In the UK there are two main types of legal ownership: Freehold & Leasehold. Although agents sometimes gloss over this, the differences are significant, and it’s very important to be clear on what sort of property title you’re purchasing. The different types of ownership come with different rights and responsibilities, so let’s dive in and get up to speed on owning property in the UK.
WHAT IS 'FREEHOLD'?
The 'freeholder' of a property owns it outright, including the land that the property is built on. It’s the simplest form of ownership, but bear in mind that if you buy a freehold, you are responsible for maintaining your property and land; as the sole owner of the whole lot (property & land), the cost and responsibility for repairs, or any other issues, will fall solely on you.
The main benefits of owning your property under a freehold title stem from the fact that you own it outright. You won’t have to worry about the lease running out, or deal with a difficult 'freeholder'. You also won’t need to pay any ‘ground rents’, service charges, or other 'landlord' fees.
Most UK houses are freeholds; when you purchase the house you own it, and the land it sits on, forever.
OWNING A ‘SHARE OF FREEHOLD’?
Share of Freehold is a sub-category of freehold title, and is significantly less common than freehold or leasehold. In practice it’s a sort of hybrid of the 2 main title types, and as such is often referred to as ‘Leasehold, plus Share of Freehold’, indicating that you have a leasehold title, but additionally own a share of the freehold too. You can buy a 'share of the freehold', along with other leaseholders (for example, other people living in a block of flats) if half or more of them agree to buy a share.
Doing this gives you more control over your home and the costs you’ll pay out. It also means you can extend your lease fairly easily for up to 999 years, which is a real bonus.
Share of freehold is suitable for things like apartment conversions, with little in the way of shared resources. Say for example, a terraced house is converted into 3 flats: in this instance there is likely little to ‘manage’, with respect to shared areas or amenities. Giving each flat owner a share of the freehold allows them to keep the running costs down, and maintain their leases cheaply.
WHAT IS A LEASEHOLD?
With a 'leasehold' title, you own the property and its land only for the length of your lease agreement with the freeholder. Basically, when you’re a leaseholder, you are effectively renting the property from the freeholder, but for a much longer term than most private rental leases.
When the lease ends (‘runs down’), ownership reverts to the freeholder, unless you are able to negotiate the purchase of a 'lease extension'.
In the UK most flats and maisonettes are owned under leasehold titles, with the exception of Scotland, where there are very few leasehold properties.
Buying a leasehold...
When you buy a leasehold property, you’ll effectively take over the lease agreement from the previous owner. Some key things to consider before making an offer are:
- Lease length: How many years are left on the lease?
- Financing: How will the length of the lease affect my ability to obtain a mortgage?
- Resale Value: How long do I plan to live here before selling, and how will the resale value be affected by the lease length then?
- Costs: What are the types of annual costs associated with maintaining this lease?
LEASE LENGTH ...IMPORTANT?
As a rule of thumb, if the lease has less than 70 years left, you will probably struggle to get a mortgage. Lenders will normally be looking for the lease to run for at least 30 years beyond the end of your mortgage, but would prefer to lend on properties with a much longer term.
It can be difficult to sell a property if the lease is for less than 80 years, so bear that in mind. If you eventually want to sell your leasehold property, you’ll need to think about how many years will be left on the lease at that time.
To avoid having to pay out thousands for a lease renewal, buyers should look for a property with a lease that's unlikely to drop below 80 years in the time that they live there.
Can I extend the lease?
You can request the permission of your landlord to extend your lease at any time. Once you’ve owned your home for 2 years or more you have the right to extend your lease by 90 years, if your original lease was for more than 21 years. The freeholder will charge you for extending your lease, and the cost will vary based on the property. If for some reason, you and the freeholder can’t agree on the cost of extending the lease you are able to appeal to the UK’s Leasehold Valuation Tribunal, who will step in to help you reach an agreement. In this case you may need to hire a solicitor and surveyor, so it’s worth being aware of those costs.
THE COSTS OF OWNING LEASEHOLD PROPERTY
If you own your property under a leasehold title you don’t own the land, which means you aren’t responsible for maintaining or running the building. This is the landlord’s job, and most will appoint a managing agent to do it on their behalf. However, the building's leaseholders share the costs of this management, by paying an annual service charge to the landlord.
Leasehold Service Charges -
Service charges can vary wildly from property to property, so if you’re browsing for a new home be very sure that you have a full breakdown of these costs before putting forward any offers. Service charges pay for things like electricity bills and maintenance costs for communal areas (hallways, lobby etc), repairs or maintenance of exterior walls, roofs and entrances. Buildings with lifts, or with extensive amenities such a pools, gardens and porterage, tend to have much higher service charges, as these amenities are costly to run and maintain.
With leasehold property the repairs and maintenance within your property are your responsibility, but you’ll usually need to get the landlord’s permission to make any major changes. Check the terms of your lease for more on that.
Other charges to be aware of are:
- Ground rents
- Administration charges
- Buildings insurance (arranged by the landlord)
Remember to include all of these costs when calculating affordability, so you don’t end up in hot water. For more information on these topics, contact the Leasehold Advisory Service, or peruse the excellent guides produced by Which.co.uk