If you’re a first-time property buyer, you might have heard the phrases Freehold and Leasehold bandied around. Here’s what they mean for you and your property…
When you own a Freehold property, you own the land it’s built on plus everything that makes up the building, for an unlimited period of time.
You can make changes to the property and land as you see fit (within reason regarding planning permission and building laws!)
With Leasehold properties, you do not own the land that the property is built on – a Freeholder does. Your lease is equivalent to renting the land that your property sits on and your lease exists only for a set period of time. This could be for as long as 1000 years! But around 99 years is the most common length. At the end of this period, ownership of the land is returned to the freeholder – including everything built on it. This is why it’s a huge no-no to let the lease length run down!
Leaseholders are generally subject to ‘restrictive covenants’, which will set out what the leaseholder must NOT do. Examples of this can include: not installing hard floors, not parking large vehicles outside the property, not keeping pets, not causing a nuisance at the property, and so forth.
Depending on the terms of the lease, the Freeholder has responsibility for the upkeep of the area outside of your property. For example: If you own a flat, the Freeholder is responsible for the grounds of the flats and the communal areas such as hallways, stairways, lifts and entranceways.
You will pay Ground rent and probably other fees such as a service charge which contributes to general maintenance and preventative maintenance of the property. Other costs may also be payable in addition to these.
Whilst most flats are Leasehold properties, it is not uncommon for freeholders to build entire estates and sell houses with only leasehold titles. In fact, there are lots of properties like this locally. Initially, the restricted covenants in the leases covered things to protect the estate from dropping in standards, such as not using the property for a business, altering its appearance or converting it to flats, but as the years have gone on many freeholds were purchased by – and become huge profit generators for – businesses with less idealistic goals, and charges are applied for everything possible.
Why am I struggling to get a mortgage on a 75-year lease?
While 99 years may seem such a long time that it’s barely worth considering, the less time left on a lease, the more expensive they are to renew.
A lease under 75 years could become so expensive as to render the property unmortgageable and therefore very hard to sell.
Purchasing a 99-year lease property and then living in it for 20 years so leaves you in a predicament when it comes to selling up, so it’s something to keep an eye on over the years. Leases will never get cheaper – only ever more expensive, so renew the length at the earliest opportunity if it’s running down a bit.
What to consider when buying a leasehold property.
Sadly, once you’re saddled with a short lease on a property, there is very little that you can do other than pay to extend the lease as early as possible. Therefore, before instructing a solicitor on a leasehold property purchase, you can do plenty of research yourself to ensure you’re making an informed decision about all the financial commitments and clauses around the leasehold. Always consider:
1. How long is remaining on the lease? You can easily find this out by searching for the property on Land Registry. It will show you if the property is Freehold or Leasehold and for a small fee (£7) you can purchase the Leasehold Title which details when the lease was sold, and how many years it had on it.
2. How much is the Ground rent? This is often payable every 12 or 6 months and can vary from year to year depending on the rules of the lease. Some have clauses that state that the Ground Rent doubles every five years!
3. With that in mind, check the lease thoroughly for all the potential money traps. For example, it’s very common, particularly with large cooperate freeholders that a £250/£300 admin fee will apply to every request you submit to alter your house in any small way (such as installing a satellite dish!) as well as extortionately high costs in the £1000s (often with little explanation as to how they have been calculated) for agreement to bigger works being carried out on your house such as extensions.
4. Are there any service charges? If the freeholder hires a management agent to look after the lease, there may be additional service fees for them. Find out what the existing owner is paying now.
5. Buildings insurance. The lease may state that you may only use the freeholder’s approved buildings insurance company (Again, particularly common with big corporate freeholders who benefit financially in the form of ‘kick backs’ from these arrangements). Check this before purchase as you can expect to pay 3 or 4 times over the odds in some cases when the control over these decisions is restricted.
What’s a Section 20 notice?
As a leaseholder, you have a number of financial obligations that can lead to additional, sometimes unexpected costs. You will likely pay a service charge, which covers routine maintenance and other essential work on your property as well as any communal areas that are covered by your lease.
But, there may be occasions when additional work is required with costs that fall outside of the service charge. That may be because of unexpected repairs or essential refurbishment and other forms of preventative maintenance.
In this case, the freeholder must issue a Section 20 notice which informs you about the proposed works, and how much they are going to cost you.
If you’re considering purchasing a leasehold property, consider if you have a contingency for works to the building under a Section 20 notice, that could land you with an unexpected bill, and if not, it would be a good time to start a savings account for such events!
Section 20 has been scrutinised in recent years – after the Grenfell disaster when it was established that many large apartment blocks needed to be reclad in safer materials. Many Leaseholders were suddenly liable for huge fire safety works to be carried out on their buildings – sometimes reaching into £100,000s per property. Thankfully a new Building Safety Bill has shifted this responsibility onto building owners for this work, but a Section 20 bill is absolutely still something to be aware of and prepared for.
When you own a leasehold but you have no contact with the freeholder, this is termed as an Absent Freeholder.
On face value this might seem a positive thing – you won’t be charged ground rent or service fees from an absent freeholder, for example.
However, it really causes problems if you want to:
- Extend your lease
- Buy the freehold
- Repair communal areas
- Sell the property
The usual procedure is to go to a tribunal and fight the case that you have made all reasonable efforts to track down the freeholder, and in their absence make a request to buy the freehold yourself. Your order may be rejected if you haven’t proven you’ve made a reasonable attempt to track down the freeholder though, so ensure you:
- Place 2 adverts in the local newspaper;
- Hire a search agent to find the freeholder;
- Physically attend the last known address of the freeholder; and
- Check the probate records.
Lease lengths and how to extend them
Any agent or seller should be able to advise you how long is left of a lease. Alternatively, you can easily find this out by searching for the property on Land Registry. From there, you can easily work out the remaining period:
Several factors are used to determine what the renewal cost should be, including how long is remaining and the cost of the house.
This calculator can guide you on what the renewal cost might be – https://www.lease-advice.org/calculator/
Help with a short lease
Sadly, it can be a real vicious circle If you have a short lease that you’re struggling to renew. If you are having issues with your lease, please speak with the Leasehold Advisory Service.
I’m Joanne. I’ve lived and breathed property for longer than I care to remember! This blog provides advice and support with problems surrounding property, and life in general.
Previously on the blog…
A young family had saved and saved in order to buy their own home. The case at a glance: A young couple had maxed themselves out on their mortgage When the husband lost his job, they used loans and credit cards to fill the gaps each month They got letters...read more
Upon marriage, a couple had moved into the house that one of them owned, and rented out the one that the partner had owned. The case at a glance: A couple were happily renting out their second property to a family They both lost their jobs in quick succession...read more
After a Marital split, the husband in the couple had moved out and stopped paying the mortgage. Wendy's case at a glance: Husband had left and stopped paying mortgage £30,000 mortgage arrears Three autistic children meant she needed to stay where she was for...read more
A lovely lady had inherited her Sister’s house in Westcliff after she sadly passed away - a bungalow with serious damp problems. Lucy’s case at a glance: Inherited a property from her sister Couldn't afford to keep the property running Didn’t understand the...read more