What are Freeholds and Leaseholds?
The difference between freehold and leasehold is that they are the two fundamental forms of legal ownership. You should be careful to ensure that you understand your ownership status when going to purchase your desired property, as they are essentially quite different things.
Owning a freehold means that you not only own the house but also the land it is built, meaning that you own the house for eternity. The Land Registry will show you as the freeholder having complete and absolute title to the property.
Should you buy a Freehold?
As a freeholder, you are not liable for failing to maintain the building, though you have the responsibility of maintaining the roof and the outside walls of the property. Furthermore, as time passes the value of a freehold is likely to increase.
You may also go on the sell the property whenever you desire. However, the initial cost in purchasing a freehold will be considerably more than when purchasing a leasehold.
Owning a leasehold, on the other hand, means that you have a lease to use the property for a certain amount of time, usually a number of years. If you are purchasing leasehold, you will not be an absolute owner of the property and your rights and obligation will defer as from those of a freeholder. You will be living in the property under a contract which sets out your legal rights and obligations.
Should you buy a Leasehold?
You will incur a lesser initial cost as compared to a purchasing a freehold, but you will be responsible for maintaining the common parts of the property, paying annual maintenance fees and service charges, and paying annual ground rent.
Moreover, if you want to sell the leasehold, you may have to first get the consent of the freeholder. You may also have issues with your freeholders such as high ground rent and maintenance charges.
Consent requirement and other restrictions in leaseholds
Additionally, you need to obtain permission from the freeholder if you want to carry out any major works to the property. You may also face other restrictions and in case you fail to abide by them, may lead to you facing eviction from the property. More significantly, if you purchase the leasehold on a property, and the landlord sells the freehold to a third party who may seek to increase the ground rents and fees. Therefore, it is pertinent that you fully understand the form the ownership you will be taking up.
The Reverse Time Effect in Leaseholds
Another common issue with leaseholds is that, conversely to freeholds which increase in value over time, leaseholds, on the other hand, decrease in value as the lease on the property shortens. This may causes problems for you.
As the time on the lease shortens, you are less likely to be able to mortgage the property and the property will hardly attract any customers in you ever want to sell it.
This is because once the lease expires, the occupant will have to leave the property. However, if you do not want to move, you may extend the lease but this involves a lot of cost such as renewable fees and premiums.
Extension of Lease in Leaseholds
When the lease on the property you are interested in is less than 90 years, you should be wary of purchasing such a property. As mentioned earlier, short leases will not only affect the value of the property and are likely to be less stable as compared to a longer lease.
You may also find yourself in a position where you will have to extend the lease. Though now law protects short leaseholders by providing them the right to extend their lease or providing them right to buy the property but this can prove to be very expensive.
Extension of lease for flats
This new law differs between houses and flats. You may be able to extend the lease of a flat by 90 years, in which case you might be able to negotiate your way out of having to pay ground rent. However, this is only a possibility where you have held the lease for 2 years and it was originally a long lease. You will also have to pay a premium when extending the lease. If you qualify for extension of your lease but your landlord rejects your offer, you can challenge their rejection in court.
Extension of lease for houses
In case of houses you may be able to extend your lease by 50 years. Similar to law on flats, you can only take up this opportunity if you have held the lease for 2 years and the lease was originally a long lease. If your landlord fails to extend your lease, you may challenge this in court.
A freehold has a more expensive sale price but you will be buying it permanently and have complete control over the property. Additionally, there will be not additional costs as part of your purchasing costs.
On the other hand, with leaseholds, they may be initially cheaper but you have to pay extra fees such as service charges, ground rent, and maintenance charges etc.
Additionally, you will not be responsible for maintaining the fabric of the property but may have to pay towards repairs
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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