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Freehold vs Leasehold: Understanding Home Ownership Types

Buying a house or downsizing is known to be one of the most stressful processes to undertake. What’s more, in recent years there have been scandals involving leasehold agreements. These were often due to conveyancing solicitors misinforming or missing out key information when advising home buyers of agreements and the rights associated with the lease.

Want to know the differences between freehold and leasehold agreements? Then look no further. This guide will explain the important pros and cons of both.

Freehold ownership

Freeholders own the land, bricks and mortar of a property and therefore become responsible for its maintenance. You can pretty much do as you wish with the property as long as it is within law. A freeholder’s responsibility includes pets, damage, alterations such as extensions and insurance (buildings and contents).

One benefit of freehold ownership is that the freeholder can buy or sell the property when they like. In addition, mortgage repayments are the only definite cost to worry about, unless maintenance is necessary.

On the flip side, any other admin fees are to be completed by you as a freeholder.

Leasehold ownership

This type of ownership is typically relevant to flats or apartments, but some houses too, especially new build houses.

If you buy a property under leasehold, you do not own the land, but own the property for an agreed number of years, as per the contract with the freeholder or landlord.

During the lease period, owners are essentially renting the property from the freeholder or landlord. A lease can be anywhere between 80 years and 999 years, but the usual period is 90 or 120 years initially.

Ownership of the property is given back to the freeholder at the end of the lease, unless they agree to extend it, which can take several months. It is advisable to get a short lease extended before you buy a leasehold property, as once you have bought it, you do not have rights to extend it for at least two years of ownership.

You can also ask to buy the freehold from your landlord at any time.

Pros to leasehold ownership

The benefits of leaseholds include that you are not directly responsible for maintenance such as necessary upkeep, decorating, updates to plumbing, lighting and so on. You will, however, be paying for this through a service charge or ground rent, typically between £50 and £100 annually.

Cons to leasehold ownership

If the length of the lease term (how long is left on the lease) is under 80 years, it can be challenging to get a mortgage or re-sell because the freehold value is much less.

In these cases, it might be easier for you to sell your property for free with an online agent, to avoid traditional and expensive estate agent fees.

It is vital that you find out the length of the lease term. Take into consideration how long you plan on living there. If your move is only temporary, opt for a leasehold property with a longer lease, or a freehold home that can be sold on more easily.

These properties can be hard to mortgage, as lenders may refuse to contribute when there are high ground rents involved. This could lead to a decrease in equity.

What is ground rent?

Ground rent is paid to the freeholder and covers costs to maintain the land and building.

Ground rent is generally quite low – around £50 and paid annually. However, it can be paid in one instalment, bi-annually, or quarterly. This will be detailed in your written agreement, so always make sure to read this before you buy any property.

New build houses have been known to have high ground rents.

It is within your rights to see a summary of how this is spent, and to see receipts of this being used as stated by your landlord or the freeholder.

Leasehold scandals

In some cases, ground rent is variable rather than fixed. This is the main cause for leasehold scandals that has attracted media attention in recent years.

In some cases, variable ground rent can double quickly, and this can come as a surprise. Therefore, make sure to ask your agent or solicitor about ground rent before you buy.

This should not put you off buying a property under leasehold if you are interested in this type of property. The scandals were generally because of poorly communicated agreements, and if you ask about variable ground rents you should not incur unexpected fees.

If you are unsure, get advice from a conveyancer or solicitor to make sure you understand the agreement beforehand. One way to avoid miscommunication and poor advice is to find a solicitor independently, rather than use the one suggested by your agent. They may have a financial relationship behind the scenes.

Commonhold agreements

Due to leasehold scandals, the Government started to negotiate a ban on leasehold sales for houses last year. The alternative proposed was commonhold agreements, which would apply to properties like multiple flats in one building, where there is more than one occupant in the freehold.

Commonhold agreement grant equal ownership to leaseholders of a building. The main benefit to this is that the ownership is not for a set period like leaseholds, and maintenance of shared areas such as gardens or corridors can be completed by the occupiers without third-party management. This can give the occupier more control and freedom with the property and its maintenance.

This said, it is not yet against the law to lease houses, and commonhold agreements may be hard to come by until this has been confirmed.

Are you looking to sell your home quickly, perhaps due to ground rent or leasehold complications? If so, SOLD.CO.UK can help. Find out more.

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