Freehold or Leasehold – what’s in a name?!
In England and Wales title to property can either be freehold or leasehold but what does that actually mean, why does it matter and what should you look for when buying or selling.
When you own a freehold property you own not only the property but also the land that it sits on outright. You are responsible for the property and the land, its maintenance and its insurance. Subject to things like planning constraints you can do as you wish with the property and the land it sits on.
Freehold with management charges
The majority of newbuild houses (and many houses built in the last twenty years) are freehold properties which are subject to an estate service charge or rent charge. This does not change their title, they are still freehold properties. It’s just that they have an obligation to contribute along with their neighbours to the costs of the estate on which they live. This will usually include items such as open spaces, play areas, shared parking and accessways and other less obvious items such as insurance and annual inspections of those areas. Management of these areas is usually taken on by a management company after the developer has completed the estate, this management company will often (but not always) be controlled by the residents on the estate.
In order to ensure that those who own and occupy the properties are those who are obligated to pay then there will be a process in place to update the ownership records as part of any sale or remortgage. This does mean that there are additional administrative processes and costs which are incurred on these properties.
A flying freehold is a property that is built over land but isn’t part of the property. For example, if one freehold property hangs over another. Flying freeholds might happen in the following situations:
- adjacent terraced or semi-detached properties if there isn’t a definitive vertical dividing line that can split them
- houses built on steep hills
- rooms built across passageways
- basement vaults and cellars that run beneath other properties
- a balcony that overhangs the property next door
Often the properties will have rights of support and protection contained within the title documentation but even with those rights not all properties which include a “flying freehold” are consider suitable security by mortgage companies.
Owning a leasehold property means you own the property for a fixed period of time but you do not own the land on which it sits. The length of time varies but is usually somewhere between 125 – 999 years.
You will have a contract (known as a Lease) with the freeholder of your property, this sets out exactly what you are responsible for, what the freeholder is responsible for and (if there is one) what the management company is for.
The Lease will contain a ground rent, a sum which is paid to the freeholder as payment for the use of the land. This can be a nominal amount but can depending on the drafting of the Lease increase substantially over the term of the Lease again affecting the value of the property.
You will also be required to contribute towards maintenance, insurance through payment of a regular service charge.
Maintenance will either be arranged by the freeholder direct usually through a managing agent or via a management company. On larger developments you will often see more than one management company in place, a company which deals with the block in which the property is based and also for the estate generally. Things can and do get very complicated.
For the majority of leasehold properties you will need to get permission from the freeholder to carry out any major works to the property, while there may also be limitations on things like keeping pets, floor coverings and decoration and sub-letting the property.
Selling or remortgaging a leasehold property requires communication with the freeholder and any management companies involved. There will be additional costs to meet the administrative fees charged in providing all of the information which will be needed by a prospective buyer. It’s very important to keep all correspondence and documentation received during your ownership as this will be required on a resale.
When you reach the end of the fixed period then the full ownership of the property will revert to the freeholder. This means that the shorter the length of the lease the less value the property has. As a general rule of thumb a Lease of eighty years or less will need to be extended before it will be considered as adequate security for a mortgage company.
Leasehold is usually reserved for flats and apartments, but this has not always been the case. Many older properties in England, Wales and Northern Ireland are on leaseholds and, in recent years, there have been a number of new-build homes sold in this way. In 2019, the UK government banned this practice, ensuring that all new-build homes are sold as freehold. They also made a number of changes to what could and could not be included in leases of flats and apartments.
Currently around 20% of homes in England and Wales are leasehold. There are real concerns that many leaseholders are effectively stuck in their homes due to the mounting difficulties in relation to selling, remortgaging and owning leasehold properties. These include: –
- Excessive ground rents and unreasonable rent review arrangements
- Spiralling service charge costs (including costs arising from cladding and other safety issues)
- Cost and complexity of the lease extension process
Share of Freehold
You will often see flats and apartments marketed as being not leasehold or freehold but as “share of freehold”. In reality these are leasehold properties where in addition to buying the leasehold title to the property you are also buying a share of the freehold title which is either held in the personal names of the other flat owners or in the name of a company which is owned and controlled by the flat owners. There is no such thing as a “share of freehold” title. Whilst a resident controlled freehold does come with lots of benefits including reduced costs and more control it’s important to note that often these can be problematic on resale as the residents do not maintain proper record keeping of insurance arrangements, works carried out, costs incurred and contributions made. These properties can therefore be more complicated than they originally seem.
Just a little footnote on commonhold. This is a method of ownership which bridges the gap between leasehold and freehold. It was introduced in 2002 but hasn’t caught on with fewer than 20 commonhold developments established since that date.
The stated aim of both main parties is to move to this method of ownership and scrap leasehold altogether. This system adopted in many other countries is seen by many as a fairer simpler system. You can find more information in relation to commonhold here https://commonholdnow.uk/
If you are thinking of buying or selling a property in the near future, please do not hesitate to contact our large and experienced Residential Conveyancing team across our three offices: St Albans, Harpenden and Luton.
Disclaimer: General Information Provided Only
Please note that the contents of this article are intended solely for general information purposes and should not be considered as legal advice. We cannot be held responsible for any loss resulting from actions or inactions taken based on this article.
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