Property Freehold – The Facts
There are two main types of property ownership in England and Wales: freehold and leasehold. Both types of property ownership have their own advantages and disadvantages and you will find residential properties of both types on the market. However, as a general rule, when you buy a new house, it will be freehold and when you buy a flat, it will be a leasehold. Leasehold properties can be converted into freeholds later thanks to certain legal rights granted by successive Acts of parliament.
Before you make any major decisions about property, it is important that you know what you are getting into. Buying a freehold property or converting a leasehold into a freehold can benefit homeowners in a number of ways. Here’s everything you need to know about freehold properties, to help you decide which option is best for you.
What Is A Property Freehold?
A property freeholder is someone who owns not only a property but also the land that it is built on. Because freeholders are responsible for maintaining both the property and the land, property freeholding can be more expensive than leaseholding. Leaseholders own property, subject to the terms of their lease agreement with the freeholder, but not the land beneath it. Most homes in England and Wales are freehold properties, and many people don’t realise that leasehold properties exist until they are going through the home buying process themselves.
The Benefits Of A Property Freehold
A property freehold comes with more responsibility than a leasehold, as you will have to take responsibility for both the property and the land. However, there are also a number of benefits to a property freehold.
First and foremost, a property freehold means that you own the property outright in perpetuity. With a leasehold, the leaseholder effectively owns the property for the duration of their lease, within the parameters set out in their lease agreement. This can create some serious headaches when the lease is coming to an end and needs to be renewed.
Another benefit of being a freeholder is that you don’t have to worry about dealing with a landlord; you are the landlord. This also means that you don’t have to worry about paying the various costs, such as ground rent and service charges that leaseholders are responsible for.
Buying A Property Freehold
Most homes in England and Wales are sold as freeholds, but when it comes to flats, it is much more likely that you will be buying on a leasehold basis. If you have purchased a home as a leasehold, then it usually makes good financial sense to buy the freehold on it as soon as you are able to. Houses are rarely sold on a leasehold basis, but if you find your dream house on the market as a leasehold , you should know that you can purchase it as a leasehold and then, after a period of two years, buy the freehold from the landlord.
Buying The Freehold Of A House
Since the introduction is a 1967 Act of Parliament, which has been strengthened by subsequent updates in 1993 and 2002, leaseholders have had the right to buy freehold of a house when certain criteria are fulfilled:
- The property must be a house and not a flat or another type of residence. Deciding whether a property qualifies as a house or not can be more difficult than you might think. For example, there are large buildings that contain both residential and commercial elements. To qualify as a house, the residential portion of the property must be self-contained and divided from any neighbouring properties using a vertical divider. If any part of the other property runs under or over your property, there is no right to purchase or enfranchise.
- The lease on the house must be at least 21 years when granted.
- You must have owned the house for at least two years since the property was first registered with the Land Registry.
- If you have inherited the tenancy from a deceased family member, then you can still qualify, even if you haven’t owned the house for two years.
If you decide that you want to purchase the freehold on a house, there are two routes that you can take. The more formal route involves invoking your legal right to enfranchisement. This way of doing things provides some level of protection to you as the leaseholder, in the event that you and the freeholder are unable to come to an agreement on the terms. The law clearly defines the procedures that must be followed and the timescales over which they must be completed.
The alternative to the formal route is the more informal approach where you approach the freeholder to ask them if they are interested in selling their freehold. Whereas the legal route requires the freeholder to engage, there is no obligation for them to respond if you approach them informally with a proposal. However, there is nothing to stop the leaseholder and freeholder negotiating together on their own terms without turning to the law.
In many cases, starting the process informally will be cheaper and will save you both time and money. If informal negotiations between you and the freeholder fall apart, then you can always pursue the formal legal route if you meet the criteria.
Buying The Freehold Of A Flat
Under a legal process known as collective enfranchisement, the leaseholders of a block of flats have the option of pooling their resources together and purchasing the freehold on the property. This right was first introduced in legislation introduced in 1993 but was seldom used until a subsequent update to the Act in 2002 strengthened the hand of leaseholders. Unlike houses, where the vast majority are sold on a freehold basis, most people who purchase a flat will be purchasing it as a leasehold.
If you don’t own the freehold on your flat then when the time comes to renew your lease, you could be looking at paying tens of thousands of pounds to extend it. In fact, once the value remaining time on your lease drops to 80 years or below, the cost of extending can increase dramatically. Buying the freehold on your flat will enable you to extend the lease on it for a full 999 years, completely free of charge (setting aside any legal fees you might need to pay). Purchasing the freehold will also remove a number of ongoing costs from your plate, as you will no longer be responsible for service charges or ground rent.
Share Of Freehold Or Lease Extension?
You should remember that buying the freehold on a flat is different from acquiring the freehold for a house. When you buy a freehold on a house, you become the sole owner of the property and the associated land. However, buying the freehold on a flat under collective enfranchisement means that you will be sharing ownership with a number of other tenants.
Note that in most cases, the costs of purchasing a freehold will be similar to acquiring a 90-year extension on your lease. If you are considering purchasing a freehold because you want to extend the duration of your lease, it might make more financial sense to extend your lease instead. However, once the remaining term on your lease drops below 80 years, both options become much more expensive, so if your property is nearly at this point, you should consider a freehold purchase.
Anyone who pays attention to property news has probably come across more than one horror story about freeholders who are charging hundreds of thousands of pounds for routine maintenance work that should cost half as much. The Leasehold Valuation Tribunal exists to enable leaseholders to challenge unfair charges levied against them by a freeholder. However, taking a case to the tribunal can cost thousands in itself, making it a difficult route for many people. Unfortunately, there is little oversight to prevent freeholders from charging excessive fees for work.
When you purchase a share of the freehold, you and your neighbours will be freeing yourself from the freeholder and won’t have to worry about paying high maintenance costs. Instead, you and the other freeholders will be able to keep your costs as low as possible. You will still have to pay those maintenance costs, but as the freeholder, you have complete control over how you pay for them.
You should always carefully weigh up your options when you are making decisions about buying property, so you know what you are getting into. Purchasing the freehold on a house or a flat offers a number of advantages over the alternative. As a freeholder, you will have complete freedom and control over your property, and you won’t be at the mercy of another freeholder. If you are buying a new home, it will almost certainly be a freehold property, but you should always check this beforehand to be certain. Remember, you can convert a leasehold house into a freehold after two years, so a leasehold property may well be a worthwhile investment for some people.