If you’re new to the property market, the prospect of buying your first home can be daunting. Should you buy a new build or opt for an older character property? Which mortgage is right for you? How much of a deposit is enough?
And then there’s the leasehold v freehold decision to make. If you’re on a budget, leasehold properties may seem more affordable, but are they a good idea?
In this beginners’ guide to leasehold and freehold properties, we’ll explain the basics so you can make an informed decision.
What Does It Mean to Buy a Leasehold?
If you buy a leasehold property, you do not own it outright. Instead, you are leasing your home from the person who owns the freehold for a fixed period — the “lease term”. You have the right to live in the property for the duration of the lease.
A new leasehold can range from 99 years to 999 years. If you take over an existing leasehold, the term could be less than 99 years. Most leasehold properties are flats, although some houses are sold this way. In July 2017, the government pledged to ban new-build houses from being sold as leasehold properties, but this has yet to come into force in the UK. The move was an attempt to prevent unfair practices such as leaseholders being charged extortionate ground rents or being forced to pay a fee for owning a pet.
How Does a Leasehold Work?
Leasehold properties are generally sold in the same way as freehold residential homes. They are marketed and the freeholder chooses to accept whichever offer they prefer.
When you purchase a leasehold, you have a legal agreement with the freeholder or landlord, the “lease”, which determines how long you have the right to live in the property.
The landlord is usually responsible for maintaining common areas in the building, for example, foyers, hallways and exterior walls, unless the other leaseholders have claimed their “right to manage” and assumed collective responsibility for this work. This usually only happens if the other residents of the building are unhappy with the way the landlord is managing and maintaining the property.
Even if the landlord retains maintenance responsibilities, the leaseholders will have to pay a fee to cover maintenance costs, as well as annual service charges and their share of the building’s insurance. There will also be a ground rent to pay. The lease should stipulate the amount of rent payable. Ground rent can be either “fixed” — it cannot be changed until the end of the lease term — or “escalating” — the rent increases by an amount and at a frequency stipulated in the lease agreement. The landlord must send a written demand for payment of the ground rent to the leaseholder, otherwise, there is no obligation to pay it. If a leaseholder extends their lease term under the Leasehold Reform Act 1993, they no longer have to pay ground rent to the landlord.
Do Leaseholds Depreciate?
The less time there is remaining on a lease, the lower its value. For example, if you buy a property with a 90-year lease and decide to sell it when it has 75 years remaining, the value of the leasehold will have dropped significantly since you bought it. Generally, properties with fewer than 80 years left on the lease are less appealing to buyers.
The reason for this depreciation is:
- Buyers know that the value of the leasehold will continue to drop as the remaining years reduce and are therefore not willing to pay a premium for it.
- A property with a short lease is more difficult to sell.
- Buyers generally do not want to buy a leasehold knowing that they may have to leave before they choose to, for example, if there are only 20 years left on the lease.
[If you want to sell your leasehold property before it depreciates further, contact House Buyer Bureau for a free, no-obligation cash offer. Download our guide, “5 Financial Benefits of Selling to a Quick House Sale Company”.]
Why Would Anyone Buy a Leasehold Property?
There are some advantages to owning a leasehold property.
- Short-Term Accommodation. A leasehold property may be a helpful option for people seeking short-term accommodation.
- Covenants Are Easier to Enforce. Covenants — rules that state what can and cannot be done on a piece of land — are much easier to enforce on a leasehold property than on a freehold home.
- More Affordable. Leaseholds are generally a more affordable option than buying the freehold, allowing first-time buyers to get a foot on the property ladder.
- Low Maintenance. The freeholder or landlord is typically responsible for maintaining the building and communal areas.
- Less Admin. For example, the landlord is responsible for arranging building insurance on the property (although the leaseholder must contribute).
However, these benefits need to be carefully weighed against the potential disadvantages of buying a leasehold property:
- Ground Rent and Service Charges. These can soon add up in addition to the price of the leasehold.
- Lack of Control and Freedom. You will have to seek the landlord’s permission before undertaking certain work on the building or even getting a pet.
- Restrictions on Running a Business from Home. This may be a concern for an increasing number of people since the coronavirus pandemic has led to a surge in new businesses.
- The Lease Is Not Forever. This may seem obvious, but it’s something to consider, especially as the value of your home will drop once the remaining lease falls below 80 years.
