Freehold or Leasehold?

Buying a house or home is one of the biggest decisions and investments people will make in their lifetime and is generally speaking their largest asset.

This is still true whether you decide to purchase a freehold or a leasehold property. So what is the difference?

Ownership of a freehold property could be described as owning the property outright and indefinitely until the property is sold on. Ownership of a leasehold property means you own the property for the term of the lease only which can be sold during the course of the term. The transfer of an existing leasehold title is known as “assignment”. For the sake of clarity in this article we are talking about a long lease of many years – commonly 99 or 125 years or longer not short term letting agreements such as an assured short hold tenancy.

Both freehold and leasehold ownership is recognisable as ownership of property at law and for mortgage lending purposes but it is important to consider which better suits your personal circumstances both now and in the future.  For example, an obvious benefit of purchasing a freehold property is that you do not have to worry about the lease expiring and as such having to negotiate with your landlord terms to extend your lease.

However, a benefit of purchasing a leasehold property is that usually you do not have to worry about the maintenance and repairs of the building which are generally carried out by the landlord or a management company. There are some exceptions to this.

Leasehold

Advantages

• Purchase price may be lower
• May be ideal for short term needs
• Perhaps a good way to get onto the property ladder
• In most cases the landlord or management company will be responsible for the repair and maintenance of the structure of the building subject to receipt of financial contributions by the tenants (service charge)

Disadvantages

• A lease will expire at some point in the future, in this case an extension will need to be negotiated which will involve additional costs – even if the lease has not expired or is many years away from expiry a buyer may require you to start or complete this process
• Leases generally impose more extensive covenants/regulations upon the tenants and can be very restrictive for example in some cases not to keep pets
• Usually alterations to the property will require landlord’s consent
• Yearly payments of ground rent and service charge are generally payable and can be high if large maintenance works are required to the building

Freehold

Advantages

• You own the property outright (subject to any third party interests such as a mortgage)
• You can generally do with the property as you wish within the confines of the law, any local authority requirements and restrictions contained within the legal title
• Generally you will not have to pay any ground rent/service charge or management company charges however some freehold estates do have a management company that looks after common parts such as roads or shared areas so look out for this
• It may be a more suitable long term investment

Disadvantages

• You are responsible for all maintenance and repair
• Freehold property is generally more expensive to purchase in the first place and could be out of reach to those taking the first step on the property ladder

The costs involved when purchasing a freehold or leasehold property are generally similar, for example legal costs, stamp duty, search fees and Land Registry fees will still need to be paid. However, you can expect to pay slightly more overall when purchasing a leasehold property. Additional costs include:-

• Ground rent apportionments at the point of completion – ground rent is usually paid yearly in advance and you will have to pay for the proportion of the year that you take ownership for which the seller has already paid for in advance
• Service Charge apportionments (as for ground rent) – service charge is estimated at the beginning of the year and will then be adjusted up or down at the end of the year dependant upon actual expenditure
• Administration Charges of the landlord for example payment for a management pack or landlord’s consent to the transfer of the leasehold title
• It is usual to pay a fee to the landlord to notify them of the change of ownership of the leasehold title and any new mortgages

You should also be aware that when you are selling a leasehold property additional costs may be payable. For example it is usual for the seller to pay for the information pack that will be required from the landlord, or any management company acting on their behalf, to provide to the buyer upon any sale. Some leases contain a provision where a percentage of the purchase price is to be paid to the landlord upon any sale so look out for this.

The Government website provides some helpful information regarding ownership of leasehold property

There are many different types of leases or example leases of a flat within a larger building, a maisonette or the lease of a house, shared ownership leases are becoming increasingly popular. In view of this it can be difficult to know exactly what you are buying. Therefore obtaining legal advice from an experienced legal professional is crucial whether you are buying freehold or leasehold property.

If you need advice call our Residential Conveyancing team on 0800 088 6004.