Posted on 28.11.17
When you buy a property there are many factors to consider – price, location, transport links, local schools, crime stats, what there is to do in the local area etc. depending on your requirements the list is potentially endless. However, few of these factors are as important as whether the property you’re purchasing is leasehold or freehold.
Many buyers, particularly first time buyers, can’t be blamed for thinking that when you buy a property, it is then yours to do with as you please. Unfortunately it’s not quite that simple. Whether you own the freehold or just the leasehold will affect your rights over the property.
Freehold Vs Leasehold
The fundamental difference between freehold and leasehold is that with a freehold property, you have outright ownership of the property and the land on which it stands. Whole houses are usually sold freehold whereas flats are often leasehold. Leasehold is a bit more complicated. If you own a leasehold property, you have a lease to live there for a certain number of years (anywhere up to 999 years) but someone else (commonly referred to as the ‘landlord’) owns the freehold.
Typically, freehold is always preferred as there is very little downside. As the freeholder, you have sole responsibility for maintaining the fabric of the building (walls and roof). You also have the freedom of not having to gain permission from the freeholder (often referred to as the ‘landlord’) if you want to make alterations to the property (such as adding a conservatory or extension). You also have the added bonus of not having to pay service charges and/or annual ground rent or to the freeholder.
With a leasehold property, you will pay an annual ground rent to the freeholder, you will normally have to get permission to undertake any major works or alterations to the property. Depending on the terms of the lease, there may also be other restrictions such as no pets or subletting. Failure to fulfil terms of the lease could lead to it becoming forfeit.
Declining Value of Leaseholds
There is more to consider when buying a leasehold property. First and foremost, it’s important to check the length of the lease as anything less than 80 years can significantly affect the value of your property.
If it’s a long lease the value of your property will be stable, but as the lease gets shorter, the leasehold property will reduce in value. The reduction will be minor at first but as the lease gets shorter the value will decrease at a greater rate.
Whilst whole houses are normally sold freehold, in recent years there has been an accelerating trend of leasehold houses (particularly new builds) with an estimated four million homeowners in England not owning the freehold rights to their property.
With leasehold new-builds it’s particularly important to check the terms of the lease for onerous ground rent clauses. There have been numerous controversial cases of escalating ground rent, where ground rent charges would double every decade eventually causing the amount to spiral to absurd levels, leaving the buyer with an unsellable property.
There have also been instances where buyers are told they have the option to purchase the freehold rights to their new-build property after a period of time for an agreed fee (typically £2000-£3000), only for the landlord to then sell the freehold rights to an Investment Company who then charge the leaseholder severely over the odds to purchase it, often amounting to £40,000 or more.
The unfair charges levied on buyers of leasehold new-builds have prompted proposals from Communities Secretary Sajid Javid to ban leaseholds on new-build houses in England.
It’s important to make sure you fully understand what purchasing a freehold or leasehold property entails, from potential charges and fees to your rights and responsibilities. The more knowledge you have, the easier it will be to spot any potential problems. If you have any questions, speak to your conveyancing solicitor.