The difference between freehold and leasehold property
Though it may seem only like technical legal language, there is nothing more crucial about your home than whether it is a freehold or leasehold.
The difference is one that is important to understand as it affects buying, owning, and selling your home.
Forms of property ownership
These two terms refer to the two forms of ownership of a property a person can have in the UK.
Normally, houses are sold freehold properties . Whereas, only flats are usually sold as leasehold properties.
However, some new houses have been sold as leaseholds in the recent years, leading to reports of a leasehold scandal.
What is a freehold?
A freeholder of a property owns the entire property (i.e. both the building and the land it is built upon) in perpetuity. The Land Register will show them as the freeholder of the property having the absolute title.
A freehold property can also be co-owned. You may wish to read about co-ownership of property and the difference between joint tenancy and tenancy in common.
The benefits of owning a freehold
Generally, buying a freehold is more expensive as compared to buying a leasehold. Further, freehold usually refers to houses than flats.
However, as a freeholder, you will have the “absolute title” to the property – meaning that you are completely in charge of the property and how it’ll be used.
Your responsibility is to only maintain the “fabric” of the building. This includes the roof and the outside walls. Further, you will be responsible for arranging buildings insurance.
Purchasing a freehold property can be a beneficial investment choice for people looking to move to a new home. When it comes to real property, its’ value is almost always likely to increase with time. If you make some home improvements, it may increase the value greatly.
Soa freehold ownership is the preferred form of ownership. Compared to leaseholds, you will not be burdened by additional costs (which is a significant concern for leaseholders) and will not have to put up with a landlord.
What is a flying freehold?
Flying freeholds is a legal term that refers to a freehold property that has a part lying under or over a part of another neighbouring property.
It could be a balcony overhanging your neighbour’s property or it could be a cellar that lies underneath your neighbours’ property. You may wish to read further about what is a flying freehold and whether it makes your home less saleable.
What is share of freehold?
In some circumstances, with flats, you can get what’s called a “share of freehold”.
These types of flats may originally be leasehold flat and later on divided into freehold units.
The term simply means you own freehold over the flat and all flat owners manage the communal areas and external walls and parts of the property jointly through a management company.
It is a preferred option for people who prefer communal living. However, as with any form of community ownership, conflicts can arise between freeholders.
What does leasehold mean?
Owning a leasehold means that you will have a legal agreement (called a “lease”) with the landlord (also known as the “freeholder”) to use the property for a certain amount of amount, usually several years.
Leaseholders own the building (and not the land it is built upon) but don’t hold title absolute. They live in the property under a contract that sets out their rights and obligations.
Ownership of the property reverts to the landlord upon the lease coming to an end. However, leases can go up 999 years. Therefore, the property will be sold and purchased numerous times before the lease expires and the ownership reverts to the freeholder.
Most leasehold properties are in the form of flats rather than houses. However, in the recent years some houses have been sold as leaseholds, that has led people to talking about a leasehold scandal.
Mortgage on leasehold properties
You can get a mortgage if the property you are interested in purchasing is a leasehold or a freehold flat. However, the circumstances in which a lender will be wiling to lend on a leasehold property are different from when the property is a freehold.
To find out more about the factors in how to get a mortgage on leasehold property, check out our article.
The major benefit of owning a leasehold property
One of the major benefits of owning a leasehold is that you will incur a lesser initial cost than purchasing a freehold.
Further, the landlord is normally responsible for arranging buildings insurance and maintaining the common parts of the building, such as the entrance hall, staircase, and the fabric of the building.
But should you purchase a leasehold property?
Your lease agreement will set out the conditions you have agreed to. However, this form of home ownership can be complex and the conveyancing fees are also typically higher for leasehold properties.
Eight things you should know about leasehold properties before you purchase one
While the agreement may make the landlord responsible for the common parts, you will have to pay service charges and annual ground rent that goes to maintaining the building.
If you want to get any major works done to the property that is not a Permitted Development, (perhaps you want to make an extension or make alterations to the property), you may need permission from the landlord before starting any work as well as planning permission. The exact procedure will be set out in your lease agreement.
However, you would have the right to get information about services charges and insurance. Further, you will also have the right to be consulted about certain maintenance and running costs.
1.What are service charges?
