Differences between Freehold and Leasehold Properties
Askews Legal LLP are a firm of Solicitors based in Coventry who deal with various transactions, including Freehold and Leasehold sales and purchases.
It is important to understand the fundamental difference between leasehold and freehold properties before deciding which type of property is right for you. All too often clients put in an offer to purchase a leasehold property only to find out later during the conveyancing process that leaseholds are subject to service charges, have limited term set out in the lease and other limitations not seen with freehold properties. We have set out below some differences between freehold and leasehold properties to keep in mind, when looking for your new home.
One of the main differences with leasehold properties is that they are granted by the freeholder (landlord) only for a limited amount of time (defined as a lease “term”). When a leasehold property is created the landlord grants the lease for a certain period. This period is usually between 99 to 999 years. Once that period is over the leasehold title ceases to exist and ownership reverts back to the landlord. As such leasehold properties with fewer years remaining on the lease are not attractive to buyers and indeed mortgage lenders. Most mortgage lenders will not lend with 70 years or less remaining on the lease. When the term of the lease is getting closer to 70 years, you should consider whether a lease extension can be obtained from your landlord. There are several ways to proceed with a lease extension, however, it is important to bear in mind when you are purchasing a leasehold property in the first place that extending a lease will incur additional expense as you may have to pay additional solicitors fees and perhaps even a premium to the landlord to extend the lease.
Leasehold properties are also subject to ground rent and service charges, which are either payable to the landlord or the management company. A management company or managing agent is sometimes appointed by the landlord to deal with the day to day running of the building, which contains various leasehold properties. Service charges are charged for maintenance and repair of the communal areas, accounting costs and any other costs that are incurred by the management company. It is also common for the lease to state that the management company/landlord will be responsible for insuring the whole building. This is to make sure that there is adequate insurance always in place for the building in case the worst happens. If the management company/landlord insures your building then you will be paying towards the insurance, as a part of your service charges.
Service charges vary from building to building but can range from a nominal cost to several thousands of pounds each year on buildings with various amenities. You should bear this in mind when budgeting your annual costs for your new property. Furthermore, service charges can increase from year to year and it is difficult to bring recourse against a management company you feel is increasing service charges excessively.
When we are acting on behalf of a buyer of a leasehold property, we undertake additional checks on the term of the lease and service charges. We ensure that all ground rent/service charges have been paid up to date and that there is not too few years remaining on the lease. It is also important that clients are aware that freeholders and management companies also charge additional fees when you are purchasing a leasehold property in respect of the notices we must serve upon them of notification of the purchase and mortgage.
Additionally, leasehold sales and purchases also do tend to take a bit longer to reach completion in comparison to freehold properties. This is because there are often additional parties involved in relation to leasehold sales and purchases such as the landlord and the management company that must provide replies to enquiries. The seller of a leasehold property is usually also responsible for paying for the cost of a management pack chargeable by the freeholder or management company.
Contrastingly, a freehold property is not limited by term and therefore if you purchase a freehold property you (or your successors in title) will own it indefinitely. There may be restrictive covenants and rights registered on the freehold title but these are usually not as extensive, as contained within a leasehold title.
When purchasing a property you should bear in mind all of the above as it can dictate how long the transaction will take to reach completion and indeed any additional costs that you may incur during the transaction and following completion, as ongoing costs such as service charges and ground rent.
If you are thinking of selling or buying a freehold or leasehold property, please contact our experienced Residential Conveyancing Team at Askews Legal LLP in Coventry. Click here to visit our conveyancing page.
