When looking to buy a home or property investment, it’s important to know the difference between freehold and leasehold properties. There are also reforms coming into effect that will impact owners of leaseholds.
Here is a quick guide to help you understand the differences between freehold and leasehold properties and the new leasehold reform being brought forward by the government.
What are freehold properties?
With freehold properties, the owner of the property has ownership of the property and the land it was built on. As the freeholder, you’ll be responsible for maintaining both the property and the land. These costs should be budgeted for when looking to purchase a freehold property. Most houses are freehold, but some have been sold as leasehold, often through shared-ownership schemes.
What are leasehold properties?
With leasehold properties, the owner of the property has bought the right to live in the property for the time remaining on the lease. The freeholder retains ownership of the land the property sits on. Most maisonettes and flats are leasehold properties. With this, you own the property in the building, but you have no stake in the actual building itself. Some houses are sold as leasehold, but this is less common.
The obligations and rights of the freeholder and leaseholder are set out in the lease agreement. The leaseholder usually has to pay an annual ground rent and service charge. Additionally, a lease is granted for a fixed period of time. Leases for new-builds are usually set at 99 or 125 years but sometimes these go up to 999 years.
Owners of leasehold properties may have to extend their lease at some point. Many professionals recommend extending a lease well before 80 years are left as the price for lease extensions rise the fewer years that are left on the lease.
Why apartments are mostly leasehold
According to the Ministry for Housing, Communities and Local Government, there are approximately 4.5 million leasehold properties in England. Of that, 69% are flats and only 31% are houses. Land Registry data shows 23% of residential property transactions during 2019 were leasehold. This equates to around 216,000 transactions in total. During this time, nearly all flats were sold as leasehold, while only 6% of houses were.
Because of the nature of having a neighbour below and/or above you, apartments are usually sold as leasehold. Additionally, with a number of common areas in apartment blocks, a management company will usually take care of the maintenance and cleaning of these areas of the building. This includes corridors, stairways, lifts, car parks, gardens and the exterior of the building.
New changes to leaseholds and ground rents
In recent months, there have been a number of reforms announced for leasehold properties in England. The government has described these changes as some of the most significant reforms to property law in England for 40 years.
In January 2021, the government announced leasehold changes that will mean a leaseholder who decides to extend the lease on their property by 990 years will no longer pay any ground rent to the freeholder. The leaseholder will just have to make one premium payment to extend the lease. This reform is expected to save millions of leaseholders up to tens of thousands of pounds.
Banned ground rents for new-builds
To stop lease agreements from containing clauses that allow ground rents to increase at regular intervals, new leasehold reform is being introduced by the government. This will ban ground rents from rising above the peppercorn amount for new-builds.
The reform is not expected to include current leases. However, some developers have already adopted peppercorn ground rent rates. These reforms are part of the Leasehold Reform (Ground Rent) Bill, which was officially introduced to Parliament on 12th May.
Commonhold homeownership model
In May, a Commonhold Council was created to inform the government on the future of leasehold homeownership. The commonhold model is used across the world and provides a different structure for property owners to collectively own the building their apartment is in. This will also provide property owners the ability to have more say on their building’s management, shared facilities and related costs.
These leasehold reforms will change the way leasehold properties and ground rents work in England and could bring benefits for owner occupiers and property investors alike.