October 2021

There may be limits on what you can do to your own home, depending on whether it is freehold or leasehold. This guide explains everything you need to know about freehold versus leasehold ownership. What is leasehold? Leasehold properties only give the right to live in them for a set number of years, specified in the lease, and you will not own the land the property sits upon. The building and land are owned by the landlord, and once the lease runs out, it will revert back to them as the freeholder. In England, Wales, and Northern Ireland, flats and apartments are commonly owned on a leasehold basis, while houses are usually sold as freehold. Controversially, this has not always been the case with new-build homes in recent years. In Scotland, very few properties are leasehold. Leaseholders must obtain permission from the freeholder to make certain alterations or improvements to the property and will also have to pay them ‘ground rent’ and, sometimes, an annual fee to a managing agent. What is freehold? Someone who owns a freehold property is the sole owner of both the building and land it is built upon for an unlimited period. The Civil Aviation Act 1982 means you will also ‘own’ and have rights to the ‘airspace’ above the property to about 500 feet. Freeholders don’t pay ground rent, service charges, or permission fees, and handle the maintenance of the property. And within the confines of planning law, are free to do with them what they will. Common problems with owning a leasehold versus freehold In recent years, the leasehold property sector has been beset with issues, causing thousands of leasehold homeowners to complain about being misled or mis-sold over the terms of their lease. In 2020, an investigation by the Competition and Markets Authority (CMA) found ‘worrying evidence’ of leaseholders being taken advantage of. Among its findings were homeowners who faced punishing service charges and ground rents, and buyers, who prior to purchase, failed to receive enough information about the property they were about to buy, including how much it costs to extend a lease or purchase a freehold. Common issues with leasehold properties include: Extortionate ground rents - a central issue cited by the CMA investigation report, was the cost of ground rents. This is where the leaseholder pays a sum of money, or ‘rent’ to the freeholder. Historically, before freeholders realised this could be a real money spinner, ground rent was a nominal sum. But huge numbers of leaseholders informed the CMA they had been sold properties with ground rent in excess of £250, and in some cases, the ground rent was doubling every few years. This left leaseholders with annual ground rents running into the thousands each year.Some leaseholders found that their ground rent was so expensive, it made selling or even re-mortgaging their property almost impossible. Because the terms of the ground rent are written into the lease, it can cost thousands in legal fees to attempt to have the ground rent amended or removed, something that either needs the agreement of the freeholder, or the lease to be extended which renders any ground rent payable to nil. Legislation is currently waiting Royal Assent which, it is hoped, will bring this situation to an end. Expensive Service Charges - a growing issue for leaseholders, particularly those living on new-build estates, is escalating service charges. Such charges are paid monthly but can also be paid annually, depending on the leasehold agreement. These fees either go to the freeholder, or a service management agency, who looks after the common areas of the estate or building. A portion of the service charge may be placed into a ‘sinking fund’. This is a pot of money set aside to cover the costs of any major works in the future.For some leaseholders, service charges are modest amounts, but there have been cases where leaseholders receive invoices running into hundreds or thousands of pounds each year. These charges are typically written into the terms of the lease, and if there is no cap on what the freeholder can charge, it can easily increase exponentially. For leaseholders who pay a service charge, it is important to remember: The lease should set out the way the service charge is organised and what can and cannot be changed. The leaseholder has the right to request a summary showing how the charge is calculated and how the money is spent. Leaseholders also have the right to see any documentation supporting the summary, such as quotes or receipts. Any service charges must be fair and reasonable, which means that leaseholders can dispute any charges they think are unfair or unreasonable at a tribunal. Lack of information about the costs of extending a lease - some leaseholders informed the CMA investigation they had never been given this information prior to buying their property. Others said they had not even been told that their property was leasehold before buying it. Considerations when buying a leasehold versus freehold property Don’t make the mistake of thinking you will legally own the property. As discussed, with leasehold you get exclusive possession of a property for a fixed period. Rather than owning a property, you have essentially purchased a long-term rental. Be wary of short leases. Before deciding to purchase a leasehold property, always check the length remaining on the lease with the estate agent or seller. If it has fewer than 80 years left, you should carefully consider whether to proceed. Eighty years is generally when estate agents and mortgage lenders consider the length of the lease will adversely affect the value of a property, and its mortgagability. Agreeing to a lease extension is not a decision to make lightly. The cost of extending a lease can run into thousands, with the price depending on several variables, including the value of the flat, the length remaining on the lease, and ground rent. For example, if a lease was worth £200,000 and has 79 years left to run, it will cost around £10,000 to extend it by 90 years. The shorter the lease period remaining, the more these costs can escalate. Be wary if a leasehold property appears cheap. If a leasehold property appears cheap compared to similar properties on the market, it should ring alarm bells, as the property may need a lease extension. Sometimes, sellers will try to market a leasehold property a full price in the hope the buyer will not realise an extension to the lease is needed. If you decide to proceed, ensure you factor this into any offer price. Remember, the lease will not stay long forever. Even if the lease is a decent length when you purchase it, you must remember as the years tick down, you may need to buy an extension in the future. This should be factored into your decision making. Check the terms of the lease. Watch out for costly ground rents. As discussed above, until the new legislation is bought in, you are at the mercy of your freeholder if they decide to hike costs. Beware of excessive maintenance fees. If you are considering buying a leasehold property, be sure to request historical and future service charges, and projected expenditure including proposed major works. Watch out for hefty insurance fees. Leaseholders must pay a share of the building’s insurance and need to be on their guard for freeholders taking kickbacks from insurance brokers buying overpriced buildings cover and passing it on to their leaseholders. Prepare for a more complicated transaction. This is because your solicitor needs to get information from the freeholder or their management company - such as ground rents, proof of buildings insurance, monthly service charges, and previous year's accounts, which all take additional time. There could also be extra checks that need to be carried out. Think about what will happen when you want to sell. A lease falling below 80 years may be difficult to sell and could result in fewer people willing to buy your home. Of course, the alternative to leasehold is to buy a freehold property. Crucially, with this type of tenure, you remain in charge of how money is spent and what you do with your property.

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