Freehold Vs. Leasehold: Knowing Your Rights

When it comes to owning a house – and more specifically a flat or communal building – it won’t be long before you hear people debating the merits of freehold versus leasehold. Should an issue ever arise, it pays to be clear on the difference between the two ownership structures and what your rights are in regard to both. Here, the experts from the HomeOwners’ Alliance answer some of the big questions.

First, let’s start by understanding the difference between freehold and leasehold…

“If you own the freehold, 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. First, 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; and you have responsibility for maintaining the fabric of the building – the roof and the outside walls. Whole houses are normally sold freehold – there is no reason for a standalone house to be leasehold though there is an increasing trend for leasehold houses, particularly with new build homes, so check before you buy.” 

Okay, so tell us a bit more about 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 and 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 also have to pay maintenance fees, annual service charges and their share of the buildings insurance and normally pay an annual “ground rent” to the freeholder. Leaseholders will also have to obtain permission for any majors works done to the property and 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 forfeited.” 

Is it true the value of leasehold properties diminishes over time?

“When the term of the leasehold goes down to zero years, then the property reverts to the freeholder. So, if you have a 40-year leasehold, you only have the right to use the property for 40 years before it goes back to the freeholder. A lease with a term of zero years is clearly worthless, and all other things being equal, the shorter the lease, the less it is worth. The value of long leases stays fairly stable, but the value of short leases can drop rapidly. For example, a flat with a lease of 60 years is worth more than 10% less than if it had a lease of 99 years – you might think that a flat is worth £200,000, but actually it is worth less than £180,000, with the difference in value being owned by the freeholder.” 

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.

Do you have the right to extend the leasehold if you’re not happy?

“A series of government acts have given leaseholders protection against short leases, by giving them the right to extend their lease or the right to buy the property – but this can be very expensive indeed. The law is slightly different depending on whether you have a house or flat, too.

“With a flat, you normally have the right to extend your lease by 90 years on top of your unexpired term. If so, you won’t have to pay any more ground rent and you can negotiate new terms for the lease, like who pays for works on the flat. However, you only have the legal right to do this if you have held the lease on the property for two years and it was originally leased on a “long lease”, usually more than 21 years. You will have to pay a premium for extending the leasehold, too. Many people considering buying a short leasehold property (generally less than 80 years) insist that the leaseholder extends the lease before they buy it. After you tell your landlord that you qualify for the right to extend the lease, they can accept, negotiate or reject your offer. If they do the latter, you can challenge them in court.

For a house, you can renegotiate the terms of your lease, like who pays for works on the house. However, you only have the legal right to do this if you have held the lease on the property for two years and it was originally leased on a “long lease”, usually more than 21 years. Unlike flats, you don’t have to buy a lease extension for a house, but your ground rent is likely to go up. You should get a professional to help you extend the lease. For example, if you live in a converted house, the rules for extending a lease on a flat might apply instead.”

What’s a commonhold?

“Commonhold is a variant of freehold, created by the Leasehold Reform Act of 2002, which overcomes some of the worst aspects of leaseholds. Commonhold is where a multi-occupancy building is divided into a number of freehold units, so each individual flat owns its own freehold. The common parts (staircases and hallways etc) are owned and managed by a Commonhold Association, a company that is itself owned by the freeholders of the flats. This means there is no superior freeholder, but rather the owners of the flats manage the common and external parts of the property jointly. This protects people both from greedy landlords, and from the problems of short leases. But, as with any form of community ownership, problems and conflicts can arise between members of the Commonhold Association. Moreover, only about 15 to 20 commonholds have been completed in the UK.” 

Is it common to see disputes arise between freeholders and leaseholders?

“It is very common to have tension between freeholders and leaseholders. Fees are a major source of contention, with one in four leaseholders feeling their freeholder is overcharging, but being able to do little about it. While the ground rent usually costs in the region of £100-250, even on ordinary flats the annual charges can amount to over £1,000 a year. Leaseholders often complain that freeholders don’t maintain the building to a sufficiently high standard or keep common areas clean and tidy. One in four leaseholders complain of a lack of control over what major works are done and almost one in five have had difficulty getting necessary works done (2019 annual Homeowner Survey). Meanwhile, freeholders often complain that leaseholders breach the terms of their lease, for example by making too much noise or not getting permission for building works.” 

