Residential Leasehold Property : Leasehold vs Freehold

Leasehold vs Freehold Property

What Do Leasehold And Freehold Mean? Why The Difference Matters

Buying a leasehold property usually means that you own the flat or house (but not the land beneath it) for a fixed period (such as 99 years) as set out in a lease agreement. You will have rights to occupy and use the property during that time.

Buying a freehold property usually means you are purchasing the building and – importantly – also the land beneath it.

Both ways of buying have their advantages and disadvantages. Need advice? Call us now on 01202 355697.

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Buying Freehold Property

Buying your property freehold is usually better than buying leasehold because you generally acquire unrestricted (or less restricted) ownership.

You may have to buy leasehold property to start with if you are buying a flat in a residential block – or if a developer of a house insists on a leasehold sale.

Leases are usually granted for 99 years or more. As time passes, you may struggle to sell your property if it has a short lease. This may force you either to extend the lease or to buy the freehold.

You may not be able to buy the freehold as an individual but it may be possible to do so through collective enfranchisement – but only if at least 50 per cent of your fellow leaseholders participate.

Usually, you would be a shareholder in a company nominated to buy the freehold on behalf of all participating leaseholders living in your block.

So, if there are 20 participating flat owners/leaseholders, then you may end up owning a 1/20th share in a company that owns the freehold.

Such shareholdings can sometimes differ, depending on contributions and participating leaseholders.


Buying A Leasehold Property

Buying residential leasehold property can seem confusing to start with because it is such a complex area of the law.

It is very easy to confuse residential leasehold property (purchasing a flat with a lease of, for example, 99 years) with short term tenancies of say six months or more.

This is because the law uses the same terms – landlord and tenant – in both instances.

So even if you have bought a flat by way of a lease that lasts for decades, by law you are still classified as a ‘tenant’ or ‘leaseholder’ – and the ‘freeholder’ will be referred to as the ‘landlord’.

And even though you own your leasehold flat, you may still have to:

  • pay the freeholder/landlord a ground rent (read your lease carefully before signing it – beware of ground rents that increase sharply or even double every 10 years)
  • pay for maintenance at least once a year to help cover the cost of cleaning, repairs, gardening and buildings insurance (although each leaseholder should consider their own separate contents insurance)
  • abide by rules (covenants) and restrictions such as not owning pets, not running a business from your home, not being noisy or anti-social.

Your freeholder will usually be responsible for the upkeep of the main structural parts of the building, any communal areas (lifts, stairs, hallways) and the grounds surrounding the block.

They will usually pass the cost of this on to you and your fellow leaseholders as maintenance/service charges. You may also have to contribute to a sinking fund to cover the anticipated cost of very large long term projects such as a new roof or major lift repairs.

These generally expected obligations should always be checked when buying leasehold property.

A freeholder may instruct a managing agent or a separate management company to look after maintenance, administration and the collection of ground rent. The leases may require or enable this type of structure.

If you fail to pay service charges or sinking fund contributions on time then the freeholder can seek enforcement. This may include applying for your mortgage lender to meet the cost, which may be a breach of your mortgage lending conditions and may have further financial consequences to you. 

In very rare cases of non-payment or other breaches of the lease (such as anti-social behaviour), the ultimate sanction can be  forfeiture of the lease – you could lose your home (or your share of the property).
 

Your Leaseholder Rights In Relation To The Freeholder

As a leasehold property owner in England and Wales, you have many legal rights. Our specialist solicitors are here to help you with them.

Contact us to discuss your legal rights. They include:

  • Right to Buy the Freehold – relating to only flats, this is also known as collective enfranchisement. To succeed, it needs at least 50 per cent of the leaseholders to participate.
     
  • Right of First Refusal – again relating only to flats, if the freeholder/landlord wants to sell their interest, they must usually first offer to sell it to the leaseholders on the same terms.
     
  • Right to Extend Your Lease – if you have owned your flat for at least two years, generally speaking, you are likely to have the right to a ‘new lease’ on the same terms but with an extended length and a reduction in ground rent to a peppercorn (virtually nothing at all).
     
  • Right to Manage (RTM) – if you and your fellow leaseholders (of flats) are unhappy with the management of the building or you and the other leaseholders wish to take control of the management function, you can exercise the right to manage. There is no requirement to prove fault on the part of the existing landlord, managing agent or management company.
     
  • Right to Appoint a Manager – this is very similar to the Right to Manage (RTM) but there are a few legal differences. Firstly, there is a requirement to prove fault with an application to appoint a manager. Secondly, RTM can sometimes be unavailable if the building has commercial areas or if there is a resident landlord. If RTM is unavailable you should consider exercising your Right to Appoint a Manager.
     
  • Disputing Service Charges – as an individual leaseholder, you have the right to challenge service charges that:
    - are unreasonably expensive
    - do not meet the terms of your lease
    - are unfair or poor value because the work has been done badly.

    Service charge disputes are not uncommon. Leaseholders sometimes complain that landlords are not keeping the grounds and communal areas tidy or in repair; freeholders sometimes complain that tenants are not paying on time or otherwise complying with the terms of their leases.
     
  • Restriction on Demands – service charge and administration demands must include certain information. They must be accompanied by a summary of rights and obligations in a prescribed form (which differs, depending on whether they are service charges or administration charges). Ground rent demands must also be in a specific form.

    What’s the difference between service charges and administration charges? Service charges are shared between all the leaseholders in the block; administration charges apply only to specific leaseholders.
     
  • Consultation on Major Works (£250+ per leaseholder) or Qualifying Long-Term Agreements. These agreements must be:
    - for at least 12 months or for a sum in excess of £100 per leaseholder
    - between the freeholder and third parties such as cleaners and gardeners.

Leaseholders must be consulted in a prescribed way about any major works or qualifying long-term agreements.


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