To Have and to ‘Hold’
Lesley Price FCILEx sets out the differences between being a freehold and leasehold owner. And what to watch out for in terms of purchase costs.
Freehold in its simplest form means you have outright ownership of a property and the land on which it stands. There is no time limit to your period of ownership and you will be responsible for the entire property in terms of maintenance, repair and insurance. With older properties this usually also means your property is not subject to outside charges for communal facilities or services but this is not always the case particularly on more modern estates. Freeholds are usually houses as while it is possible to have a freehold flat you are not able to get a mortgage on these so they are very rare.
**Rentcharges. When freehold isn’t ‘free’ **
The free element of freehold as mentioned above differs on certain estates which do have matters which the property owners are required to pay towards collectively. These can include shared road maintenance, common gardens, shared spaces and street lighting. In these cases the property will usually still be freehold but will be subject to a legal obligation called a rentcharge that obliges the owners to contribute a amount each year to the communal pot. Depending on the size and shared areas of an estate these charges can be quite high. When buying a property with a rent charge it is important you see both the estimates and at least the last few years final bills. So you can budget for how much you are likely to have to pay and you can make sure the charges are stable at roughly the same amount each year.
Leasehold flats are in a communal building so the Landlord/Freeholder will own the roof, foundations and the outside skin of the building. This would usually be insured by the Landlord under a block buildings insurance policy and you will be asked to contribute towards the costs. Unlike a freehold title your ownership of the property is time limited by how long the lease runs and in theory when your lease term runs out the freeholder gets the property back. (Although there are a number of ways to extend leases when they get too short) You will pay a service charge towards the maintenance of the shared parts of the building and you will be restricted in what alterations you can make to your property.
There has been a lot of media discussion in the last few years regarding leasehold houses. And indeed no more leasehold houses are now being built on development sites. But these do fall into two different categories and it is important to know the two different types of leasehold homes and why they are very different.
Established second hand leasehold houses are usually leased for a 999 year term at a very minimal rent often a nominal value. In many cases the original freehold can no longer be located and you can treat the property in many respects like a freehold house.
Newer leasehold houses were built on sites where the developer wanted to retain ownership of the land under the development for investment purposes and typically came with higher rents and shared maintenance costs that existing leasehold houses. These are now no longer allowed to be built and an experienced solicitor will want to proceed with caution if the property you are looking to buy falls into this category. These properties may be capable of being converted to freehold or the terms of the Lease improved by varying or reducing the rents. But this will require proper investigation and you should be very certain of the advice you have been given before proceeding with one of these homes.
Shared Ownership Properties
All shared ownership properties and many retirement properties will be leasehold. Whether they are houses or apartments. This is because the mechanism that creates the ownership ‘shares’ is a model form Lease that is approved by most mortgage lenders in advance and designed to regulated fairly the relationship between a Housing Association and their shared owner. The amount you will pay towards the upkeep of your home will vary depending on whether it is a house or apartment but estimates should always be obtained so you can fully budget for the ongoing costs involved. With flats once you complete your final staircasing then your property will remain leasehold but in the case of a shared ownership house you can often convert your title to freehold after final staircasing. Make sure your legal adviser checks and confirms this for you.
**Costs implications. **
When deciding what type of property to buy, whether freehold, leasehold or shared ownership it is important that you seek experienced legal advice from a solicitor who understands that type of property. They should investigate all possible additional costs for you such as rent or maintenance charges, administration fees to be paid to landlords or management companies and future fees you may have to pay for consent for alterations or to let your property for example. It is important that not only the initial purchase costs but any ongoing costs you may be liable to pay are set out for you by your legal adviser. That way you can budget for them effectively and avoid any financial surprises.
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