Leasehold versus freehold property

Do you really own your home?

property freehold costs have risen by 10 times with some leasehold contracts

It has recently been reported that developers have been selling new build properties on a leasehold basis rather than the more commonly used freehold, and then selling the leasehold to a third party. When the home owners wish to buy the freehold the cost has been inflated to 10 times the amount that the freehold was estimated to be, making the freehold unattainable and the property in some cases unsaleable.

This has also been the case with ground rents where due to a ground rent escalation clause in the leasehold contract the amount payable could double every 10 years (and in some cases this has already happened), also making the property unsaleable .

Taylor Wimpey on 27 April 2017 has taken the unprecedented step to say that they will set aside £130 million of funds which may have far reaching implications on existing and future leasehold houses.  

Also from the 11May 2017 Nationwide Building Society will no longer accept mortgage applications for new build leasehold properties where the lease is less than 125 years for flats and 250 years for houses, they will also only be accepting ground rent on new builds if it is no more then 0.1% of the property’s value. No doubt more lenders will start to follow.

So what is the difference between a freehold and a leasehold property?

There are two ways in which you can own property and these are freehold and leasehold.

If you purchase a property which is freehold, you own the absolute and permanent tenure (ownership of a building) which you are able to sell at will.

If you own a property which is leasehold, you will only own the property for a fixed period of time. This could be for 125 or 999 years or the remaining time period. A leasehold contract is more commonly found in a flat and will have a Freeholder (Landlord) who will own and maintain the structure of the building together with the common areas such as staircases and hallways.

A leasehold house is much less common although not entirely unusual. In the past and up to the present day, a leasehold house would sometimes be built so that the developer or landowner retains an interest/investment in the property to which you would then pay a ground rent.

The inherent problem with leasehold properties is that if a lease is left to run down over time, the property value will be reduced and the lease would need to be extended. There is legislation in place to do this () however the costs can run into thousands of pounds due to solicitor’s fees and a premium payable to the landlord.

This has caused particular concerns amongst owners of leasehold houses. In some cases leases’ can be drafted so that you can be solely responsible for the ownership and maintenance of the property. This then raises the question as to why you are paying a ground rent (which could also be increased) and then ultimately why a lease extension should be purchased. There are also further concerns that the developer’s may have sold the landlord’s interest in the house to a third party who may then charge more to sell the freehold interest in the house to you.

Due to various complaints and concerns, Taylor Wimpey has set aside £130 million to compensate some affected owners of leasehold houses. At present, we await further details as to who will be eligible to claim and who are most affected as the compensation fund might not be available to all owners of Taylor Wimpey leasehold houses. Further, if the property was not constructed and sold by Taylor Wimpey, you will be unable to make a claim. We are yet to hear if any other developers will follow suit or if other properties constructed will be affected.

At Hunt and Coombs Solicitors we are experienced in dealing with leaseholds, lease extensions and the purchase of freeholds. So If you think that you have been or will be affected by these announcements and would like any further advice on buying or selling a property please contact the Residential Conveyancing Team on 01733 882 800.

Author

Andrew Boullemier, Licensed Conveyancer

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This article has been prepared for general interest and information purposes only; it does not constitute legal advice and should not be relied on as such. While all possible care has been taken in the preparation of this article, no responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the firm or the authors.