Freehold or Leasehold...
Could knowing the difference between leasehold and freehold help save you money and time?...
With the recent media surrounding New build homes and the differences between leasehold and freehold properties, we want to advise you on the difference and encourage you to make informed decisions in purchasing a new build home.
What is the difference between freehold and leasehold?
What is freehold?
If you own the freehold, it means that you own the building and the land it stands on outright, in perpetuity. It is your name in the land registry as “freeholder”, owning the “title absolute”. Freehold is pretty much always the preferred option: you can’t really go wrong with it.
• You won’t have to pay annual ground rent
• You don’t have a freeholder either failing to maintain the building, or charging huge amounts for it
• You have responsibility for maintaining the fabric of the building – the roof and the outside walls
• Whole houses are normally sold freehold
What is leasehold?
Leasehold means that you just have a lease from the freeholder (sometimes called the landlord) to use the home for a number of years. The leases are usually long term – often 90 years or 120 years but as high as 999 years – but can be short, such as 40 years.
• A leaseholder has a contract with the freeholder, which sets down the legal rights and responsibilities of either side
• The freeholder will normally be responsible for maintaining the common parts of the building, such as the entrance hall and staircase, as well as the exterior walls and roof. However, other leaseholders might have claimed their “right to manage”, in which case it is their responsibility
• Leaseholders will have to pay maintenance fees, annual service charges and their share of the buildings insurance
• Leaseholders normally pay an annual “ground rent” to the freeholder
• Leaseholders will have to obtain permission for any majors works done to the property
• Leaseholders may face other restrictions, such as not owning pets or subletting
• If leaseholders don’t fulfil the terms of the lease – for example, by not paying the fees – then the lease can become forfeit
The leasehold system has existed for a long time in England and Wales, especially in blocks of flats. Many leaseholders have long leases, for example for 999 years, and experience no problems.
But the trend for new-build houses being sold as leasehold has accelerated in recent years. While not all house builders use this model, those that do argue it helps make developments financially viable. This has led to some problems arising for some buyers of new build properties in that some companies have sold the freehold onto investment companies as in England and Wales, the "right of first refusal" applies to flats, but not houses.
This issue and the plight of a few home buyers has reached the attention of Parliament and has been addressed in the House of Commons…
Mr Barwell MP put forward that developers should be ordered to halt future sales of leasehold houses or face government action next year.
He also told developers to come up with solutions for householders already stuck in homes where soaring ground rents have made their property virtually unsaleable.
“There is a widespread problem here that needs addressing. These practices are not illegal but it seems to be one of those cases where there is a gulf between the letter of the law and our sense of what is right.
“The secretary of state and I are clear that it is not just a matter of stopping this practice going forward, but it is also about addressing hard working people who believe they have bought their home but actually they are in a position where they may find they are unable to sell that home down the line.”
Homebuyers have been left with houses they cannot sell as lenders will no longer offer mortgages against them because of the ground rent clauses.
The Commons debate highlighted numerous other abuses in the leasehold sector, including excessive service charges, 40% insurance commissions, manipulation of leasehold valuation tribunals, and even the forfeiture of homes by leaseholders who battle freeholders.