If you’re thinking about buying a property, you’ve probably come across the terms ‘Leasehold‘ and ‘Freehold‘ along the way, but do you know what they actually mean? It is important that you have key information early in the process, so you can decide if a home is right for you.
With that being said, we will be talking you through how leasehold and freehold properties differ and we will also touch on the main things you should consider if you’re thinking about buying a leasehold property.
What is the difference between Freehold and Leasehold?
When you purchase a freehold property, it means that you own the property outright and this includes the land that it sits upon. However, when you purchase a leasehold property, it means that you own the property for a fixed amount of time and you do not own the land upon which it sits.
Generally, most houses in the UK are freehold and most apartments are leasehold however, there are still some houses in our local area that are leasehold which is why it is always important to check with your agent.
What is a long Leasehold contract? (AKA a Lease)
A lease is a contract between a leaseholder (you) and a freeholder (also known as a landlord), which outlines the terms under which one party agrees to rent an asset – in this case property – owned by another party.
In this instance, here is what you can expect:
- The landowner or landlord will generally manage and maintain the building subject to receipt of service charge and ground rent payments.
- The leaseholder will agree to keep the property in good order and pay any ongoing payments under the lease, such as service charges and ground rent.
Both parties are bound by the terms of the contract and there is a consequence if either fails to meet the contractual obligations.
You can also find more information here: Leasehold vs freehold: what’s the difference? – MSE (moneysavingexpert.com)
Length & Extension of Lease
A lease can be any length however, a typical term is 99, 125 or 999 years. Top tip – make sure you are aware of this number when you are looking to buy a leasehold as this could impact your mortgage options. Most lenders are less likely to provide mortgages where the lease has less than 80 years remaining.
The initial term starts when the freeholder creates the lease and reduces in length as the years go by. The term does not reset when the property is sold by one leaseholder to another, and when it the lease term ends, the leaseholder’s interest will end. Once the term ends, the freeholder will have the right to occupy the land and any property on it.
To extend the lease term, certain conditions have to be met and there will normally be a charge involved.
Leasehold charges
A lease typically contains a range of charges a leaseholder will need to pay every year. The most common charges include:
- Service Charges – The services charge is a fee that the leaseholder pays to the landlord to cover their share of the cost of maintaining the leasehold property. There will also be a charge for managing the building which can be performed by the landlord or a management company, such as cleaning and gardening. These charges will vary depending on the terms of the lease.
- Ground Rent – The ground rent is a fee that the leaseholder must pay to the freeholder, to rent the land upon which the leaseholder’s property stands, if required by clauses in the lease. Top tip – it is important that you are aware of these payments and understand how they may be increased in the future as it may make lenders less likely to provide mortgages.
- Sinking Fund – This is a fund set up to cover major works or emergencies such as roof repairs or replacing the communal boilers. Having a fund in place ensures that the cost of major but infrequent repairs are paid for equally by all generations of residents, rather than leaving large expenses to be footed by future occupants. This figure will be stipulated in your lease agreement and your solicitor should advise you on this when you first purchase your property.
- Other Charges – A leaseholder may also have to pay the freeholder administration charges in certain circumstances to cover the cost of granting approval (usually referred to as a permission fee) or to supply documents such as providing a management pack. You might also have to pay for a ‘notice of transfer’ (payable for adding a new owner).
You can ask us, your estate agent, for a full breakdown of these charges, whether they will increase per year and by how much. For more detailed information, you can visit the Shelter England website: Leasehold service charges explained – Shelter England
Share of Freehold
If your purchase includes a ‘share of the freehold’ it means that as well as purchasing the leasehold interest, you will also be buying the seller’s interest in the freehold title.
Buying the freehold can be a difficult process. We recommend that you get professional help from a solicitor and surveyor with experience in this area. Or visit The Leasehold Advisory for more information: How can we buy the freehold of our building? – The Leasehold Advisory Service (lease-advice.org)
Top 10 things to consider when buying a leasehold property:
- The number of years remaining on the lease term.
- The annual ground rent, whether it increases, the frequency of the increase and the method of the increase.
- The current service charge and what this covers.
- Whether any major works have been recently completed or are anticipated for which you may be asked to pay towards.
- Whether there are any restrictions on how you use the property or charges for certain activities.
- Whether there are requirements for gaining permission, for example, to sublet or alter the property, and whether fees will be charged for doing so.
- Whether ground rent payments are up to date and who collects them.
- Who the freeholder is and if there is one, which managing agent do they use for the property.
- Which insurance company will insure the building and what is the annual insurance amount. This may be addressed in the service charges information.
- Whether the freeholder has agreed to or intends to, sell the freehold (especially for new build properties).
We hope you’ve found this blog useful, and ask that you reach out to us should you have any questions. We would also recommend checking out the GOV website and watching their video: Buying or owning a leasehold home – GOV.UK (www.gov.uk)
You can call us on 01793 688 708 or email us at apartments@richardjames.uk
