When buying your first home, one of the first legal distinctions encountered is determining the property’s tenure, specifically whether the property is a freehold or leasehold. In this blog, I'm going to explain the differences in simple terms along with the questions I am asked most frequently.
- What does freehold mean?Ownership of a freehold property means you own the building and the land it stands on entirely and indefinitely. Freehold owners have greater autonomy over their property, having liberty to undertake renovations and alterations to the property, subject to planning permission.
- What does Leasehold mean?
Ownership of leasehold property means you own the property for fixed number of years under a lease, but you do not own the land it sits on. The land remains owned by the freeholder (landlord). For example, if the property is a flat, you do not own the shared parts or the structure of the building. Once the lease ends ownership of the property returns to the freeholder, unless both parties agree to extend the lease.
A leaseholder will be required to comply with any restrictions in the lease. These are known as tenant restrictive covenants. For example, you may need permission from the freeholder to make changes to the property, such as extensions or renovations and subletting the property.
- What charges do leasehold and freehold owners pay?
For a leasehold property, you are usually required to pay ground rent to the landlord and service charge for maintenance of the communal areas. The Leasehold Reform (Ground Rent) Act 2022 was introduced to abolish ground rent from being charged for most new residential leases. However, this only applies to new leases granted from 30 June 2022 and not existing ones. Leasehold owners are also usually required to pay administration fees which are usually payable when you buy and sell the property or when consent is requested from the Landlord for alterations to the property.For a freehold property you are solely responsible for maintaining both the property and the land and for insuring the building and contents. No ground rent or service charge is usually payable. However, it is becoming more common for freehold houses on new build developments or private estates to also be subject to service charges. These charges are commonly called estate charges and are contributions towards the upkeep of communal areas. The costs are shared out amongst the property owners of the estate.
- How can the length of a lease affect mortgage eligibility?
When purchasing a leasehold property, it is important to check the term of the lease remaining. As the lease term decreases, this may adversely affect both the property’s resale value and mortgage options. Lease terms significantly influence mortgage eligibility. Most lenders require lease terms to have at least 85 years remaining. Leases with shorter terms than this can be problematic, as the diminishing term adversely affects the property’s market value and consequently reduces the number of lenders willing to consider mortgage applications. Where a lease term falls below 80 to 70 years the availability of mortgage products can be impacted, due to the increased risk level for the lender as a shorter lease reduces resale prospects in the event of repossession. Nevertheless, a lender may be prepared to proceed and accept the property as security where a formal lease extension has been initiated or sometimes may permit both the mortgage and lease extension to complete simultaneously.
Marriage value represents the increase in the property’s overall market value after a lease is extended with 50% of this increase in value being payable to the freeholder. Marriage value only applies when a lease has less than 80 years remaining. Once a lease falls below this term, the cost of extension rises significantly as the leaseholder is required to pay 50% of the value added to the property by the extension to the freeholder.
- Future changes - What are the key reforms for leaseholders?
The Leasehold and Freehold Reform Act 2024 is aimed at making leasehold ownership fairer and more transparent. Implementation of the law is being phased in gradually. The key changes being introduced include longer 990-year lease extensions, abolishment of marriage value, better transparency from landlords on service charge and a ban on leasehold houses.Further building on leasehold reform, the government has published a draft Commonhold and Leasehold Reform Bill that is currently subject to parliamentary scrutiny. This reform could profoundly reform residential property ownership in the UK. The key changes proposed include:
- Ground rent caps of £250 per year for existing residential leases, reducing to a peppercorn (zero) after 40 years.
- Banning new leasehold flats. The bill proposes ending leasehold with commonhold becoming the default form of ownership for new residential flats. Under commonhold the flat owners will own the property outright.
- Abolishing forfeiture (termination of a lease) as a remedy for covenant breaches replaced with a fairer enforcement procedure.
If you have any questions regarding freehold vs leasehold or need help with any aspect of conveyancing, please get in touch and I’ll be happy to assist.