So as a leaseholder, what are some of your main rights?

“Your landlord or freeholder is obliged to give you a statement of your rights every time they demand a service charge. Don’t just file it away, get to know what to expect. Watch out though, not all contracts are the same: although some aspects of the law are universal, some only apply to the private sector and some are just for the public sector. And not all public sector leases are the same. For example, if you’re a secure tenant in a local authority home you can’t challenge your service charges but if you’re a housing association tenant you can.” 

Your landlord or freeholder is obliged to give you a statement of your rights every time they demand a service charge.

What about when your freeholder sends you a bill for something – can you push back at all?

“Section 20 of the 1985 Landlord and Tenant Act says your freeholder must provide you with at least two estimates and give you 30 days’ notice before major works. But demand more and make sure value for money is a priority: shop around for the cheapest quote and ask for an explanation as to why certain companies have been contracted.”

If you have a complaint, what are some of the steps you can take?

“Speak to your landlord/freeholder – try and settle things face to face. Speak to other leaseholders – if they are having the same problem, you will have a stronger case if you complain together. Consult your building’s tenants’ association if you have one – landlords have to consult them about all works and long-term agreements. If you don’t have one, set one up. Look for advice from other people in your situation, too. If consulting fellow leaseholders and the freeholder doesn’t work, consider a mediation provider – they will help settle the dispute with your landlord for a fee, but it still might be cheaper than court. Otherwise, the 1996 Housing Act says you can take your landlords to tribunal if you don’t think the price of the service charge tallies with the level of service provided. Taking the freeholder to tribunal is less formal than going to court, it will never cost more than £500 and, regardless of the outcome, you won’t be told to pay the leaseholder’s fees.”

How will a ‘right to manage’ company help protect your rights as a leaseholder?

“If your building has a private sector freeholder, and you can get more than 50% of your fellow leaseholders on board, you have the right to manage your own property by setting up a ‘right to manage’ (RTM) company. You can establish an RTM if the building contains two or more flats; two-thirds (or more) of the flats have long leases (typically more than 21 years); at least 75% of the block is residential. You can also ask your landlords to sell you the freehold at any time and you might even be eligible to demand that they sell it to you.”

So, you sometimes have the right to ask to buy the freehold?

“You might have the right to buy your house or flat outright, so that you own the freehold. This is called ‘enfranchisement’. While there are complicated legal procedures and legal costs involved, this process of enfranchisement can be invaluable. Again, the law depends on whether you have a house or flat. Ensure you get professional advice and assistance.” 

Okay, so how much money are we talking?

“There are calculators online but none of them are particularly reliable as there are so many variables involved in estimating the cost. Freehold prices vary in the same way property prices vary but certainly the shorter your lease, the pricier your freehold. In terms of what the costs involve, to buy your share of the freehold you will need to pay your flat’s share of the purchase price for the freehold (the premium); the cost of a valuation surveyor to do an accurate freehold valuation so you avoid paying over the odds; legal fees for the leaseholders; the freeholder’s legal and valuation fees and stamp duty land tax if the purchase price is over £125,000.”

Anything else you think people should know?

“It may seem like technical legal language, but there are few things more important about your home than whether it is freehold or leasehold. It makes the difference between owning your own home outright and having a landlord. Although estate agents tend to gloss over it, the difference can be between a home that is worth buying and one that isn’t. Many people who don’t sort this out when they buy a home end up regretting it – getting it wrong can be hugely expensive.”

 

For more information on freehold versus leasehold and the rights and challenges involved, visit HOA.org.uk.

 

*DISCLAIMER: Anything written by SheerLuxe is not intended to constitute financial or legal advice. The views expressed in this article reflect the opinions of the individuals, not the company. Always consult with an independent financial advisor or expert before making an investment or personal finance decisions.

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