When a property is sold, sometimes it won’t come with the land that it is built on. So, any buyers that are about to start the process of purchasing a house should double check which basis both the property and the land are being sold on prior to committing to it. Especially if they are sure they don’t want to buy a leasehold property.
What is the difference between freehold and leasehold?
The main difference between freehold and leasehold is the ownership of the land that a property is built upon.
Leasehold is a tenure by which you only own the building itself and not the land it is located on. A lease agreement is created between the landlord and the leaseholder, which allows the leaseholder to use the property for a certain period of time. Lease durations can vary, but generally they will be either 99, 125, 500, or 999 years long, lease extensions can be granted by the landlord.
An important part of the terms of a leasehold is the payment of ground rent. Ownership of the property will go back to the landlord or freeholder at the end of the lease period. This type of home ownership is most common in shared properties like flats.
A lease agreement will determine any covenants related to enforcement, rights of way and access on the land, as well as any repair and maintenance covenants. It will also include details on paying ground rent. You can find more information about leaseholds in some of our other recent articles.
When you own a property freehold, both the property and the land are yours outright and there are no time limits applied. Usually, the majority of houses are sold freehold. However, new builds can be either freehold or leasehold, so it is always worth clarifying the tenure on any home you’re interested in purchasing.
Is it worth buying the freehold of a home?
For residential houses, it’s generally worth buying the freehold if it becomes available. There are many ways you can benefit from owning your home freehold including having more control of the property, for example deciding how much to spend on maintaining it, and which suppliers to use, rather than paying ongoing ground rent leasing costs.
Also, there is the independence you will get from not having a landlord. Anyone who has had problems with landlords in the past might even consider this to be the biggest advantage to freehold. If the property is a flat on the other hand, there are some factors to consider before opting for a freehold.
An example of this is the responsibility of communal areas and facilities. In addition, there is the complicated dilemma that one flat owner can’t purchase the freehold of only one flat. Everyone who lives in the building would have to agree to buy a suitable share of the overall freehold.
Shared services like insurance and maintenance would need to be paid for, meaning a process would be introduced to ensure a fair distribution of cost, collection of each person’s contribution of the charges, and competitive suppliers to carry out the necessary services.
Eligibility of buying the freehold of a property
The Leasehold Reform Act 1967 Legislation, also referred to as the ‘1967 Act’ provides leaseholders with the right to buy the freehold of a property. However, there are some terms buyers need to adhere to in order to be eligible to acquire the freehold of a leasehold home.
To be eligible, the current lease should not be a commercial lease and it must have a duration of 21 years minimum left. The property itself will also have specific eligibility criteria such as:
- If the property is divided into flats, there must be at least two flats within the building
- A minimum of 2/3 should be owned on a leasehold basis (if only two flats, both must be leasehold)
- The property must not be part of a cathedral precinct, charitable housing trust, or the National Trust
If all the criteria are met, the freehold will then need to be valued. This is known as Collective Enfranchisement or Freehold Enfranchisement.
What is the cost of buying the freehold of a house?
The price of a freehold will be worked out using three factors:
- An up-to-date value of the property
- The yearly cost of the ground rent
- The years left on the lease
The 1967 Act was designed to ensure a fair exchange of the lease from the landlord to the tenant. However, the rules of valuing a freehold have changed significantly with various amendments to the original act. It is quite complex to complete without the assistance of professional residential property solicitors and surveyors. There are two methods for valuing a house under the 1967 Act, Original Valuation and Special Valuation.
You can’t choose which method is used to value the freehold; it is only dictated by the eligibility criteria. The process for valuation is complex and so normally requires professional input. Other costs that can apply when buying a freehold include legal fees, property valuation fees, any freeholder’s fees, and stamp duty.
Leases and mortgage lenders
Mortgage lenders often prefer there to be a minimum of 50 years left on a lease after the end of the mortgage term. So, the lender would want there to be a minimum of 80 years remaining on the lease if the chosen mortgage term is 30 years. The length of a lease can be extended if an agreement is made with the freeholder and will typically involve extra costs and legal fees.
As we have seen there are many benefits to owning the freehold of a property. However, the process can be fairly challenging to navigate even for a buyer with more detailed knowledge. Therefore, it is strongly recommended that you seek support and advice from professionals like Toomey Legal.
Our team is made up of experts in not only residential conveyancing but other essential legal matters that will ensure all your property needs are met. Contact us today to find out more.