We get this question all the time, especially from our overseas investors. In the UK we have two main forms of property and land ownership recognised by law, these are called Freehold and Leasehold. In general, houses are almost always freehold, whereas flats and apartments are usually leasehold. There are pros and cons for both forms of ownership. But what are the key differences between the two, and how will they affect you as a property owner?
With leasehold you own your individual property (an apartment within a larger building, for example) but not the land the physical building sits on. In this sense you lease, or in other words rent, it from the landholder for an agreed length of time. This is most common with flats and apartments. Owning a leasehold property usually means you incur service charges and ground rent, payable to the landlord (who owns the freehold for the land and building), to cover the maintenance and upkeep of the communal areas and grounds within which your property sits.
New build leasehold properties usually have leases of at least 125 years, this is very commonplace and something many British people wouldn’t think twice about. However, leaseholds on new builds can vary from 99 years up to 999 years in length. Something to keep in mind when buying any leasehold property in the UK is ensuring that the remaining length of your lease is long enough. For example, having a lease under 70 years can prove problematic when trying to sell, as it’s hard for buyers to get a mortgage for a property with a short lease. There are often options to extend your lease and this is something which is highly recommended once a lease starts to get close to the 80-year mark. However, be aware of ‘virtual freeholds’, more on that further along.
Purchase a share of the freehold
Another option you may have at some point is to purchase a share of the freehold along with the other leasehold property owners in the building. This would mean that your property itself is still leasehold, but you, along with your fellow freeholders, would form a management company that would own the entire building, and can set the terms and length of each individual properties lease. Responsibility for the insurance and upkeep of the building as a whole would also now be shared between you and the other freeholders.
Things to keep in mind:
- Leaseholds are very commonplace in the UK and buyers of property don’t really see it as a negative.
- Make sure when buying an off-plan or new-build property that the leasehold in the contract is at least 125 years. 99 years is also common, but we recommend anything up from 125 years.
- Effectively, when a lease comes to an end the Tenant (Lessee) no longer has a right to occupy the property and has to give back possession to the Landlord (Lessor). The landlord then owns the property and can resell the lease.
- You have a legal right to extend your leasehold after owning the property for more than 2 years. So make sure you top-up your lease before it dips below 80 years.
- A flat with a 50-year lease, for example, will only be worth about 70% of what an identical flat with a 99-year lease would be worth.
If you own a freehold property, then you own both the building and land indefinitely (until you sell them on of course). Whilst, naturally, you don’t have to pay any service charges or ground rent, this does mean the costs of upkeep are wholly your responsibility. And if you own a share of the freehold with other tenants in an apartment block, you’ll have to agree on how issues such as insurance and maintenance of the building are managed. This will usually be organised through a company set up by those who own a share of the freehold, although you may choose to simply employ a management company to oversee things.
Generally, only houses are sold freehold in England because you’ll own the house and the land the house sits on. In Scotland, however, most property is sold as freehold, regardless of whether it is a house or an apartment.
Watch out for ‘Virtual Freeholds’
What are they? Simply put a ‘virtual freehold’ is a property marketed with exceptionally long leases of 999-years.
The term ‘virtual freehold’ implies flat owners do not need to be concerned when buying a leasehold property, because the long lease should theoretically protect their capital investment indefinitely. But the reality is that buying a ‘virtual freehold’ property can become a real headache.
As we said earlier, when flat owners in England purchase a leasehold property they are required to pay ground rent to the freeholder, who retains ownership of the land on which the property is built. Burdensome ground rent clauses often attached to leases of 999 years mean that the ground rent doubles every 10 years! Such difficult ground rent schedules and high service charges seriously affect the flat owner’s ability to sell the property in the future.
This is why at Aspen Woolf we aim to recommend good property solicitors to our buyers. Solicitors need to be very careful, because if they don’t clearly inform their clients about the real implications of such clauses, flat owners may have a valid claim against them for professional negligence. Thankfully, we never put forth such properties as they would never get past our stringent due diligence processes, but it’s always good to keep in mind for future investments whether made through us or other companies.
In the end, when purchasing a property, always make sure you understand whether it is freehold or leasehold. And if a property has an exceptionally long leasehold, then make sure to read the fine print as you might be sucked into an expensive journey! A good real estate agent and property solicitor should minimise your worries and help you with your future property ownership and responsibilities.
If you found this article useful and want to learn more about property before you jump in, then you may also want to read about Sensible Tax Planning for Property Investors or the difference between Short-Term vs Long-Term Lets.