The vast majority of flats in England and Wales are leasehold properties, while most houses are freehold properties.
It's important to understand the differences between these two types of ownership before buying a home.
Freehold vs leasehold: what’s the difference?
The main difference is that, with a leasehold property, even though you’ve bought the property and have a mortgage bill to show for it every month, you still have a landlord: the freeholder.
The freeholder owns the land the property is built on, which means you, as a leaseholder, have to pay ‘ground rent’. What’s more, your ownership of the property is limited to a set period of time (the lease).
Once the lease expires, the property reverts ‘back’ to being a freehold property, where both the building and the land it is on are under the ownership of the freeholder.
So if you have a 70-year lease today, even if you pay your mortgage off and eventually own your property outright, in February 2087, the freeholder will suddenly be able to take ownership of your flat.
And you will have no legal rights at all. And of course ground rent isn't the only rip off to be aware of when it comes to leasehold properties.
Buying a freehold property means that you’re the owner of both the building and the land it stands on.
Generally buying and selling freehold property is less stressful than doing so with a leasehold property.
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Leaseholder and freeholder responsibilities
Leaseholders will have to pay maintenance fees, an annual service charge and their share of the buildings insurance. They also have to pay an annual ground rent to the freeholder.
In their role as ‘landlord’, the freeholder is responsible for making sure the common areas of the property (e.g. the communal entrance and corridors, the roof, the path to the front door) are maintained in a good state of repair and the building itself is insured against fire, destruction and damage.
If you fall behind with your payments, as well as taking you to court in the usual way, the freeholder can prevent you from either selling your property or remortgaging until you pay up.
Unfortunately, this system is open to abuse. Freeholders are totally unregulated and can make huge amounts of money from the so-called ‘service’ they force upon leaseholders.
Often they do this by employing companies they own or get kickbacks from to carry out the maintenance work and provide insurance – effectively paying themselves. There are no checks and balances to ensure they are acting in the best interests of the building.
What to consider before buying a leasehold property
When you buy a leasehold property you should check how much ground rent, buildings insurance and annual service charges you will have to pay.
It’s also essential that you check how many years are left on the lease.
If the property has less than 70 years left you may struggle to get a mortgage or to sell it on after you’ve bought it. Read more about getting a mortgage here.
Typically, a good lease length is between 90 and 125 years, but some are as long as 999 years.
If you choose to take on a property with a short lease, you should try to extend it or you could run into trouble.
You can ask the landlord to extend the lease at any time and once you’ve owned the property for two years you have the right to extend it by 90 years as long as you are a qualifying tenant.
However, the freeholder will charge you to do this. You can use Leasehold Advisory Service’s (LAS) calculator to estimate how much it is likely to cost to extend the lease of a flat.
How to fight dodgy freeholders
[ADVERT] To make any changes to the structure of the leasehold property – even knocking down an internal wall, never mind building an extension – leaseholders need to get the permission of the freeholder.
And for this, most freeholders will charge you thousands and thousands of pounds as a ‘fee’ for their time. So effectively, they can hold you to ransom.
Likewise, freeholders control the costs you have to pay each year like building insurance and service charges.
But if you think the freeholder is treating you unfairly there are a few things you can do.
If the majority of leaseholders in the building get together, you can collectively exercise your ‘right to manage’ – i.e. to appoint new managing agents. This will stop excessive service charges from being levied.
Another option is if the majority of the leaseholders get together, you may be able to collectively force the freeholder to sell you the property – and thus exorcise him/her from your lives completely! This is known as ‘collective enfranchisement’. Each flat then owns a ‘share of freehold’. You manage the maintenance and insurance of the building yourselves, and there is no need to ever again renew the lease
Case study: ‘my leasehold property nightmare’
A few years ago, Donna Ferguson and her husband bought a leasehold flat in North London.
It had 73 years left on the lease. This fact cost them two years of heartache – and £20,000 (adding almost 7% to the cost of buying the property).
Yet, if they had bought the flat just seven years earlier, the costs would have been less than half that sum.
Donna wanted to extend her flat, but once she realised her freeholder was going charge her thousands, she decided she would do anything to get him out of her life.
Donna opted do go down the route of ‘collective enfranchisement’. Unfortunately, it cost her most of her life savings.
In 2010, she clubbed together with the owners of the other two flats in her building to buy the freehold. This cost £42,000 – plus they had to pay his legal fees and expenses, as well as their own (around £9,000 in total).
Why did it cost so much? Because, as well as compensation for 73 years of lost ground rent, the freeholder had the right to demand a half of the ‘marriage value’ of the flat.
The marriage value is the difference in price between what the flat is worth as a leasehold property, and what it would be worth if it was a freehold property (when the building has been ‘married’ up with the land).
In Donna’s case, the marriageable value was deemed to be around £34,000, so she had to pay the freeholder £17,000, plus £3,000 in legal and survey fees. It was a very time-consuming process; the freeholder agreed to sell eventually but was able to drag out the process and take almost a year to agree to the price set by the independent surveyor.
Yet if she had bought the flat just seven years earlier, her costs would have been less than half that sum.
Why? Because – and this is really important to note – freeholders are only entitled to a share of the marriage value of the flat once the lease dips below 80 years. You can use this calculator to see how dramatically this rule affects the costs of buying a lease.
Does the system need reform?
Leasehold/freehold property law is widely criticised area in dire need of reform and regulation.
Many believe the freeholder has far too much power over the leaseholders, and it’s far too difficult (because you need the majority of leaseholders to club together) and expensive (because leaseholders bear all the costs) to force a freeholder to behave reasonably.
Where to go to get help
The Leasehold Advisory Service is a fantastic, free Government resource leaseholders can use to get help and advice. Their telephone number is 020 7832 2500 or you can write to them using their online enquiry form.
The Landlordzone.co.uk forums and ALEP, the Association of Leasehold Enfranchisement Practitioners are also good places to go.
This article is part of a series on buying your first home – everything from saving up to deposits, mortgages, Government assistance and more.