What are the differences between Leasehold and Freehold properties?
Difference between Leasehold and Freehold
If you are looking to purchase a property in the UK, you need to be aware of the basic ownership structures like leasehold and freehold. Our Service Charge Accountants have curated an in-depth guide about the differences between these structures and how these impact you.
Before you purchase a property in the UK, it’s essential to determine whether the property is leasehold or freehold. Residential or commercial properties can be freehold or leasehold in the UK. Once you understand what type of property it is, you will also be able to find out your rights and responsibilities regarding the ownership of that property and the service charge.
This article will discuss your rights and responsibilities that come with purchasing either a leasehold or freehold property.
Types of ownership:
According to UK legislation, there are primarily two types of legal property ownership:
What is a freehold type of ownership?
Freehold ownership allows individuals to enjoy full ownership of the property and the land on which the property resides. This ownership comes along with the personal responsibility of maintaining and servicing your property (section 20) and land. You are responsible for the management of your property and any other area on your land, such as garden, fences, walls, trees, pavements etc.
Perks of freehold ownership
There are numerous benefits associated with being a freehold owner.
- The owner does not have to deal with the landlord and is the landlord themself.
- There are no lease payments and their deadlines to worry about.
- The freehold ownership is free from service charge, ground rent and other landlord charges.
- The owner does not have to worry about ownership post expiry.
- There is flexibility in selling the property, making changes on the property or letting their property for rent.
- Availing mortgage loans are easier as compared to leaseholds.
Freehold ownership comes with the responsibility of managing the building and property both, hence it may become intense for someone who is busy and does not have time. Hiring an effective management company might make things easier.
What does it mean to own a share of freehold?
If you live in a leasehold development you buy a share of the freehold from the landlord, along with other leaseholders in the building. It is possible if at least half of the leaseholders are on board to buy a share. Owning a share of the freehold allows an individual to exercise more control over their property and the costs required to maintain it. If you are unsure about the process you could speak to your managing agents or a service charge accountant.
You would have to issue a Section 13 notice to the landlord. You may also be required to set a separate entity with other leaseholders to manage the building. Learn how to become an RMC director and the responsibilities that come with it.
What is leasehold?
The leasehold allows the individual to enjoy the ownership of a property for an agreed lease period with the freeholder. The leasehold may be subject to terms and conditions as dictated by the lease. As the lease period ends, the ownership then returns to the freeholder, this is normally extendable. Most of the apartments or flats owned by the people in the UK are through leaseholds. This ownership implies that even though you have right in a building, you have no share of ownership in the land on which the building has been built.
What to consider when buying a leasehold?
If you are planning to buy a leasehold, keep the following considerations in mind:
- You should check the number of years left on the lease.
- You’ll need to come up with an effective budgeting method for service charges and other costs.
- It’s advisable to work out how the length of the lease period affects the resale value of the property.
- You should check whether the length of the lease impacts your chances of getting a mortgage.
Service charge on leasehold properties:
Owning a property in a building as a leaseholder, only gives you the ownership of the property and not the land on which the building has been built. It also conveys that you won’t be responsible for managing and maintaining the building structure and the communal areas shared between the flats in the building. Instead, the landlords are in charge of the maintenance of the shared areas, they may hire a managing agent to manage and run the building on their behalf. The lease document will normally stipulate that you as the leaseholder are liable to contribute towards the maintenance of these communal areas, called service charges.
Paying for service charges on top of the mortgage can become costly and may require proper budgeting of your income to manage your finances effectively. As a leaseholder lookout for service charge accounts prepared by your properties service charge accountants. These accounts will be a certified copy of the expenditure incurred for your property for the year and will give you an idea of how your money was spent on the maintenance of your building.
The service charge covers the cost required to maintain communal gardens, exterior walls and other communal areas. It may also cover other expenses like ground rent, administration charges, or insurance.
As far as the leasehold property is concerned, leasehold owners pay for its repair and maintenance, excluding the building. But you might be required to inform the landlord and might even need their permission before making any major or minor changes.
What are factoring charges?
If you are living in Scotland, you might have come across the term’ factoring charges’ which is just another name for service charges. Factoring charges, like service charge, applies to any flat or apartment that shares common parts or houses in the residential community like a playground or park.
Related: Learn about how you can issue correct service charge demands to leaseholders if you are running a residential management company.
What are your rights as a leaseholder?
Knowing your rights as a leaseholder acts as a safeguard from any potential financial fraud.
Mentioned below are some of the rights to exercise as a leaseholder
- For your comfort, you can ask for a summary of the service charges from the landlord.
- You can ask the landlord about the estimation method of service charges.
- You can even request the landlord for receipts or invoices of the work carried out on the building.
Related: Read more about the service charge 18-month rule in detail
What to expect from the landlord?
Mentioned below are some considerations that you should keep in mind.
- The landlord must consult you on any building work that costs more than £250.
- It is the duty of the landlord that he must take you into confidence before carrying out any work that costs you more than £100 a year
- The landlord must inform you before doing any building work that can last for more than a year.
How do leasehold and freehold differ from each other?
|Leasehold Ownership||Freehold Ownership|
|Definition||Leasehold ownership allows one to enjoy ownership over the apartment/house and not on the land it’s built on||Freehold ownership allows one to enjoy ownership over both the apartment/house and land its built on|
|Example||Apartment/home owned in a private housing society||Building owned on basis of freehold ownership|
|Ownership post expiry||Depends whether the lease is renewed or not||Remains with the owner having the freehold rights|
|Mortgage loan||Financial institutions are doubtful in cases of leases, so acquiring mortgage loans is somewhat difficult||Financial institutions have greater trust due to freehold ownership so its easier to acquire mortgage loans|
|Ownership cost||Cheaper due to payment in instalments for the property||Relatively expensive because of high land prices due to the land being purchased on a freehold sale basis|
Clear house accountants are professional Accountants in London, with considerable experience in the service charge domain. Our service charge accountants work with landlords, property management companies, developers and other stakeholders to help them prepare effective service charge accounts, outsource complete accounting functions or help with ad-hoc investigative work. Speak to us to learn more.
Thao is a Senior Accounting Manager at Clear House Accountants. Her experience in the industry has led her to her current position in which she is responsible for a team of accountants, tax planners and bookkeepers.
Thao works with her team to help clients from a variety of industries, grow, save money and plan for the future. Thao holds a Bachelor and Masters degree in Accounting and Finance and is currently working towards her ACCA, she is also a Xero and Quickbooks Certified Advisor.
Thao’s expertise lies in high-level tax planning, management accounting and strategic business planning based on financial performance and business analytics. Her experience, expertise and knowledge make her an exceptional contributor at Clear House.