There are estimated to be more than 2 million leasehold residential properties in England and Wales. The numbers of these types of properties are increasing quickly, as since the turn of the century developers have been building leasehold flats or apartments rather than houses.
Why? Firstly because the size of the average British household is getting steadily smaller – so flats are more appropriate.
Secondly, the rising cost of property has put houses out of the reach of many people, especially in London.
Thirdly, in general terms developers make more money on flats and apartments, as distinct from houses.
Most flats and apartments in England and Wales are “owned” on a leasehold basis. It is very much the norm for houses to be freehold properties, but on they can be owned on a leasehold basis.
Click here to read about buying the freehold of leasehold houses.
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English property law
One of the first problems you may come across when buying a UK property is an understanding of the difference between leasehold and freehold.
You may be familiar with the terms but need to be clear on certain areas of detail before you make the big investment.
We tend to think about property in terms of bricks and mortar and a roof over our heads. English law views property very differently; rather than buildings, the law is concerned with the area of land on which a structure has been built. As a result, property owners own land rather the structures on top of them which can lead to significant complications where blocks of flats are concerned.
Freehold and leasehold – the fundamental difference
In the case of a freehold property, one owner owns both the building and the land. This is how most property in the UK is owned, especially houses, almost all of which are owned on a freehold basis.
The position for flats, however, is different. Whereas house buyers can usually simply buy a house and the plot of land it stands upon, prospective flat buyers generally have to buy the right to reside in a part of the property (which will usually be owned in full be someone else). This right to reside is officially recognised through the award of a ‘lease’.
Those who own the land itself therefore hold the most significant form of ownership – the ‘freehold title’. This title can be bought and sold as well as inherited but it will never simply run out.
The person with ownership of the freehold title is known as the freeholder and they have the freedom to use the property however they see fit. Many freeholders wish to live on the property which makes ownership very straightforward but others may wish to allow other people to reside on the freehold, hence the need for leases.
What is a lease?
With a leasehold property, the building and the land have separate owners. Leases are commonly originally drawn up for a period of 99 or 125 years. However different lease lengths are perfectly possible. For example, when joining together with your fellow leaseholders to buy the freehold of your block, it’s common to follow that purchase with extending your lease up to 999 years.
If a number of flats within a block are being sold, each buyer will be given a lease detailing their rights, obligations and any conditions they are under. They will therefore each get exclusive possession of whichever part of the building they hold a lease for. It may be that the freeholder continues to manage and administrate the building but they may instead choose to put it in the hands of a property management company.
A lease effectively gives the purchaser the right to use of live in the land for a given length of time. The lease will often be conditional upon the payment of rent or the way in which the property is used for example. However, unlike a license, a lease gives the leaseholder ‘exclusive possession’, meaning that they can prevent anyone (particularly the leaseholder) from entering their property for the duration of the lease. Whilst this lease can be inherited and sold (with the same conditions it had when first purchased) it will expire, unlike the freehold.
The only way to avoid losing your interest in the property when the lease expires is to arrange for a lease extension.
Click here to read more about lease extension
If you choose to buy freehold property and become a freeholder, you won’t need to worry about UK Leasehold Extension. You own the exclusive rights to both the building and the land on which it sits on. Freehold is the norm for houses but freehold flats remain relatively unusual (landlords usually retain the rights to the freehold of a block of flats, however long the lease).
After buying freehold property, although you may need permission to make structural changes, particularly with listed buildings, you can usually make as many alterations to the property as you wish. It’s this autonomy that makes freehold so appealing.
Once the property is purchased, apart from a mortgage, council tax and usual contents and buildings insurance there are no additional or ongoing costs. You will need to meet utility bills but providing your mortgage does not go into arrears and you are threatened with eviction, you can stay and live there for as many years as you please.
The downside to this freedom is you have total responsibility for any costs or repairs required for the building. Also, if a leasehold gives you the right to own a flat for as long as a thousand years, then a leasehold extension worry can fade. In this case, there is not so much of a difference with freehold. Worries and costs about lease extension, will either not become apparent in your lifetime or be shared by many people.
Leasehold – The advantages
If you have decided on a house or flat with leasehold, you only own the right to live in that property rather than the land itself. Unlike houses, flats are usually owned on a leasehold rather than freehold basis. Also some leases might be more flexible than others so it’s worth having a look at more than one. Then there is the leasehold extension issue to think about.
Leases last for a set period of time (anything from 99 to 125 years). This is an important point as you have to make sure your lease has over 80 years before expiry. With a shorter lease, if you do not extend the lease, you will find it difficult to secure a mortgage with most lenders. It’s possible to negotiate a lease extension up to 999 years and you have the right to force the freeholder to extend your lease.
Leasehold – The disadvantages
Leasehold properties have regular costs.
- A service charge is payable and covers many aspects of building maintenance such as lighting, cleaning and window cleaning. Additionally, service charges normally cover roof maintenance and building insurance. These costs are normally met by the freeholder out of the service charges which each tenant pays monthly.
- Ground rent is usually paid yearly to the land owner because you live in a building that is on their land.
Leases can also be surprisingly restrictive in what you are able to do with the building. A lease provide rules of what can and can’t be done when a person lives in that building. A lease may state that no pets are allowed to live in the building, or that nothing can be fixed to the outside. There may also be rules that are enforceable by the freeholder, such as the maintaining the grounds and painting the building’s exterior every few years. However when it comes to long leasehold (i.e. leases granted originally for 21 years or over), there is no such thing as a standard lease.
So if you’re thinking of buying a leasehold property – or already own one, do make sure you read your lease and understand it – don’t be afraid to ask your solicitor about your lease– that’s what they are there for.
Leases are temporary rights and eventually run out. So what should you do if your current lease has nearly run out, or indeed is anything less than 85 years. The answer is simple – a UK lease extension. If a lease runs out, ownership of the building is transferred from the building owner to the land owner, who then becomes a freeholder. Short leases discourage most potential buyers. In addition, you will struggle to get a mortgage if the lease on a property is less than 75 years.
However, the leaseholder can negotiate with the freeholder (ie the building owner) for a lease extension – and if the leaseholder has owned a flat for at least two years, then subject to certain restrictions, they can force the freeholder to grant them an additional 90 years on the lease.
The other main disadvantage with some leasehold flats relates to their management. The starting position is that the freeholder responsible for managing the flat – they will set the service charge and maintain the block, choosing contractors or a management company to do so. However as many leaseholders have found out, freeholders don’t always do the best job of managing block properly for a reasonable price. And that can prove expensive for the leaseholder.
However there are 3 potential solutions to this issue for leaseholders:
- coming together jointly to buy the freehold – click here to read more about lease enfranchisement
- exercising their right to take over the management of their block themselves – click here to read more about the right to manage
- an application to court to appoint a new block manager – click here to more about the court-appointed property manager
Freehold or leasehold – what’s right for you?
So, are you looking for your own property where you can plan the changes to be made, with freedom? Or maybe that leasehold flat with shared costs is your ideal and a leasehold extension is no problem especially with a good lawyer who is knowledgeable about leasehold rights.
Whatever decision you make, ensure from the outset you know the facts and it is the right decision. If you are confused or are anxious about making the wrong decision, it’s wise to consult a specialist solicitor before taking too much risk.