The Difference between Freehold and Leasehold

This week, one of Britain’s richest men, the Duke of Westminster, could see the value of his estates plummet this week benefitting 2 million households across England and Wales.

If the ruling goes in favour of the claimant, the Property industry will be hugely affected, slicing as much as half off the cost of extending a lease or purchasing a Freehold.

At present there are estimated to be 2.1 million homes in England and Wales where leases have less than 80 years remaining. The cost of extending leases back to 99 or 125 years could fall by 31% if the legal challenge succeeds.

The case involved the following:

A small flat in Chelsea where the lease has fallen to under 23 years was charged £420,000 to agree an extension. The surveyor on the Property is challenging the system of lease valuation which was commissioned on behalf of the Duke of Westminster more than 20 years ago.

The Duke of Westminster’s estate includes the freeholds to some of the most expensive Properties in the world with the duke (Hugh Grosvenor, 26) one of the richest men in Britain with a fortune estimated at £9.5 billion.

If the Mundy case goes in favour of the leaseholder, it is expected to go to the supreme court on appeal.

However, even if the case is unsuccessful, leasehold valuations are expected to fall after a government review into the sector.

Below, we will discuss the difference between Freehold Property and Leasehold Property to give you an insight into the world of Leaseholds.

Leasehold vs Freehold

If you purchase a leasehold property you have purchased the right to use the dwelling for a number of years. You do not own the land that the dwelling stands on. In this arrangement, you’re known as a ‘leaseholder’. On the other hand, when you purchase a freehold property, you become the sole owner of land permanently.

In England and Wales, flats are most commonly owned on a leasehold basis, whereas houses are normally sold as freehold Properties – however, there are exceptions.

With leasehold properties the land is owned by the landlord i.e. the ‘freeholder’. Once the lease runs out, ownership of the entire property will revert back to them.

Leaseholders must also get permission from the Freeholder to make certain alterations to the Property as well as paying rent each year – known as ‘ground rent’.

How long do you need left on your lease?

As a lease is a legal document it will outline how long you are allowed to occupy a building as well as what you need to pay towards insurance and upkeep.

When they are first drafted, residential leases often last for 125 years, with some lasting up to 999 years.

As a general rule, the longer left on a lease, the better as Properties with short leases can be difficult to sell or mortgage.

Once the lease on your Property falls below 80 years, its value plummets.

Should I avoid buying a Property on short leasehold?

Leases of 90 years or less can start to be problematic for leaseholders and should be approached with caution. Any lease of 80 years or less will affect the value of the Property. If you have a short lease, the Property can decline in value even if Property prices are rising. This means that people will be reluctant to buy the Property and mortgages companies will be reluctant to lend on it.

Service Charge

The cost of purchasing a leasehold property isn’t the only charge that a buyer will incur.

You will also need to pay a service charge – these can add a significant sum to your monthly bill.

A service charge is payable for maintenance of common areas of the building as well as supplying services to the building or employing a managing agent to do so on the freeholder’s behalf.

While older leases have fixed charges that are payable each year, newer agreements include ‘variable service charges’ which allow the freehold to estimate the cost. This allows freeholders to raise fees to finance one-off expenses i.e. refurbishing a lift or fitting a new roof.

Ground Rent

This is usually a token fee payable to the freeholder in exchange for renting your dwelling.

On older properties this is usually a relatively low amount – £50-100. This can either be a fixed charge, or an increasing cost.

If you extend your lease, your ground rent is reduced to zero or a ‘peppercorn rent’ as in the past, the terms of a lease couldn’t be reinforced without a set ground rent.

Ground rent is likely to concern the majority of leaseholders, however, there are exploitative ground rent schemes on some new-build homes which see ground rent costs multiplying over time.

How do I extend my lease?

Many leaseholders have the right to extend their lease. This can be a complicated business and throw up many questions.

To be legally entitled to extend your lease you must live in the property for two years. If you have lived in the property for two years or more, you have the legal right to add 90 years to the existing lease.

This does not change, regardless of how many years are left on it; however, Leasehold extensions and Leasehold extension costs can be complicated and time consuming which is why Solicitors are involved.

Can I buy my freehold?

Buying the freehold of your building can give you more control over what you pay out in maintenance charges and protect the value of your property.

Buying a share of the freehold in a block of flats differs from buying the freehold of a house.

When you buy the leasehold of a house, you’ll outright own the land your property sits on.

If you buy your flat’s freehold, however, you’ll jointly own the land with your fellow freeholders – meaning you’ll have a share of the building’s freehold.

You can usually extend your lease to 999 years for free (aside from legal fees), freeing you to manage your own service charges, and potentially increasing the value of your property too.

For more information or advice, or a no obligation chat with a solicitor at Sutton & Co. Solicitors please call us on 0121 448 3107.

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