The landlord may provide certain services under the lease and charge a service charge for doing so, such as heating, alarm system, lifts, lighting, repairs and general maintenance, and cleaning shared areas. The law is set out in the Landlord and Tenant Act 1985.
What the service charges cover and how it is worked out is supposed to be set out in the agreement.
Service charges are also one of the main areas of dispute between leaseholders and their landlords.
1.1.Fixed or variable service charges?
At first, the costs of services were incorporated in the rent payments by landlords. Some old leases still allow a fixed charge to be charged, notwithstanding the actual cost born by the freeholder.
However, newer leases are based on the actual or estimated cost of services and are subject to change annually. These are known as variable service charges.
1.2.Structure of service charges
Further, your contract with the landlord will also set out the frequency of payments, which works the service charge will cover, and what percentage of the service charge you must pay.
Frequency of payments
Service charge periods are often a year. However, payments may be due either every six months or three months, or, in some circumstances, after the cost has run up.
The agreement will dictate whether you must make advance payments. If so, whether they are based on the previous year’s costs or an estimate of the cost in the coming year.
Often, you will be required to make payments of any shortfall at the end of the year when the actual cost figures become certain.
If you pay more than the actual costs, the amount can be adjusted against next years’ charge, refunded, or paid into a reserve fund (which we will get to shortly)
The best practice is for the landlord to ask for advance payment of service charges before they pay for work and services. The amount will, of course, be based on an estimate.
Calculation of how much service charges you pay
Your share may be calculated based on the square footage of your flat in proportion to the whole building.
It could also simply be based on a simple percentage of the total service charge.
Some older leases are based on the rateable value of the flat as a proportion of the rateable value of the whole building. Whereas other archaic leases just state that the leaseholder is liable to pay a “fair” share.
What your service charges can cover
The general rule to always remember is that the landlord does not have to provide a service if it is not covered by the lease. Similarly, the leaseholder does not have to pay for anything that is not specifically set out in the lease.
Therefore, the agreement may be very specific, setting out precisely which works or services your landlord can charge for.
In some circumstances, the agreement can be very vague and simply refer to the costs of repairing and maintaining the structure of the building. If this is the case, it will be safe to assume that it will cover the costs of repairs and maintenance of the fabric of the building, any lift facilities, boilers, cleaning, lighting and maintaining shared areas.
If you pay a service charge, you have the right to ask the landlord for a summary showing how the charge is worked out and what it is spent on.
Additionally, you are allowed to see any paperwork supporting the summary, for instance, receipts. If your landlord refuses, they will be committing a criminal offence.
1.3.Restriction on increases in service charges and the right to be consulted for qualifying work
There is no legal limit on services charges, but the landlord can only recover reasonable costs.
Further, you have the right to be consulted about charges for running or maintaining the building if you either pay more than £250 for planned work (called “qualifying work”) or £100 per year for work and services that last more than 12 months.
In such a case, your landlord has to follow what is called the “Section 20 consultation” procedure. If either of those circumstances exists and you have not been consulted, there is a legal limit on how much you have to pay.
1.4.What is reserve or sinking funds?
Often leases allow the landlord to collect money from leaseholders to create what is called a reserve fund or sinking fund.
The purpose of this sinking fund is to cover the cost of irregular and expensive work. This ensures that all tenants contribute towards the major works and not just the ones living in the building at that time. Further, the landlord can avoid sending large one-off bills by evening out the annual charges.
However, more often than not, the reserve funds are not sufficient to cover the full cost of major work and the leaseholders will have to pay the landlord the balance amount through service charges.
While some leases may allow the leaseholder to claim back any contribution paid to the reserve fund, most don’t.
2.Right to information relating to services charges
Summary of service charges account
A leaseholder has the right under section 21 of the Landlord and Tenant Act to ask the landlord for a summary of the service charge account.
The request must be in writing and sent directly to the landlord or to the managing agent.
You can request a summary of the service charges for the last accounting year.
If your landlord does not keep accounts by accounting years, then the past 12 months summary of service charges can be requested.
Inspection of accounts and receipts
A leaseholder can also inspect the documentation relating to the service charge, such as receipts any other document and have the right to get copies of the same.
3.What is ground rent?
Ground rents are fees the leasehold must pay to the landlord as a condition of the lease. However, the landlord must send a formal written demand in the prescribed form.
