Buying Freehold or Leasehold Property in the UK

Buying freehold or leasehold property

Investors is planning to purchase property residential purposes or investment in the buy to let (BTL) rental market need to consider the type of title you will hold on the property as this may affect the properties future value and may impact on lender willingness to provide mortgage finance.

Freehold and leasehold are two fundamentally different legal forms ownership. Estate agents often gloss over their meaning but the difference can be between acquiring a property that is worth buying and one that is not.

Buying freehold property

Freehold title means that you have absolute ownership of the land and all buildings that stand on that land can do with it what you please subject to local planning regulations and building regulations.

Advantages of holding freehold title to a property

• Annual ground rent – Freehold title means that you will not be required to pay annual ground rent as you are the owner of the land.
• Building maintenance – Maintenance of the building remains your responsibility and you are free to handle this in any way you wish.
• Property value – freehold property will almost certainly hold its value better than a similar leasehold properties unless the remaining lease term is very long and charges low.

Buying a leasehold property

With leasehold, you are buying the right to the use of the land and buildings for the period of the lease provided you pay the annual charge for the lease. Failure to do so will forfeit your right to use the property.

Leases can be for up to 999 years but between 40 and 125 years is common. When the lease ends your entitlement to use the property ends and the property will revert to the landlord without compensation to you. If at some point you will expect to sell on the property then you will need to ensure there will be sufficient lease term left to make the property attractive to a buyer. Once the lease falls below about 70 to 80 years the value of the property to a potential buyer reduces.

General conditions normally associated with leasehold contracts

The lease is a legal contract between the leaseholder and the freeholder sets out the conditions the leaseholder must meet.

• The leasehold contract – This document will be specific to this particular property and although it will cover the usual situations it is likely to contain some very specific clauses. It is imperative that you review these carefully with your legal representative prior to signing the lease.
• Landlord general duties – In flatted property the landlord will normally be responsible for maintaining the common parts of the building such as the entrance hall, staircases and roof. Ground maintenance such as grass cutting is also usually included. These services are not free and landlords will charge for this.
• Property maintenance fees – Check your lease to confirm how maintenance will be carried out and determine how this will be handled and paid for.
• Buildings insurance – In the case of flatted property it is likely that the landlord will have responsibility for arranging the buildings insurance but will charge you for your share of the premiums. Contents in the home will not be covered and this will fall to you.
• Ground Rent – Leasehold is a form of tenancy and their will be an annual charge for renting the leasehold..
• Landlord reserve funds – The majority of leases allow the landlord to collect money in advance for future works. The lease should clarify this and state when maintenance works and payments will be due. Contributions made are not usually reimbursed when the property is sold.
• Landlord permissions – Should you wish to make alterations to the property you will need to seek the permission of the landlord. This will all be set out in the lease agreement but be aware that permission may not always be forthcoming.
• Leaseholder risks – If you fail to fulfil the terms of the lease the lease will become forfeit. Should a court approve this then the landlord can repossessing the property.
• Property managing agents or factors – In many situations the landlord will arrange the management of the property themselves but often they will appoint a managing agent or factor for this.
  • Property managing agent fees – the managing agent will usually invoice the leaseholders for their portion of fees either monthly or quarterly.
  • Major works – Where major works are being undertaken the managing agent or factor can charge an additional fee which would normally be a percentage of the total cost of such works.

Rights to extend your lease

There have been a series of Government acts aimed at providing leaseholders with protection against short leases. Leaseholders now have the right to extend their lease or have to buy the lease but this can be expensive. The law covering this is slightly different depending on whether you have a house or flat.

• Extending the term of the lease– If you have a flat you will be entitled to extend the lease by 90 years on top of the unexpired period of lease you have left. For houses the period you can extend for is 50 years.
• Conditions for extending the term of the lease – To claim your right to extend your lease you must have held the lease on the property for 2 years and if it were originally leased on a long lease basis that period may be extended to 21 years or more.
• Extending the term of the lease before buying – Investors considering buying a leasehold property with a short lease should insist that the landlord extends the lease prior to purchase.
• Notifying your Landlord to extend the lease – When you inform your landlord that you qualify for the right to extend the lease the landlord can either accept your offer and negotiate terms with you or they can reject your offer. If they reject your offer you can challenge them in court.
• Professional legal assistance – Due to the complexity of lease conditions it is always sensible to seek assistance from you solicitor to make sure everything s properly arranged.

Mortgages for leasehold property

Where a property is leasehold then the period that is left on the lease will be taken into account by any lender and if the lease is still sufficiently long, you can expect normal lending rules to apply. Short leases under 75 years may cause difficulty and could mean that the property cannot be mortgages.

Buying the freehold of a property

Owners of leasehold property and may wish to consider buying the freehold on their property.

• Rules covering buying freehold – the rules that apply to the purchase of a lease on flatted property are subject to the terms of a law called the leasehold reform housing and urban development act 1993. This act stipulates that a minimum of half of qualifying leaseholders have to participate in the scheme and leaseholders qualify if they have owned their lease for two years or more.
• Buying the freehold as a group – To purchase the freehold as a collective group all of the leaseholders in the building will need to meet the requirements.
  • Collective enfranchisement – Often the group of leaseholders will form a company to hold the freehold and hold the property as a nominee.
• Cost of buying the freehold – Landlords who are prepared to sell their leasehold must be compensated for their expected losses. Some of the things considered under the act are a follows.
  • Loss of value – The Landlord must be compensated for loss of value when the property reverts to freehold.
  • Loss of income – The Landlord must be compensated for loss of ground rent that had applied to the property under the original lease.
  • The marriage value of the property- The marriage value relates to the potential for the property to increase in value between the time of purchase and the date the original lease expires. The act stipulates that in the event of the leasehold being sold this value should be split half and half between landlord and purchaser. However if the length of unexpired time left on the lease is greater than eighty years the marriage value is ignored under the act.

Should investors buy leasehold property

Current property law in England and Wales effectively ensures that most flats be leasehold. Scotland is a bit different as most buildings and flats are now held freehold. Given that you have a well written and long term lease on a properly managed property a leasehold property ought to provide a perfectly good investment.