Freehold or Leasehold - which is the best? Well, when buying a
property in the UK there are two main types of ownership – freehold and
leasehold - and, when boiled down, they mean the following:
Freehold: The person who owns the freehold of a
property owns the property and the land it stands on;
Leasehold: As a leaseholder you do not own the land the
property is built on. A leaseholder essentially rents the property from the
freeholder for a number of years, decades or in some Victorian terraced houses,
for centuries.
All apartments have to be sold as leasehold properties
because of the very nature that you have a neighbour above or below you (so
both of you can’t own the land) with the length of the lease being over 100
years (even more sometimes).
However, with some apartments – particularly Victorian and
Edwardian houses converted into numerous apartments – which are sold on the
basis that the leasehold apartment owner also owns part of the freehold (with
other leaseholders in the same building), having what is known as 'share of
freehold'. Similarly, the Government also
brought in legislation a number of years ago for more modern apartment blocks
built in the 20th century where it allowed leaseholders to club together and
have the right to purchase the freehold together.
Now I must stress, there is nothing wrong with leasehold –
it’s been a useful type of homeownership since Norman times, it’s just that with
a leasehold comes a potential extra responsibility. If there are four
apartments in a block, who would pay for the leaking roof when all benefit from a
watertight roof? Who pays for the bad foundations, when everyone benefits from good
foundations? Who pays for building insurances? The list goes on – so clauses
are added to the leasehold agreement to ensure everyone is protected and pays
their fair share of the joint costs of the building with service charges and a
nominal ground rent (ground rent is a nominal rent, commonly quite low, often
in the region of £50 per year to the freeholder of the property).
Houses tend to be sold as freehold as it's a more unambiguous
set-up, given there is only one property on the land. Contentiously however, in
the last 20 to 25 years this has not always been the case with
new-builds as some new homes’ builders have sold the leasehold to the buyer and
retained the freehold. There is nothing wrong with that, it’s just in some
cases, but not all, they also added some oppressive clauses to the lease of the
property they were selling, which could be the next PPI scandal - albeit for
property.
Government reports have emerged recently that suggest 12,000
leaseholders in the UK are facing ground rents – which they pay to the
freeholder – that double in cost, usually every 10 years, but occasionally more
frequently.
Builders started to add clauses into leasehold property
sales with ground rent being set at £300 and £400 a year, yet it doubled
every ten years. Though unwary first-time buyers were habitually told that their
500 and 999-year leases were practically freehold, the clauses inescapably
meant that the ground rent would spiral to ridiculous levels meaning the
average ground rent would be £23,750 a year by 2070 and £379,900 a year by
2130, making the properties practically unsellable today, with owners often
left unable to re-mortgage too.
So, how many people are affected by this in our local area?
Well, using Government data, our research suggests that in Charnwood
84 householders have bought a detached house, semi-detached house or town house
(which would normally be freehold) as leasehold. Not all these have onerous
lease clauses, yet some do. I know it doesn’t sound a lot, yet that is
potentially 84 lives effected with houses they can’t sell - making them prisoners
in their own property.
The good news is the Government is on the case and serious
about sorting out this issue as they have proposed a ban on the future sale of
houses as leasehold, as well as cutting ground rents to zero. Yet stern
questions remain about the future of homeowners in existing leaseholds. Westminster
wants the builders to set up compensation plans, and we will say many (not all)
have stepped up to the mark and started to sort this, although some campaigners
have said the schemes are not fit for purpose, let’s hope they are wrong.
If you are interested in talking about this or potential investments, or would like a second opinion on any properties you have seen, please feel free to call me on 01509 260777 or email me.
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