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What Does It Mean To Buy A Leasehold Property?

Freehold and Leasehold. What’s the difference?

The two most common forms of property ownership in the UK are freehold and leasehold. But what do these terms mean in practice? Whilst it might sound quite technical, knowing whether or not the property you want to buy is freehold or leasehold is extremely important. It makes the difference between owning your own home outright, and having a living on somebody elses land. Here is a breakdown of some of the most important aspects of owning a freehold or leasehold property.

What Does It Mean To Buy A Leasehold Property?

If you are planning to buy a property and it is Leasehold, this means that you have a lease from the person who owns the freehold (sometimes called the freeholder or landlord). This lease states that you are allowed to use the home for a number of years. Leases are usually long term, often 90 years or 120 years and sometimes as high as 999 years. However, they can also be short, like 40 years. If you buy a leasehold property, you do not own the land the property is built on. All rights to this land remain with the freeholder. Flats are almost always leasehold. They usually come with monthly or yearly charges to the freeholder or their agents to cover service, maintenance or ground rent. Make sure you’re aware of the service charges before you put in an offer on a property as it might affect whether you can afford to live there.

You are entitled to ask the landlord to extend the lease at any time but they can charge you for doing this. After you have owned your home for two years, you have the right to extend your lease by 90 years as long as you are a ‘qualifying tenant’. You are normally a qualifying tenant if your original lease was for longer than 21 years. Always seek the advice of a conveyancing solicitor.

It is important to remember that affordable ground rents can rise substantially over the years always ask your conveyancing solicitor about the rental projections on any leasehold purchase.

Drawbacks Of Leasehold Properties.

One of the biggest drawbacks of buying a leasehold property is that due to the set number of years of ownership, they are technically a declining asset. As the years on the lease diminish, the property may become harder to sell or get a mortgage or remortgage on. Extending a lease is an option but this can cost from around £8,000, including conveyancing fees, to tens of thousands of pounds in total. It adds value to the property but is something that you would have to evaluate against the cost and bother of going through the process.

When you take into account the costs incurred by conveyancing solicitors advice, valuation report by a surveyor, your freeholder’s legal and valuation costs, which you are required to pay by law, and Land Registry fees, it might make you think twice.

With a leasehold property you:

  • Have a contract with the freeholder. This outlines the legal rights and responsibilities of you both
  • Rely on the freeholder to maintain the common parts of the building, like the entrance hall and stairs, gardens and the exterior walls and roof.
  • Other leaseholders can claim the “right to manage”, meaning it is their responsibility to do so.
  • Will have to pay maintenance fees, an annual service charge and your share of the buildings insurance.
  • Normally pay an annual “ground rent” to the freeholder.
  • Must obtain permission for any major works you want to carry out on the property
  • Might have to adhere to other restrictions like not owning pets or subletting.
  • Might forfeit the lease by not fulfilling the terms of the lease.

What Does It Mean To Buy A Freehold Property?

Freehold properties are the more attractive option when it comes to property purchase. This is because it means you own both your property and the land on which it stands. There are no time limits or maintenance charges other than those you choose to take on. Most houses are freehold though there was a recent controversial incidence of new-build homes being sold on a leasehold or part-freehold basis.

In these cases, leaseholders had the option to buy the freehold. Some developers of new-build houses have been reported as giving freeholds to buyers for nothing so if you find yourself in this position it is worth enquiring what terms are available.

With a freehold property:

  • You do not have to pay annual ground rent.
  • You do not have a freeholder, responsible for maintaining the building and charging you for doing it.
  • You have responsibility for maintaining the structure of the building including the roof and the walls etc.

Conveyancing And Leasehold Properties.

If you are buying a leasehold property then your conveyancing solicitor will need to examine the lease and its terms in addition to all the usual legal work involved in buying a property. They will also have to communicate with the landlord and/or management company as well as the sellers conveyancing solicitor. This can make the process longer and make the conveyancing fees more expensive.

Once your conveyancing solicitor has received instructions, they will ask the seller’s solicitor for is a copy of the lease. The lease is a contract between the leaseholder (you once you own the property) and the freeholder/landlord. The lease gives you the right to live in the property for a set period subject to specific conditions that will be written into the lease as outlined above. Your solicitor should then be able to provide you with a ‘report on title’. This includes a summary of the main provisions of the lease.

Conveyancing on a leasehold property is usually more expensive than that for buying a freehold property because your solicitor extra work to do. You in all likelihood have to pay extra conveyancing fees, through your conveyancing solicitor, to the landlord for providing the information and replying to enquiries. Sellers must pay for the Leasehold Management Pack which can cost from £300 to £800.

If you buy a leasehold property, you will also have to pay for a Notice of Assignment also known as a Notice of Transfer. Your conveyancing solicitor will send this to the landlord informing them you are the new owner. This can cost from nothing to £300. If you are taking out a mortgage, then a Notice of Charge is also sent to the landlord since the lender has an interest in the property. This will add another £50 to £200 to your fees on top of conveyancing and disbursements.

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