The ground rent may:
- stay the same throughout the term of the lease
- increase after a period of time, if your lease says so
- increase according to a formula, if agreed so in the lease agreement
3.1.When do you have to pay ground rent?
Ground rent is usually paid annually. However, the landlord must ask you to pay the ground rent through the prescribed notice of demand form. Otherwise, you don’t have to pay. Further, the due date cannot be less than 30 days or more than 60 days.
Your landlord can take legal action if you don’t pay your ground rent. They can approach the court to recover what you owe. The landlord can also approach the court to seek possession of the property. This is called a forfeiture action.
However, the landlord can only bring a forfeiture action if the arrears have not been paid for 3 years or more or you owe at least £350 in ground rent. It can also be a combination of ground rent, services charges, and administration charges (which we will get to shortly).
Building insurance has to be arranged by the landlord (not for the contents). This will usually be part of your service charge.
You have the right to ask the landlord for a summary of the insurance policy. If you think the cost is unreasonable, you can challenge it through the housing tribunal.
The rights relating to administrative charges were introduced by the Commonhold and Leasehold Reform Act 2002.
An amount payable by the leaseholder which is payable for:
- The grant of approvals under the lease
- Provision of information or documents to a person who is not a tenant
- Costs arisen from non-payment of an amount you owe the landlord
- Costs arisen in connection with a breach of the lease
If the cost results from one of these situations, they will be classified as administrative charges.
Administrative charges must be reasonable. Otherwise, the leaseholder can challenge them by applying to the tribunal, unless the leaseholder:
- already agreed to pay
- referred the matter to arbitration following the dispute
- applied to the court and the matter was not resolved in his favour.
6. Forfeiture and repossession by freeholder
If you fail to pay service charges, administrative charges, or ground rent, you will be exposed to legal action from your landlord. However, for a very small amount, the procedure is different (which we will get to next).
If you have a mortgage on the leasehold property, your landlord can seek a county court judgment, seeking that your mortgage company pay the arrears and add the amount to your outstanding mortgage.
Additionally, your landlord can take action to end the lease and repossess the property. However, your landlord cannot repossess the property unless they have a court order. This process begins by serving a valid notice under section 146 of the Law of Property Act 1925 (also called “a section 146 notice”) on the leaseholder.
A section 146 notice can only be validly served unless :
- you agreed that you owe the money
- you broke a term of the lease; or
- a tribunal, court, or arbitrator has made a final decision that you have broken the lease and you have not taken action to stop the breach or to settle the arrears.
6.1.Failing to pay small charges for a short period
In this case, whether your landlord can serve a section 146 notice depends on the amount you owe and the length of time since you owed this amount. There are measures in the Act preventing landlords from using the section 146 procedure to recover very small amounts.
Your landlord cannot serve a valid section 146 notice unless you are in arrears of:
- service charges
- ground rent
- administrative charges; or
- a combination of all of these
and the total amount you owe isn’t at least £350, or it includes an amount that has been outstanding for over 3 years.
7.Reverse time effect of leasehold properties
As the term remaining on the lease reduces each year, so does the value of the leasehold property.
To illustrate (using an overly simplified example), if house prices are increasing roughly 3% a year, a freehold property bought for £99,000 might be worth up to £114,768 five years later.
However, a similar leasehold property with 99 years remaining on the lease may only be worth £109,599 five years later.
8.Leasehold properties with short leases
Any leasehold property with less than 80 years left on the lease is considered a short lease period. Such leases can be extremely problematic for the leaseholder and very few people will want to buy the property.
Few mortgage lenders will lend on a leasehold property that has less than 80 years left on the lease. So your buyer may have to back out due to his mortgage being refused.
Extending a lease before selling the property may give the seller a higher sale price. In any case, it is best to move to extend the lease if the remaining term is fewer than 90 years.
You may wish to read further about lease extensions to leasehold properties as you have to meet certain requirements to qualify for lease extension.
A leaseholder may be able to buy the freehold of the property. This is known as enfranchisement.
However, the enfranchisement process can be complicated. Usually, there the leaseholder has to pay a premium (on the purchase price), amongst other factors involved, to acquire the freehold. Therefore, seeking advice from a solicitor is vital.
You can read our brief explanation of the enfranchisement process and its pros and cons before you engage a solicitor.
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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