When you buy a freehold property, you own the building and the land it’s on until you decide to sell it. But if you buy a leasehold property, you own only the building but not the land it’s on. This is a simplified version of the difference between leasehold and freehold.
But, how exactly does a leasehold property work? Is leasehold better than freehold? Is it hard to sell a leasehold property? Below, we discuss the differences between them and the advantages of each.
What does leasehold mean?
If you buy a property leasehold, you simply own the building for a designated period. Once the lease expires, the property belongs to the landowner unless the lease is extended further. In the simplest terms, this means that the amount paid for the property would be lost if the lease were to run out. This rarely happens, however, it’s something you’ll need to be aware of if you enter into this type of arrangement.
How long does a lease last?
Leases can extend from 90 to 999 years, very few will be shorter. If you manage to secure a 999-year lease, you’re in a very strong position and can use this to your advantage. There are a few disadvantages of a leasehold when compared to a freehold, for example, leases with a shorter time frame can become problematic – if you have less than 80 years left, it can make the property hard to sell and can be complicated to remortgage as the cost to extend your lease increases considerably. This is referred to as 'marriage value', which is the increase in the value of the property following the completion of the lease extension and reflects the additional market value of the longer lease. This potential ‘profit’ only arises from the landlord’s obligation to grant the new lease, and current legislation requires that it be shared equally between the parties.
What happens when a leasehold expires?
If the leasehold is running out, the lease either gets renewed or the ownership automatically falls back to the landlord. Renewing a lease at the right time can save leaseholders a lot of money, as when a lease has close to 80 years remaining, the marriage value may become payable, which is something you want to avoid.
Under the current laws, you can extend a flat for 90 years and a house for 50 years*, however with the leasehold reform in England and Wales, the number of years you can extend by may be increased by 990 years**.
What else is different about a leasehold property?
Generally, leasehold properties tend to be apartments or flats. A lease owner does not own the land, nor are they responsible for the communal areas for example, the lobby, stairways or halls. Owners in these types of buildings pay 'ground rent' - a regular fee collected by the freeholder. The terms should be set out in a contract during the initial purchase. The contract may also set out other rules or codes of conduct around pets, refuse, utilities and repairs.
What is tenure freehold?
Tenure freehold refers to the freehold of a property. In the UK, most houses are freehold. Purchasing a property freehold gives you complete ownership of the property and the land. You may hear this type of arrangement referred to as ‘title absolute’ and sometimes by the curious term ‘fee simple’. As the owner, all costs are your responsibility. This includes any maintenance, repairs and building’s insurance.
What are the advantages of a leasehold property?
If you own a property in a communal building, being leasehold has a number of advantages. When repairs and maintenance to the building are due, the owner of the freehold is responsible for any maintenance and looking after the structure, e.g. the roof. Freehold owners often contribute towards these maintenance costs, instead of having to cover the entirety of the cost. The owner of the freehold is also accountable for the building's insurance, although the fee is usually charged to the leaseholder at a later date.
Keep in mind that each lease agreement varies and stipulates the rights and responsibilities of the freeholder and leaseholder.
What are the disadvantages of a leasehold property?
The disadvantages include having to pay service charges and/or ground rent, plus you are not able to change the property's external features without permission from the freeholder, and you could be subject to rules around pets and subletting. It may also become harder to sell, if the lease nears 80 years or under.
What are the disadvantages of a short lease?
Although it is possible to remortgage short-term leases, the number of lenders prepared to lend is reduced and you may well end up paying a higher rate of interest.
The property I want to buy is a leasehold property. What should I be aware of?
When buying a leasehold property, check the length of the remaining lease and how much the ground rent is. The length remaining on the lease may affect the price of the property, as well as the type of mortgage available. These are some of the more important considerations that should be at the top of your list when looking to buy; however, your property lawyer will be able to advise on these to ensure the deal you’re getting is suitable for you.
What does the Government's reform of leasehold tenure mean for me?
This reform will make buying or extending lease agreements “easier, faster, fairer and cheaper…". When the leasehold changes come into play, leaseholders across the UK will be given the right to extend their lease by a maximum term of 999 years at zero ground rent.
If you’re seeking advice or further information on freehold and leasehold properties, get in touch today.