Lessons in Gobbledygook – Freehold v. Leasehold

Written by Saracens Solicitors- saracenssolicitors.co.uk/

So, you have found the perfect property that ticks all the boxes, you have made an offer, and it has been accepted – congratulations!

What happens next will make all the difference in ensuring you get into your house, apartment, canal boat or whatever it is that you want to call “home” without the associated bouts of panic and hypertension. What am I talking about?

Drum roll please…. choosing the right solicitors for the legal process.

It pays to shop around to get a reasonable costs quote so you can decide who to instruct to do the work for you. There is usually a clue in the price and as with most things in life; you get what you pay for; although cheap doesn’t always mean poor quality, and expensive doesn’t always mean good quality.

Consider recommendations from friends and family, the quality of work that the law firm/conveyancing practice has previously done and any industry accreditations or quality marks as this shows that their work has satisfied independent industry standards. In addition, you can also ask for client testimonials which most good firms will readily offer you.

One of the first questions you will be asked when contacting firms for quotes will be:-

Is the property you are buying, freehold or leasehold?”

And so you unwittingly enter a world of legal jargon.  But thankfully, it’s easy to understand legal gobbledygook as we explain…

Land ownership

In England and Wales there are two main types of land ownership – freehold and leasehold.

If you are buying a freehold property (usually a house which could be a bungalow/terraced property/semi-detached/detached) you will have an outright ownership of the property and the land on which the property stands and the sky above it. So, if you own a freehold house and wanted to build a stairway to the moon, you would, in theory at least, be within your legal rights to do that, although the local council will probably have something to say about planning permission, but that’s a subject for another day. With freehold property, you are ‘free’ to do what you want with it, within reason. If you wanted to paint it bright yellow with purple stripes, you could do just that, without having to seek official permission from anyone else.

If you are buying a leasehold property (usually a flat), then it’s slightly different. You only own the lease over the property, you do not have any ownership of the land on which it stands; i.e.: you have a right to the lease for a number of years until that lease expires or until you sell the lease, if earlier.  As the leaseholder, all you have is time. The leaseholder is required to make a payment to the owner of the land (known as the freeholder) to have use and enjoyment of the property.  The document which sets out the time   that you will own the property for is known as a lease and is for a set term of years. When the lease comes to an end, the ownership of the property automatically goes back to the freeholder.

Buying a leasehold property

All flats in England and Wales will be leasehold properties.  The leases are usually for a term of 99 or 125 years, but there are some leases which can be for 999 years.

The term of the lease starts to decrease from the date it starts.  Therefore, if you are buying a property which says that it has a 125 year lease, you must take into account the lease commencement date.

For example, a flat being sold today with a lease that was granted for 125 years on 1 April 1984, will have decreased by 30 years, and so will have 95 years remaining of the lease. Generally, the fewer the years on the lease, the cheaper the lease becomes to buy outright, but conversely the more expensive the premium becomes to extend the lease.

Any lease which has more than 80 years still remaining on its term is a good “marketable” lease.

This means that any bank lending a mortgage will be happy that the lease will not come to an end any time soon.

If there are less than 80 years remaining on a lease, then some banks may require that the lease term is “extended” to give it a longer term before they will agree to lend against it.

The legal process of buying a leasehold property is similar to that of buying a freehold property.  There is additional work involved for your property lawyer as they will need to look into a few more documents but in terms of the actual legal process, there is no difference.

What is a lease and what is in it?

A lease is a legal agreement between two parties known as the freeholder (the landlord) and the leaseholder (the person who benefits from the lease, commonly known as the tenant).

All the rights and responsibilities of the freeholder and leaseholder are recorded in the lease itself.  There are conditions as to what you can and cannot do with a leasehold property and failure to comply with the conditions could result in you being in breach of the lease, and allowing the freeholder to take legal action against you and even claim the property back from you.

As a leaseholder you will have to pay a “rent” to the freeholder under the lease.  With long leases, this is known as ground rent – and it literally means that you pay for the privilege of staying on the freeholder’s land.

The ground rent is a fixed amount and should be clearly stated in the lease.  Some leases which have a greater length (i.e. 999 years) often have a “peppercorn” ground rent.  This means that there no money is actually paid to the freeholder.

Residential leases with a shorter term will have a monetary ground rent payable.  Failure to pay ground rent  does allow a freeholder to take legal action  although practically, ground rents are usually very low amounts, typically less than £100 per year. The lease will also state that the freeholder can claim payment for looking after the building.  This is known as service charge.

The service charge is collected for the maintenance and upkeep of the building in which the flat is situated.  This can include decoration, cleaning, lighting, insurance of the building against risks like fire, flooding, etc.

Other conditions will include the permitted use of the property, restrictions against changing the layout of the property, and the use of floor coverings, to name but a few.

There are restrictions that are also placed on the freeholder too.  These include allowing the leaseholder to peacefully enjoy the property upon payment of the ground rent and service charge, making sure that leases of other flats in the building have the same terms and conditions and insuring the block in which the property is situated.

The freeholder cannot just walk in and take over the property if you have paid the ground rent and followed the conditions in the lease.  The freeholder must allow you to enjoy your property with as little unnecessary interference as possible.

Why Buy Leasehold?

It is your property lawyer’s job to go through the legal documents, check the lease and all associated documents for you.  There is more paperwork involved with leasehold properties but don’t let that put you off. .  Your lawyer will report to you information about the lease and the property itself. If there are any concerns about it, your lawyer will bring these to your attention and advise you how best to proceed.

Working in the City of London, space is at a premium but so are travel costs. Living closer to work and the social hub that the city has to offer could actually save you money for travel and this is why many city workers rent or buy here It is also the reason why most residential properties in city centres are leasehold flats.

Buying a leasehold property is often cheaper than freehold property and allows you to take that step onto the property ladder.

As explained above, the lease term will start to decrease from the day it starts.

The law allows leaseholders the right to “extend” the lease.  There is a cost aspect to this and you will need to pay the freeholder a sum of money to extend your lease and also pay the freeholder’s legal fees too.  In return you gain more years on your lease and more importantly add value to your property.

Like freehold property you can sell your leasehold property at any time.  You may need to get consent from the freeholder to do so, but the freeholder cannot unreasonably stop you from selling the property.

The law also allows you to make an application to purchase the freehold from the freeholder too.  To do so, leaseholders must meet certain legal criteria and pay a premium.

For further information about buying your home or investment property, please call the residential property team at Saracens on 020 3588 3500. SARACENS SOLICITORS – saracenssolicitors.co.uk/

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