The property market is always going through changes, however there are still 2 legalities when it comes to property ownership. Managing freehold and leasehold properties have very different responsibilities.
What is a Freeholder?
- The freeholder owns the building and the land that their property is on
- The freeholder has the responsibility to maintain the building, roof and external structure
- Whole houses tend to be sold as freeholds, however this isn’t always the case
What is a Leasehold Property?
A leaseholder has the right to live on the land owned by the freeholder (landlord). The lease is an agreement between the freeholder and the occupier, stating the number of years that they can live there, the responsibilities both parties have and the fees they must pay. This is usually more than 90 years, anything less than 80 years isn’t recommended, renewing or extending the length of lease can be costly.
- The lease outlines legal rights and responsibilities for the leaseholder and freeholder
- The freeholder, even if the property has a leaseholder in occupancy is usually responsible for maintenance of the buildings internal (staircase, walls, etc) and external (walls, roof, etc) structure
- Freeholders will require service charge from the leaseholders to cover cost of maintenance and buildings insurance as well as ground rent
- If more than 50% of leaseholders in one block/estate are unhappy with how their property and communal areas are managed they can apply for Right to Manage which gives them the responsibility
- Leaseholders are required to obtain permission from the freeholder should they want to do any major work on the property
Leasehold Flat v Leasehold House
Generally, leasehold properties are flats, the freeholder owns the block (building) and the ground surrounding it (car parks, gardens, communal areas etc), they lease out the properties (flats) inside the building, the leaseholder has the right to occupy the property for a set number of years.
Leasehold houses are less common than flats however these are becoming more frequent. Homeowners have been paying ground rent on properties they own for years where their property is on land owned by a freeholder, traditionally this has been a minimal fee.
There are positives and negatives to being a leaseholder, you aren’t responsible for work on your building (bonus) but you will have to pay for it and you’ll never own the land you live on (not so good).
With the property market shouting out for new builds developers have opportunities to explore different revenue streams. Some are returning to old methods and not only buying land to build estates on but they are then selling the properties but not the land. This allows them to earn a couple of hundred pound a year from each house by collecting ground rent.
Not only does this cost the resident but being a leaseholder has restraints too, should you want to build an extension or conservatory on the property permission must be granted from the freeholder which can be inconvenient.
There are more than 650,000 leasehold houses in the UK, many of whom are occupied by first-time buyers, this trend is continuing to rise.
When a property, whether in a block or an estate is owned by a freeholder who looks after the maintenance of the building and surrounding areas a service charge fee is issued to the leaseholder.
A service charge budget, typically calculated on an annual basis is non-for-profit. It is created to cover the cost of work, up-keep, ground rent and insurance of the building. Many freeholders choose to outsource this with a management agent.
It is common for disputes to arise between leaseholders and the management agent. Should more than 50% of leaseholders be unhappy with the management agent they can implement Right to Manage but this is generally ill-advised. Professional management companies are experts in providing this service. Right to Manage set-ups can lead to many people trying to do one job.
Length of the Lease
A lease can be up to 999 years however they are mostly start around 90 or 120 years. If they are less than 80 years the value of the property drops and mortgages are harder to obtain. Leases can be extended but that is up to the freeholder.
If the lease runs out then the freeholder gains possession of the property. A lease with zero years is worthless.
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