Buying Freehold vs Leasehold
Who owns the property?
Freehold usually trumps leasehold for one major reason: control. As the owner, you can mostly do what you wish with your home provided you keep within local planning rules.
It is important to understand the difference between a freehold and leasehold property. The majority of leasehold properties are flats – whether in a purpose-built block or a conversion from a house - and can have restrictions to your rights as the owner. A freehold property, on the other hand, gives the buyer certain rights and responsibilities.
Before you buy a property – whether freehold or leasehold - the solicitor will do local searches to check whether there are plans for any major developments near you which could affect you such as a main road or new railway line. The preparation phase should also throw up if there are any rights of way or rights of access across your property or alongside it.
What is freehold?
The freeholder owns the building and land outright and has control over its maintenance and day-to-day running. Freehold property means that the owner has complete and absolute ownership of the land and all buildings that stand on the land.
Freehold – The freeholder owns the building and land outright and controls its day-to-day running.
Leasehold – You purchase the right to live there for a period of time. The freeholder – or landlord – is responsible for maintaining it.
The main restrictions come from your local authority. If you want to make major alterations you will have to check with the planning department beforehand and conservation areas often have rules about changing the look of the outside of your property such as painting the brickwork or altering the appearance of the windows.
Freehold property tends to be more expensive than leasehold property.
What is leasehold?
A leaseholder, on the other hand, only purchases the right to live in the property for a certain length of time – typically between 90 and 125 years. In effect, it is simply a long tenancy. The length of the leasehold is set at the beginning and reduces every year.
You are buying the space in your leasehold property and everything within its walls including the floorboards, walls (provided they're not structural) and ceiling, but you don't own the structure or the land it is on. These, along with the common parts such as the communal entrance hall and staircase, are owned by the freeholder.
The freeholder, who is often referred to as the landlord, is responsible for maintaining the building and insuring it but you will have to pay for it – along with the other leaseholders – through the service charge which can run into thousands of pounds a year, especially if a major repair is due.
There are often disputes with landlords over the yearly service charge, which may include contributions to a sink fund for major renovations. The landlord may employ a managing agent to run the property and oversee its maintenance. Provided the landlord isn't the local authority, the leaseholders can band together to take over the management of their block of flats under 'right to manage' rules.
Leaseholders have to pay ground rent annually which is normally quite cheap (£50 - £200 in most cases).
You can sell your home during the leasehold. Even though the length of the lease is falling, it will still go up in price if properties in the area generally are rising. But once the leasehold falls below a certain number of years your property will be hard to sell.
It's difficult to be specific as it depends on a number of factors. For instance, in London's upmarket Belgravia it's not unusual for flats with only 20 – 30 years left on the lease to fetch amazing prices still, but normal flats will struggle to sell once the lease is down to around 80 years.
You can buy an extension to the lease or even buy the freehold under certain conditions which are explained below.
Buying your freehold
The law gives a leaseholder two separate rights.
The first is the right to buy the freehold of a building, either individually if you own a leasehold house, or collectively in the case of a block of flats. A group of leaseholders will need to meet certain requirements to purchase the freehold together.
The process is generally known as collective enfranchisement. Using this route, the group of leaseholders may form a company to purchase the property as a nominee.
Rules regarding the purchase of a leasehold property are subject to the terms of a law called The Leasehold Reform Housing and Urban Development Act, 1993, which has since been amended by the Commonhold and Leasehold Reform Act of 2002.
This act stipulates that a minimum of half of qualifying leaseholders have to participate in the scheme. Leaseholders usually qualify if they have owned their lease for two years or more and their lease is for longer than 21 years. For blocks of flats, at least two-thirds of the owners must be qualifying leaseholders. But, if you live in a building with only two leasehold flats, both leaseholders need to participate in purchasing the freehold.
However, in an interesting quirk in the legislation, if you're buying the freehold through a company – the collective enfranchisement route - there is no such ownership requirement. But there must be more than four flats in the building and it can't be a purpose-built block.
The second right is to extend the lease. You can ask to extend it for up to 90 years once you have owned it for at least two years. You have to agree the price with the landlord and if you can't come to a fair price you can ask the Leasehold Valuation Tribunal (LVT) to settle it.
Limits to your rights to buy the freehold or extend the lease
These properties are exempt:
- Crown properties – those owned by the Queen
- National Trusts properties
- Building within a cathedral precinct
- Leaseholders have the right to buy the freehold – but there are strict terms
- Freeholders have more rights and freedom than leaseholders
- Leaseholders have the right to extend their lease
Owning the freehold of your home trumps leasehold as you have more control