Freehold and leasehold property explained
In this guide, we explain the difference between a leasehold and a freehold property. The process of buying a leasehold property can sometimes be less straightforward than buying a freehold one.
What is freehold?
Quite simply, if the property is freehold it means that you are the sole owner of the building and the land that it’s built on.
Benefits of having a freehold property
- Because you are the outright owner, you don’t have to consult the freeholder first about any alterations you wish to make to the property (although you will need to make the usual applications to the local authority)
- You don’t have to be concerned about the lease running out
- You will not be required to pay ground rent
What is leasehold?
A leasehold property means that you have the right to live in that building and the land it’s built on for the length of the term of the lease. However, somebody else actually owns the property – the freeholder. They lease the property to you for a number of years and this lease can often last for decades or even centuries. In other words, you aren’t buying a property, you’re buying a lease.
On a leasehold property you are usually required to pay an annual ground rent to the freeholder. Sometimes this may be what is known as a peppercorn rent – a nominal charge of a few pounds. Or it may be a little more substantial. You may have to consult the freeholder if you wish to make alterations to the property. For example, you may be refused permission to extend into any loft space, under the terms of the lease. You may also need to pay a service charge if the property is a flat or if you share facilities, such as gardens or stairs or other communal areas, with other leaseholders.
Your conveyancer or solicitor will check the terms of a lease before you buy to ensure that they are suitable. Many lenders will only lend on leasehold properties with a good number of years to run. We will only lend on residential leasehold properties that have more than 30 years remaining after completion of term of the mortgage.
In Scotland, there are very few leasehold properties. Unlike England, Wales and Northern Ireland, the vast majority of flats and apartments are freehold. Therefore there is no ground rent to pay, but like the rest of the UK, you may have to pay service charges (known as ‘factoring fees’).
In Northern Ireland there are different rules for buying freeholds and lease extensions. You can find more information at www.nidirect.gov.uk
Extending a lease
If you’re a leaseholder and have been living in a property for more than two years, you may have the right to pay to extend your lease. Sometimes this can be negotiated amicably with the freeholder. If they are unwilling to negotiate or talks break down, you have the right to engage a solicitor to serve a Section 42 Notice. This can be a time-consuming process and the freeholder has the right to appeal. However, if and when things are settled, you could be entitled to an extension on the lease of up to 90 years and for the ground rent to be reduced to zero. Ask your solicitor for more details.
Buying a freehold
If you are in a flat or an apartment, you may be able to buy a share of the freehold. Leaseholders have the right under the Leasehold Reform, Housing and Urban Development Act 1993 to collectively buy their building’s freehold if they meet certain qualifying criteria. This is known as collective enfranchisement. This is a legal right, however there is nothing stopping leaseholders approaching the freeholder informally. You’ll find more information at www.lease-advice.org
As a leaseholder, you have some protection against an unscrupulous freeholder. If you find yourself in a dispute with the freeholder and you can’t come to an agreement between yourselves, you may be entitled to a Leasehold Valuation Tribunal (LVT). An LVT is normally used to settle disagreements over service charges, the price of buildings insurance or if the freeholder is providing an inadequate service.
Leasehold property management
Usually, a freeholder who owns a leasehold property will ask somebody else to manage any communal areas attached to the property. This normally comes with an annual fee for the leaseholder, sometimes known as a service charge (or factoring fee if the property is in Scotland). This is to cover the cost of upkeep of the communal areas and general maintenance.
The material contained in this article is intended for information purposes only and not as advice.
You should obtain professional legal or other advice if you are unsure about the effect on you of any matter in this article
Published: 26 January 2018