Clients often ask what is the difference between purchasing a freehold property and a leasehold property. There are a number of distinctions between the two.
If the title to the Property is freehold, it means that you own the Property outright, in perpetuity.
If the title to the Property is leasehold, this means that you have a lease from the freeholder to use the Property for a number of years. A lease is a contract with the freeholder and sets down the legal rights and responsibilities of either side. When a lease ends, the property usually reverts to the freeholder.
A lease determines the way a Property can be used and you will not have as much control with a leasehold property as you would a freehold property. For example, there may be restrictions on use, occupation, alterations etc. which are often actively enforced and may be subject to costs such as rent and service charge.
If you are a leaseholder and you do not comply with the terms of your lease, the freeholder will have certain rights to enforce the Lease. For example, the freeholder may be able to take you to court to require you to do something (such as repair the property) or stop you from doing something (such as causing a nuisance). In more extreme circumstances, the freeholder may be able to bring the Lease to an end and prevent you from continuing to occupy the Property. You may also be responsible for the freeholder’s legal costs and interest on any money you paid late.
Certain activities may be prohibited completely or may require the freeholder’s permission first, often by way of a written legal document. The Lease will usually require the leaseholder to pay any costs the freeholder incurs when they give this permission, for example, any surveyor’s fees or legal costs. As an example, a leaseholder may need the Landlord’s permission before building an extension to their property or to have pets.
Leasehold estates are a diminishing asset, in other words, the property becomes less valuable as the number of years left on the lease term reduces.
While there is no specific rule regarding an acceptable lease term for potential buyers (and indeed their mortgage lenders), it is generally considered wise to make sure a lease has more than 80 years remaining in the term. This is because where a lease term drops below 80 years, the leasehold interest itself devalues significantly. As a result, the majority of lenders are not prepared to offer a mortgage if the lease term is due to expire in less than 80 years.
You may be entitled to act upon your statutory right to request for your lease to be extended. However, you will only be eligible to do so from two years after the completion of your purchase. Where the lease term is less than 80 years, the premium, price of which the landlord is entitled to ask for the extension increases significantly.
Please do not hesitate to contact our Property Solicitors should you have any questions in relation to freehold or leasehold property.