- Subletting May Be Prohibited. With a freehold, you can easily earn an extra income from taking in a lodger or renting out your entire home. However, with a leasehold, the landlord may prohibit subletting, cutting off a valuable source of income.
- High Conveyancing Fees. Because the legalities of buying a leasehold are typically more complex and time-consuming than buying a freehold, the associated conveyancing fees are often higher.
Is it More Difficult to Sell a Leasehold Property?
There will always be some buyers who are interested in buying a leasehold property because of the advantages this type of arrangement can offer, as outlined above. However, the shorter the remaining lease, the harder your home will be to sell. Generally, it’s a good idea to sell before the lease term drops to fewer than 90 years remaining. You can apply to extend the lease, but this is rarely a budget option.
There may also be certain terms in the lease agreement that put buyers off, for example, an escalating ground rent that means the fees payable will significantly increase in the years to come. Expensive service charges can also be a deterrent to potential buyers.
[Find out more about Selling a House with Leasehold Problems.]
What Is Meant by Freehold Property?
If you own the freehold, you are the legal owner of both the building and the land that it sits on until you choose to sell it. There is no end date to your period of ownership and no one has the right to tell you what you can or can’t do on your property (unless you live in a listed building, or a conservation area or similar, where restrictions will apply).
How Does a Freehold Work?
When you buy the freehold of a property, you have the right to live in it forever and do not have to seek permission to do things like rent out a room or take in a pet. You are free to do with the property as you wish (within the confines of any other relevant legislation, such as that relating to noise pollution or nuisance behaviour).
The “title absolute” remains in your name until you sell the property to someone else. At this point, ownership of the freehold is transferred and you no longer have any claim over it. However, you may choose never to sell your property but instead to bequeath it to a family member upon your death.
You have full responsibility for maintaining the property and therefore do not pay anyone ground rent or service charges.
Most houses are sold as freehold properties, but some flats may be too. New build houses are sometimes sold as a leasehold, although there is a move towards banning this.
What Is the Benefit of Owning a Freehold?
Most buyers will opt for freehold ownership of their homes if they have the choice. This is because owning a property outright offers certain advantages over being a leaseholder:
- No Fees to Pay. Once you have purchased the property and paid all the fees associated with buying a home, there are no ongoing service fees or ground rent to pay besides your mortgage, if you have one.
- Freedom and Control. You do not have to seek permission from a landlord to make changes to your home, take in a lodger or adopt a pet.
- Return on Investment. Buying a freehold can be a savvy financial investment as you will build equity in the property the longer you have it (as long as property prices continue to rise).
- Easier to Sell. If you do decide to sell up and move on, a freehold property will generally be much easier to sell than a leasehold.
[If you need to sell your house fast, we can help. We can buy your house in as little as 7 days or any time scale that suits your needs. Find out more about how selling to House Buyer Bureau works or request a free, no-obligation cash offer today.]
Does Owning the Freehold Add Value?
If you own a leasehold property and the remaining term is dwindling, you might consider purchasing the freehold. This is an effective way to circumvent the potential negative consequences of a short lease, such as difficulty selling and a lower valuation.
Your home will probably be much easier to sell if the freehold is up for grabs.
You can ask the owner of the freehold if they will consider selling to you at any point during the term of your leasehold. There are some eligibility requirements your property will need to meet; for example, the building you live in must contain at least two flats. And be aware that the cost of buying the freehold will rapidly increase as the remaining lease decreases — a property with 120 years left on the lease will be much more affordable to buy outright than a property with just 60 years remaining.
Buying the freehold of a leasehold property may not add much value, but it will save you the cost of service charges and ground rent while you wait for the right buyer to come along. It will probably also help you to sell your house more quickly.
How to Sell a Freehold Property
Freehold property is a more appealing prospect to many buyers than leasehold property. However, not all freehold houses are a breeze to sell. It may take longer to sell your home than you’d prefer or need if the market is slow or you have a problem property, for example:
- a non-standard construction that is difficult or impossible to get a mortgage on;
- problem neighbours;
- a property in poor condition;
- the presence of Japanese Knotweed;
- ongoing boundary disputes;
- property title problems; or
- dry rot.
If you’re struggling to sell your property or are in a hurry and don’t have the time to find a buyer via the traditional on-market route to sale, House Buyer Bureau can help. We are a genuine cash buyer with the funds ready to buy your property in as little as 7 days. Whether your home is freehold or leasehold, get in touch and one of our team of expert house buyers will be happy to make a free, no-obligation cash offer.