The terms freehold, leasehold and commonhold are used to describe the legal tenure, or basis of ownership of a property, whether it is a building or a piece of land. If you go house hunting, you may notice that for one property you have the opportunity to buy it freehold, whereas another is offered on a leasehold basis.
If you look more closely, you will also notice that freehold properties tend to be detached, semi-detached or terraced houses and bungalows, while leasehold properties tend to be flats. This applies mainly to residential property. Most commercial property, such as shops and offices, public houses, etc., tend to be leasehold properties, irrespective of the type of building.
So, what is the difference between freehold and leasehold property and why are not all properties freehold?
The freehold of a property includes not only the house or bungalow, but it also includes the land it is built on. In the very simplest of terms, when you buy the freehold of a property, you buy everything, and nobody else has any ‘interest in the property. ‘Interest’ is a legal term to mean ‘financial investment/ownership’.
If you are the freeholder of a property, you are at liberty, within the restrictions of local authority building control, to make any alterations to the property you wish. However, if the property is ‘listed’, either Grade I or Grade II, then you will need permission from the local planning authority for any alterations.
If you own the freehold of a property, you are the owner of the property for as long as you wish and until you sell on the freehold.
When you buy the lease of a property, you buy the right, or any subsequent leaseholder, to occupy it for a specific period. Owning the lease means you are also the leaseholder. The person who owns but cannot occupy the property is the freeholder. Leases are usually granted for 99 years, after which the right to occupy it reverts to the freeholder. More recently, leases for up to 999 years have become common.
Most flats are leasehold properties, and while it may sound a contradiction, it is better to own a leasehold flat than a freehold flat; we will explain why later on. When you purchase the lease of a property, you will also be responsible for paying ground rent to the freeholder. That ground rent is literally that, rent paid for the use of the land the property is built on. In most cases, ground rent is a nominal amount.
With flats, there is usually an additional annual payment which has to be paid to a managing agent. That payment is a service charge. This charge covers the cost of maintaining communal areas, together with the lighting of communal areas and insurance for the building’s structure. You will be responsible for insurance of anything inside your flat.
Besides, depending on the conditions of the lease, the maintenance of external walls and roof may also be included in the service charge. If not, then you will be legally bound to contribute to any costs involved in the maintenance or repair of the walls and roof.
The amount you have to contribute will be based on the size of your flat in comparison to others in the block. With modern flats, it is usual for each leaseholder to be responsible for an equal share. Thus, if there are eight flats in the block, you will be responsible for one-eighth of the costs.
When buying the leasehold of a flat, you must work out what the ground rent is and whether there are any provisions for its increase. It would be best if you also established what the service charge is and how much it is allowed to increase by each year. You should also find out if there are any major structural works due in the next few years and what the likely costs will be, such as replacement of the roof.
Additionally, when buying a flat, it is essential to know how many years are left on the lease. If that number is less than 76, then you may have trouble getting a mortgage or, of equal importance, it may make it harder to sell your flat if you decide to move in ten years and there are fewer than 76 years left on the lease.
You can always approach the freeholder to establish if they would be prepared to extend the length of the lease and, if so, how much it would cost.
In certain circumstances, you may be able to buy a share of the freehold of a flat. This is again quite common with modern flats where, in a block of four, each flat is sold with a one-quarter of the freehold of the whole property. You would then form your own management company to cover the maintenance of communal areas and to maintain the whole structure of the building. This then brings us neatly on to commonhold property.
Commonhold property was first introduced in 2004 and generally involved flats. As in the example given above, if you have a block of four commonhold flats, there is no landlord or separate freeholder.
Instead, the four flat owners become mutual owners of the entire property, and you will create a commonhold association, which becomes the ‘freehold owner’. Each of you will be a member of the commonhold association and will have an equal say in how the property and communal areas are maintained. This way, you can keep a cap on costs. Unlike a leasehold property, the most significant advantage of a commonhold property is that there is no lease, so the value of each flat will not fall the closer the end of the lease is.
It should also be noted that providing everyone in the same block of flats is in agreement and is prepared to make the necessary financial contribution; it is possible to buy the freehold of a leasehold property and then convert it to a commonhold property.
It is essential when buying a leasehold property that you have a conveyancing solicitor to check the terms of any lease. Here at Qredible.co.uk, we have solicitors who specialise in property law and conveyancing. We would strongly recommend you contact a conveyancing solicitor to advise you on the legal aspects of any lease belonging to a property you are interested in buying.
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