Freehold and Leasehold
Whether you are new to property or you have been in the industry for many years, the term freehold does come up a lot. In England and Wales a property will fit into one of three categories. Property can be freehold, leasehold or commonhold.
When a property is assigned freehold status in legal terms this means that the owner of the property or ‘freeholder’ owns the land and any buildings which occupy it. If a freeholder were to pass away, the building and land that they own would be passed on to their heirs as part of their estate.
The owner of the land and buildings can decide how they would like to use the land, provided that they fully comply with the relevant planning regulations. In terms of repair and general upkeep of the land a freeholder can maintain the land and building, or not as they wish.
Freehold property is often more desirable than leasehold because this type of legal ownership offers greater flexibility to the owner on what they can do with the land and any buildings situated there. Freehold properties are often more value able than leasehold which further increases their appeal. Many residential properties are freehold.
Any property which is described as being leasehold will have various terms and conditions attached to it. Unlike freehold, a leaseholder does not have any ownership to the actual building or the land on which it stands.
The leaseholder will only own the right to occupy the internal space of a building. They do not own, nor are they responsible for the structure of the property. Leasehold properties are usually purchased on a lead which can be for any time period that the landlord specifies usually in excess of 100 years from the date the building was built. If the leaseholder takes on a property with a short lease and it expires, the property will then revert back to the landlord.
Many mortgage companies will not grant mortgages on properties where leases have 70 years or less. Extending a lease can also prove costly and complicated. The cost of a lease extension must be met by the leaseholder. The majority of leasehold properties include flats rather than houses but there are exceptions to this rule and it would be wise to check any potential property purchase to determine whether it is leasehold or freehold.
Property owners of leaseholds also have to factor in ground rent and service charges for the maintenance and upkeep of the building and grounds which are payable to the landlord for the duration of the lease.
Freehold or Leasehold?
It would be wise to remember that a leaseholder will own the inside of the property while a freeholder will own the building and the land on which it stands. There are some key advantages to purchasing leasehold over freehold. The main one being that onus is on the freeholder to carry out the maintenance and repairs of the building. However the difficulty arises when leases are particularly short, usually less than 70 years when the potential purchaser can run into problems securing finance to purchase the property.
Where a property is leasehold, the leaseholder will have to agree to a legally binding document which is known as a lease. This document will outline in detail the rights and responsibilities of the both the freeholder and the leaseholder. The lease will clearly stipulate the terms under which the property can be occupied by the leaseholder and for how long. Once the lease is signed, this will act as a safeguard to protect both parties should there be any issues.
When you purchase a leasehold property you may have to pay fees known as service charges and ground rent. These are in addition to any mortgage that you have on the property. Lease charges must be paid in full and on time. In return, the freeholder must ensure that the interior of the building is kept in good condition.
Occupants of any leasehold property must act reasonably and not cause a nuisance to neighbours (in the case of flats). Any alterations or sub letting requires express permission from the freeholder.
If you are considering a leasehold property it is important to make sure that your legal representative reviews the lease carefully to make sure that you know your entitlements and obligations over the course of the lease.
When it comes to owning the freehold of a property this means that the purchaser has acquired not only the interior of the building but the actual building itself and the land on which it stands. Consequently you will be responsible for all aspects of maintenance and repair such as the roof, structure of the building and any pipes which are connected to the property.
What about Commonhold?
Everyone has heard the terms freehold and leasehold, but one of the terms used less frequently is that of commonhold. This was introduced in 2004 and it is a relatively new type of property ownership.
Where a property has multiple tenants (in the case of flats for example) Commonhold can work much more effectively. This new term was developed through the Commonhold and Leasehold Reform Act 2002 and it was seen as a potential alternative to traditional property which is classed as being leasehold.
Where a commonhold agreement is established, it is usual practice for a Commonhold Association to be established who will own the freehold of the building. The Commonhold Association for the building will be responsible for maintaining the interior and exterior of the building. Each owner of a flat or apartment will possess a commonhold title and they must agree to certain conditions which have been defined by the Commonhold Association which is very similar to that of a lease.
As with any property purchase it would be prudent to see suitable legal advice before entering into any contract. Freehold property is by far the most common type of property because it affords greater rights and responsibilities when compared to leasehold which can be quite restrictive.
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