Freehold vs Leasehold Property Ownership
As a prospective residential property purchaser, you may be more than a little curious about the differences between freehold vs leasehold. These two modes of ownership are entirely different, and any buying decision needs to be made with absolute clarity as to how your choice of property ownership will impact your future.
In this article, we will define each, explaining the key points of difference and some of the primary considerations you need to bear in mind when entering into a leasehold arrangement, or when considering freehold vs leasehold.
What is a freehold property?
Freehold is, thankfully, the most straightforward and common type of property ownership. If you own a property freehold, you automatically own the property and the land on which it resides, in perpetuity. In other words, you possess full ownership rights to your property and are entirely in control when it comes to maintenance of all aspects of the building. When it comes to selling the property, there are few legal barriers which prevent the transfer of ownership.
What is a leasehold property?
Under a leasehold arrangement, you own the property, but not the land and the building (in the case of flats). Instead, you enter into a leasehold contract with the freeholder. The owner of the building will be responsible for maintenance, and you will be required to pay additional costs for ground rent, maintenance, and service charges. Most importantly, your ownership of the property will not be indefinite; rather you will sign up to a lease for a fixed duration, which can be as long as 999 years, but commonly will be between 90 – 120 years.
As a leaseholder, you will need to request permission before undertaking extensive works to your property, and you may have specific restrictions on keeping pets or subletting. And, if a leaseholder breaches the leasehold agreement, they risk forfeiture (more about this below).
What some of the key considerations for leaseholders?
Payment of marriage value – Marriage value refers to the increase in the value of a property when a lease is extended (or following collective enfranchisement – see below). Under the Leasehold Reform, Housing and Urban Development Act 1993, the freeholder is entitled to receive a share of the marriage value when the lease is renewed if the remaining leasehold term has fallen below 80 years. In practice, this means that any prospective buyer must ensure that the length of the leasehold is as long as possible, and if they proceed with the purchase, they must take action to extend the lease while it still has 80 years or more to run.
Leasehold enfranchisement – Enfranchisement allows several leaseholders within a freehold building to apply to take over the freehold. Under such an arrangement, leases can be extended at will, and the responsibility for management of the building is placed into the hands of the new freehold owners.
Leasehold forfeiture – While rare, in theory, a freehold owner can seek to have a leasehold terminated on the grounds that the leaseholder breached the terms of the agreement.
In Northwest London in 2018, Charles McCadden, who owned a leasehold flat located above that of the freeholder Afshan Malik, was forced to vacate his £600,000 home after breaching the terms of his leasehold agreement. Mr McCadden had undertaken work (bathroom, kitchen and central heating) to his home without seeking permission from Dr Malik (as he was required to in his contract). Mr Malik took Mr McCadden to the First-tier Property Tribunal due to the breach and for not paying maintenance charges. The Court considered these serious breaches and ordered Mr McCadden to pay the outstanding fees and tribunal administration fee. He refused to pay or undo the renovation work hence Dr Malik pursued an order for possession and leasehold forfeiture, which was granted. As a result, Mr McCadden was left with nothing. The moral of this story is to make sure you understand all of the terms of your leasehold agreement and to keep within them at all times. And if you find yourself in a dispute with the freeholder, take action and seek legal advice from a residential property solicitor specialising in leasehold property matters.
Are leaseholds on the cusp of change?
Leaseholds are still commonplace across the country - as of 2019, there are in the region of 4.2m residential leasehold properties in England. However, formal moves are afoot to determine if leaseholders are being treated fairly. The Competition and Markets Authority (CMA) have initiated an inquiry into whether leaseholders have been provided with the necessary information on their rights when making their purchase, and also if unfair contract terms are being used to charge excessive fees.
This inquiry may shed new light on unfair practices in the leasehold property market, but in the meantime, leaseholders should ensure they understand the implications of the contract they are entering into and seek legal advice if they are unsure of their rights at any stage. And if your existing leasehold is close to 80 years remaining, seek guidance on gaining a lease renewal to avoid paying the marriage value.
If you understand the implications, leasehold remains a solid way of owning property; it is more complex than freehold, but by keeping abreast of your obligations and rights, you can enjoy many decades in your home.
Guillaumes LLP Solicitors is a full-service law firm based in Weybridge, Surrey. We have a highly experienced property law team who can assist you with all freehold and leasehold matters. To make an appointment, please call us on 01932 840 111.