Freehold vs Leasehold

Written on 2 March 2020 by Giles Cook in Frequently Asked Questions


If you’re looking at buying a flat in Belgravia, Mayfair or Knightsbridge, it is most likely a leasehold property. Many of the stunning terraces that characterise the area belong to the Grosvenor Estate and other landowners and are sold on a leasehold basis.

For anyone new to the London property market, it’s worth finding out about freehold vs leasehold and all the things you need to consider when purchasing a flat or apartment.

 

Freehold vs Leasehold

What are the different forms of home ownership?

There are two main types of home ownership in England; freehold and leasehold. Most flats and apartments are sold on a leasehold basis, but some houses are too. Whether a home is on the market as freehold or leasehold is one of the first questions you should ask when viewing the property.

 

What is freehold?

When you buy freehold, you are buying the property and the land which it is built on. There should be no additional services charges or ground rent to pay on the property, which you will own in perpetuity. Unless it is a listed building or in a conservation area, you are free to make alterations to the property, subject to planning laws.

 

What is leasehold?

Unlike with freehold homes, buying a leasehold gives the purchaser the right to occupy the property for the amount of time specified in the lease.

Leaseholders own the property’s internal space, fittings, floor and walls. They do not own the land the flat sits on or the fabric of the building, including the roof and external walls.

 

Key features of leasehold

What is in the lease?

The lease will outline the leaseholder’s obligations, which may include keeping the flat in good order or behaving in a neighbourly fashion. It may also include clauses such as no pets, without the prior consent of the landlord.

As part of a leaseholder’s contractual rights, they would normally expect the building’s owner – also known as the landlord or freeholder – to manage, maintain and repair the building’s structure, common areas such as staircases, hallways and lifts and exterior grounds.

 

Lease length

A key thing you need to check before viewing a property is the lease length – as these can vary dramatically.

A flat’s original lease is likely to be for a long period, which far exceeds the number of years its first owner would live there – most commonly, around 125 years, although some are for as long as 999-years. As properties get older, and pass between owners, the length of time on a lease is reduced.

Ownership of a leasehold home will revert to the freeholder once the lease runs out. Anyone buying a flat with a lease of less than 80 years remaining may also find it harder to obtain a mortgage. Even if you are a cash buyer, you may find it difficult to sell the property on, should you wish to.

 

What is ground rent?

Many owners of leasehold properties will need to pay ground rent to the landlord on an annual or half-yearly basis. This has traditionally been a nominal amount, known as a ‘peppercorn rent’ and sometimes for less than £1 a year – or no more than £300.

 

What are service charges?

To cover the costs of maintaining the fabric of the building and the shared areas of the development, the landlord or managing agent will impose a service charge. Fees will vary depending on the size of the development and what is included.

 

What is a sinking fund?

Some service charges include contributions to a reserve or sinking fund that is used to cover large, one-off bills.

 

Extending the lease on a leasehold property

Under the 1993 Leasehold Reform, Housing & Urban Development Act, flat owners are entitled to a 90-year extension to their lease at a fair market price, as long as they have owned the property for at least two years.

If you are buying a place with a short lease, you can make it a condition of sale that the vendors begin this process for you to inherit.

The legal process for extending your lease is called leasehold enfranchisement.

If you wish to formally ask your freeholder to extend the lease, it is advisable to appoint a solicitor and a valuation surveyor to recommend a realistic cost – known as the premium.

The amount of the premium will depend on factors including the value of the property, the number of years on the lease and any ground rent you need to pay. You can get a rough idea of the cost by using the lease extension calculator on the Lease Advice website.

You will need to serve a Section 42 notice, under the 1993 Leasehold Reform, Housing & Urban Development Act, proposing your premium for extending the lease. You will also need to specify when your landlord should respond to you with a counter notice – this must be no less than two months from the date you served the original notice.

You may be asked to pay a deposit of £250, or 10% of the premium set out in the Section 42 notice, if it’s more. The landlord also has a right to access your property to conduct their own valuation. You will be liable to pay your own and your landlord’s legal and valuation fees.

The landlord must respond to you with a counter notice, stating whether they accept your terms. You will then enter into negotiations until terms are agreed by you both.

If your landlord doesn’t respond, or submits a response after the deadline, you can apply to the county court for a lease extension on the terms set out in your notice. You must do this within six months of the original deadline.

It isn’t necessary to take this legal route if you can negotiate terms with your landlord informally. However, it is still advisable to have independent legal advice before agreeing to anything – to make sure you are receiving the most favourable terms possible.

 

Issues or disputes between freeholders and leaseholders

Disputes between the landlord and leaseholder can be referred to an independent body known as the First Tier Tribunal. Orders made by the First Tier Tribunal can be appealed against in an Upper Tribunal, if either party thinks there was a legal problem with original decision. Once the Upper Tribunal has given its ruling, it can be enforced by a county court order.

 

Buying a property with a short lease

If an owner doesn’t take steps to extend the lease, there may be only a short period of time left – this could be the reason why a flat in an area such as Belgravia may appear to be surprisingly good value for its location. Purchasing a property with a short lease may be an affordable way of buying in a prime location, as long as you accept the risks involved and are prepared to negotiate a lease extension, once you’ve owned the property for two years.

However, you can also make leasehold enfranchisement a part of your negotiation when buying a property with a short lease. If the current owner has started the enfranchisement process before a sale is completed, you are allowed to inherit and continue that legal action.

 

Buying the freehold on a leasehold property

If you live in a leasehold property, an alternative to extending a lease is to get together with your fellow leaseholders and buy a share of the freehold. This is known as collective enfranchisement.

You will need to get at least 50% of leaseholders in your block to agree to participate for the collective enfranchisement to go ahead.

 

What is the right to manage?

The right to manage was introduced through the Commonhold and Leasehold Reform Act 2002. It gives leaseholders the statutory right to take over the management of their property from the landlord by setting up a special company – a right to manage company.

 

Find out more

Find out more about leasehold enfranchisement on the lease advice website.

Best Gapp is a Belgravia estate agent, chartered surveyor and property valuer that specialises in leasehold enfranchisement. For further information about leasehold property for sale in Belgravia and other parts of prime central London, contact Best Gapp’s property specialists today.

Giles Cook

Giles recently joined Best Gapp in 2017 as Partner Designate and Head of Residential Agency, bringing over 20 years’ experience to the firm. Following a three-year stint as an Area Director for Foxtons, he went on to head up Chestertons’ sales and lettings operations in central London, before becoming a Partner at top Knightsbridge boutique WA Ellis.

All articles by Giles Cook

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