Ways to own a property
In England and Wales, there are two main ways to own your home: Freehold and Leasehold.
Freehold means that you own the whole building and the land it stands on, giving you ownership of the property for an unlimited period of time. You will be responsible for maintaining the buildings and the land that make up the property.
Most houses are freehold properties, but not always, and some may be held leasehold which is explained below.
Freehold is generally the type of tenure that is preferred – it’s a simpler arrangement.
A leasehold is where you are given the right to use a property or part of a property for an extended period time. This arrangement is defined in a lease document and will be for a fixed period (typically anywhere from 99 years and sometimes up to 999 years), after which the freeholder can take back the property unless you extend the lease.
Even though leases are normally granted for a very long time, technically a leasehold is a temporary right to occupy the property and it is this that differentiates it from a freehold ownership which is permanent.
A leasehold arrangement is typically used for flats and blocks in England and Wales where the freeholder own the block of flats and the land it stands on and then grant a lease to each of the occupiers of the individual flats, although there are leasehold houses too.
The lease will detail what the freeholder (also called the Landlord or Lessor) is required to do and likewise what the Leaseholder (also call Tenant or Lessee) is required to do. This will include the payment of an annual ground rent, a charge stipulated in the lease, often typically a modest charge of £50-£300 but your solicitor will need to check the exact detail of the individual lease.
You are also likely to have to pay an annual service charge for the maintenance of the communal parts of the property along with a contribution to the cost of insuring and managing the building.
When you buy a leaseholder property, you are actually buying the lease from the seller and taking it over the remaining period of the lease. A mortgage lender will generally only want to lend you the money where there is a significant period of time left to run on the lease. Typically, they will want at least a further 70 years.
If you own a leasehold property you will need to pay a share of the costs of the building which will typically include:
- The buildings insurance
- Electricity and heating of the communal areas
- Cleaning of the communal area
- The cost of repairs to the fabric of the building
- The cost of someone managing the building
Sinking Fund/Reserve Fund
Inevitably, as time goes by properties will need to be maintained and upgraded, for example, regular external decoration of a building or replacement of the roof covering. Equally, there are occasions where there is unexpected expenditure or an overspend and this also needs to be managed.
A reserve fund, which will be stipulated in the lease, is generally a modest amount of money collected and held by the manager of the freehold to cover unexpected expenditure or overspends. If the property is well managed it does not need to be a large amount but can be used to smooth out the cash flow.
A sinking fund is very similar but is designed to collect additional funds over the long term to pay for specific, normally large, value repairs or replacements, such as painting or roof replacements.
The lease will detail what charges can be made and the cost will form part of the service charge payable each year.
Share of freehold
Leaseholders can join together to purchase the freehold and each of them will then own a share of the freehold. Individually they each have their own lease, but collectively they will own the whole building and be the freeholder. The advantage of this arrangement is that it gives more control to the leaseholders, especially when thinking about communal running costs or the extension of a lease.
This was a new type of ownership put in place in 2002 but has failed to take off in the way that people expected. It was designed to modernise ownership and instead of there being a leaseholder and a freeholder, the flat owners collectively owned everything. It is broadly the next step on from share of freehold and because there’s no lease, each flat owner owns their flat permanently and not for a lease term. Most properties however still use the more traditional freehold/leasehold set up