Difference between freehold and leasehold property in the UK explained
Why is the average sold price of houses in Newington Green over £1.1m, yet flats for sale in this vibrant part of North London have an average selling price of just over £540,000?
It is not just the fact that houses in Newington Green offer more space than apartments. It is down to the tenure of the property being bought or sold. In this article, we explore the difference between a freehold home and one that comes with a leasehold.
The overwhelming majority of houses in Newington Green, Islington and Highbury (and indeed across the UK) are sold on a freehold basis. But, it is rare to find a flat on the market that is not a leasehold property.
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What are the different forms of homeownership?
There are two different forms of legal ownership for residential property: freehold and leasehold.
What is freehold?
Purchasing a freehold property gives the buyer sole ownership of both the building and the ground it stands on. This is the most typical way of selling houses as they are standalone properties and include the land they sit on. However, some new-build houses are now being sold with a leasehold, so make sure you check.
Key Features of Freehold:
- You will not have to pay ground rent or service charges
- You will be responsible for the maintenance of the building
What is leasehold?
A leasehold gives the purchaser the right to occupy the property for the period specified in the lease. Leases are usually long term – often 90 years or 120 years and as high as 999 years – but can be short, such as 40 years. In England, flats are generally owned on a leasehold basis.
Key Feature of Leasehold:
- The leaseholder has a contract with the freeholder (commonly known as the landlord), which sets down the legal rights and responsibilities of either side.
- This contract would typically state that it is the landlord’s responsibility, to manage, maintain and repair the building’s structure, common areas such as staircases, hallways and lifts and exterior grounds.
- The contract will also layout the leaseholder’s responsibilities which may include keeping the flat in good order, behaving in a ‘neighbourly’ fashion and not doing certain things, such as major works to the property, sub-letting, or keeping pets, without obtaining the prior consent of the landlord.
- Leaseholders will have to pay ground rent as well as service charges.
What is commonhold?
Commonhold is a variant of freehold and is championed by anti-leasehold groups who would like to see this replace leasehold.
It works by giving each property owner in a block of flats equal rights to a part of the freehold along with an equal responsibility in the maintenance of shared areas. Its main benefits are that there are no time limits or leases to extend, and shared spaces are managed between the property owners without the need for third-party management companies. Commonhold has yet to gain popularity in the UK. To our knowledge, there have not been any apartments in the Newington Green area sold as commonhold.
You may also have heard about having a share of freehold. This is like commonhold and can be bought from the landlord, as long as half of the leaseholders also agree to buy a share. It means that the leaseholds own a share of the company who owns the freehold. This gives the leaseholders more control over their home, as well as giving them the power to extend their lease for up to 999 years.
More information about leasehold
Service charges for leasehold properties
Most leaseholders will pay service charges to the freeholder or company responsible for managing the property. This covers all the activities that are needed to maintain the building including, buildings insurance, maintenance and repairs and provision of leisure facilities, concierge services or additional security.
What is ground rent?
Ground rent is traditionally a token fee paid to the freeholder in exchange for renting the land the property sits on. Increases in ground rent must be detailed in the leasehold document, so make sure you look at this carefully.
Ground rent is not an issue for most leaseholders. The concept of ground rent stems from a time when the terms of a lease could not be enforced unless there was a set ground rent, however small. In modern times, if you extend your lease, your ground rent will usually be reduced to zero.
What is a sinking fund?
A sinking fund covers large-scale works that a building may require. Not all leasehold agreements include a sinking fund, but those that do will require leaseholds to pay into a fund set aside for major structural works in the future.
Conveyancing fees are likely to be higher when buying a leasehold property because of the complexity of the leasehold contract.
Disputes between freeholders and leaseholders
Friction between freeholders and leaseholders is fairly common.
Leaseholders often complain that freeholders don’t maintain the building to a sufficiently high standard or keep common areas clean and tidy. Fees are also a source of contention with many leaseholders feeling they are being overcharged.
Freeholders complain that the leaseholders breach the terms of the lease, for example, sub-letting, undertaking building works or getting a pet without permission.
What is right to manage?
Right to Manage (RTM) lets some leasehold property owners take over management of the building – even without the agreement of the landlord. The leaseholders must give the landlord notice that they plan to do this.
If the leaseholders are successful, the landlord (freeholder) will still own the building, but the leaseholders will manage it.
The leaseholders will setup an RTM company, the freeholder has a right to be a member of this company and will get at least one vote.
The RTM company will be responsible for things like:
- collecting and managing the service charge
- upkeep of communal areas (such as communal hallways and stairs)
- upkeep of the structure of the building (such as the roof)
- dealing with complaints about the building from other leaseholders
New leases usually last for up to 125 years, although it’s possible to have a lease for up to 999 years.
When the term of the leasehold reaches zero years, the property reverts to the freeholder. The value of properties with short leases will rapidly reduce as the lease period decreases. A residential lease with less than 80 years left to run constitutes a short lease.
When buying a leasehold property, check how many years are left on the lease and how many will likely remain by the time you come to sell.
Extending a lease
Leaseholders have a legal right to extend their lease but only after living in the property for two years. The costs of extending a lease are significant and comprise the premium payable to the freeholder as well as legal costs and taxes. The premium amount is negotiated between the freeholder and the leaseholder and is based on the increase to the value of the property following the lease extension. Typically, the leaseholder can expect to pay the freeholder 50% of the increase in value.
For more information about both freehold and leasehold property for sale in and around Newington Green contact M&M Property today.