Published: 23/07/2021Purchasing a leasehold interest is different from purchasing a freehold ownership. As a leading central London estate agents, we have set out below the ins and outs that come with owning a leasehold property.
The difference between a freehold and a leasehold property
If you own the freehold to your property, it means that you own the building and the land it sits on. If your property is leasehold, you hold the property on behalf of the freeholder and rent the home until your lease expires. Leases are usually long term – often 90+ years although some new builds can be as high as 999 years.
As a rule of thumb, most houses in the UK are freehold and most flats are leasehold.
What is a lease?
It is the contract between a leaseholder and a landlord.
The landlord generally:
- Manages the building
- Maintains the building
- Insures the building
- Repairs the building structure, common parts and exterior
- to keep the property in good order i.e. decorating it periodically
- not to carry out any structural alternations without the freeholder’s consent
- not to do certain things i.e. to keep animals
- to make ongoing payments under the lease such as service charge and ground rent
Can I extend my lease?
If you own a leasehold house, subject to a long lease, provided that you have held the lease for at least two years you will have the legal right to extend your lease by 50 years.
If you own a leasehold apartment, subject to a long lease, provided that you have held the lease for at least two years you will have the legal right to extend your lease by 90 years. In addition, you have the right to have any ground rent, payable under the terms of the lease, reduced to a peppercorn rent (effectively nil).
What does share of freehold mean?
If you are purchasing a leasehold property, which is described as a having a share of freehold, this means that as well as purchasing the leasehold interest you will also be buying the seller’s interest in the freehold title.
In this scenario, you will usually find that a specific company has been set up to hold the freehold interest in the building in which your property is situated. Each leaseholder who has a property within the building will become a member of the company upon completion of the purchase of their leasehold interest.
This can be advantageous as you and the other leaseholders will have more control over how the property is managed and can make decisions, such as agreeing to extend the length of your leases without applying a premium.
Can I purchase the freehold during my ownership?
If you have owned a leasehold house for a minimum of two years, you can purchase the freehold interest. You will need to serve notice on the current freeholder and the price is then negotiated between the parties.
If you own a leasehold apartment, the process is more complex. The freehold building is likely to contain multiple leasehold properties and therefore the freehold can only be purchased by a collective group of leaseholders. The process is known as collective enfranchisement.
This is a fee that the leaseholder pays to the landlord to cover their share of the cost of maintaining the leasehold property. This can include decorating the common areas, cleaning the windows, buildings insurance and repairing the roof. The lease should specify your percentage contribution to the overall costs.
There will also be a charge for managing the building and this is normally performed by the landlord or an external management company.
The service charges for a leasehold property vary depending on the terms of the lease. It is important that you are provided with a summary of these payments and understand how they may be increased in order that you can budget accordingly. It is also vital that your solicitor ensures that all arrears of service charge are cleared before you purchase.
What is ground rent?
Ground rent is an annual charge which the leaseholder must pay the freeholder. It is a fee paid to the freeholder to rent the land upon which the leaseholder’s property stands on. The charge can range from a “peppercorn” which equates to no charge, to as much as thousands of pounds depending upon the terms of the lease. It is important that you are aware of these payments and understand how they may be increased in the future.
What is a sinking fund?
This is a fund set up to cover major works or emergencies such as replacing communal boilers or the roof. You should ensure that your solicitor obtains details of any notice of forthcoming major works and confirmation of whether the sinking fund has sufficient amounts to cover the costs.
Are there any other charges?
Most buyers are unaware of other charges involved in purchasing a leasehold property. These can include:
- Paying for a notice of transfer (payable for adding a new owner)
- Paying a notice of charge fee (payable for adding a new mortgage lender).
- The landlord may charge a fee for providing a management pack: information in relation to service charges, maintenance, buildings insurance, fire risk documents and proposed works.
- There may be a clause which result in you having to pay a fee to the landlord to obtain their consent to a restriction in the lease. For example, obtaining consent for an alteration. Once again, these fees can vary depending on the terms of the lease
How Circa London assist
We will inform you of all the material information in respect of the lease.
- The number of years remaining on the lease
- Ground rent costs and when it is payable, together with details of if or how this will increase over time
- The annual service charge costs and when it is payable
- Details of any event-related fees & charges payable under the lease
- Rent payable in the case of a shared ownership arrangement
- Details of any other fees or charges contained in the lease
- The total balance of the sinking fund
- Details of any unusual restrictions or covenants affecting the use and enjoyment of the property