What is the difference between buying a leasehold or freehold property? Stephen Ward, Director of Strategy and External Relations at the Council for Licensed Conveyancers, explains.
There’s a lot of jargon to get to grips with when you first step foot on the property ladder. From covenants to chattels, it can be difficult to remember what everything means – and the right questions to ask. Choose a good conveyancer, though, and they will guide you through the process.
Top of every prospective first time buyer’s list should be whether a property is freehold or leasehold, however. Under current laws, the latter could leave you locked into paying spiralling ground rents and service charges, so it’s important to know exactly what you’re taking on.
What’s the difference?
If a property is freehold, you own the building and the land. Leasehold, of which there are currently an estimated five million properties – mostly flats – in the UK, means you own the building but lease the land for a fixed period.
As the lease gets shorter, this can affect the value of the property. Leases are typically 99 years or more but depending on how long is left when you buy, you may have to pay to extend it.
Owners of leasehold properties are also usually charged ground rent, payable to the freeholder and subject to change, although leases granted after 30 June 2022, must be capped at what is called a “peppercorn” amount – that’s a very low value.
In the case of leasehold flats, while you own the flat, the freeholder will usually be responsible for insuring and maintaining the building – including any communal areas – and you will have to pay a service charge to cover your share of these costs. This can vary depending on what needs to be done, and, in addition, you may be asked to contribute to a reserve or sinking fund to cover any major works.
Leasehold reform
Many leasehold property owners consider it an outdated and unfair system and some have spent years campaigning for change.
That came in the form of the Leasehold and Freehold Reform Act, which received royal assent last year, although critics say it does not go far or fast enough as it is being introduced in stages and progress is slow.
The Act should make it easier and cheaper for leaseholders to buy their freehold, increase the standard term for leases to 990 years and provide greater transparency around service charges.
Unfortunately, the majority cannot be implemented without what is called secondary legislation, more detailed rules made by Government, consultation on which is expected to take place later this year.
One change that has taken effect already is where previously leaseholders had to wait two years from buying a property before they could apply to extend the lease, or buy the freehold. This condition has now been removed.
Separately, the Government has also pledged to create a Leasehold and Commonhold Reform Bill which would, among other things, ban new leasehold flats being built and regulate ground rents, moving the UK towards a commonhold model where the people who own flats in a building have joint ownership and responsibility for shared areas and services. The proposed bill has not yet been drafted, however, so is unlikely to become law any time soon.
What does it mean for me?
In reality, little has changed for those buying leasehold properties yet, so it is really important to understand exactly what you are signing up for. Ask your conveyancer to explain and advise before you make a decision.
In particular, you should consider how long is left on the lease and how much it will cost to extend it, if you need to, plus what the annual ground rent and service charges are. Estate agents are required to provide this information when marketing properties.
There may also be other restrictions or obligations such as that you cannot run a business from the property, keep a pet or make structural alterations without permission from the freeholder.
When researching conveyancers, ask what leasehold experience they have as they may be able to negotiate more favourable terms and challenge any charges deemed unreasonable.
The CLC will be visiting a town near you later this year in a series of roadshows offering prospective homebuyers and sellers information about the conveyancing process. We will be publicising details nearer the time. You can also find a list of CLC-regulated conveyancers in your area at clc-uk.org/find-a-clc-lawyer
First Time Buyer is an exciting bi-monthly glossy which takes a stylish and comprehensive look at all the options available, setting them out in an entertaining and informative way, and helping potential customers navigate their way through what is often a daunting and complex process. We dispel the myths, reinforce the facts and arm the reader with the tools necessary to make their homeownership dreams a reality.
