freeholder should not unreasonably reject the request but you may have to pay them a fee before work can be undertaken.
What does freehold mean?
If you own the freehold to a property, it means you own everything—the bricks, mortar and the land—so as long as it complies with Government legislation, you’re pretty much free to do whatever you want with the property and garden. However, it also means that you are solely responsible for the maintenance of the building and the grounds.
Most houses on the market are freehold, and the benefit of the tenure includes being able to sell the property whenever you want, and not having to ask permission to make minor changes or pay for the privilege to do so.
Can I buy the freehold?
Before you commit to buying a leasehold property, look into who owns the freehold and find out whether it is likely to be sold on and who too. If you are buying a new build, ask the sales office to quote you a price for purchasing the freehold. If you own a flat, you can read this guide about buying the freehold for your flat.
How long is left on the lease?
Lease lengths can vary but typically a new lease will start off at around 99–125 years but can run for as long as 999 years. You must find out how long is on the lease you are buying, especially if you’re buying an existing lease that has already begun to run down. A short lease (under 80 years) could affect your ability to get a mortgage, and to extend a lease you must have lived in the property for two years.
The number you must remember is 80 years
Once a lease drops below 80 years the cost to extend it rises considerably. Ideally you want a property with at least 83 years left on the lease, this will give you enough time to live in the property for two years if you then wish to extend the lease.
Leasehold property advice
Developers have been known to sell the freeholds of entire developments to third-party companies who then charge escalated fees to the homeowner when they come to purchase the freehold. Spiralling fees and onerous clauses have led to some building societies and banks refusing mortgages on leasehold properties—making them very difficult to sell.
Some leases have clauses that obstruct your use of the property and some restrictions are not always that obvious. Read your lease carefully and if you are unsure of anything, speak to your solicitor immediately. Make sure you have a clear understanding of what you are entering in to, how much you will be expected to pay on an annual basis and if any cost increases are due.
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