Freehold vs leasehold
The type of home insurance policy you need will depend on, amongst other things, whether a property is a freehold or leasehold property.
But what exactly does the conveyancing jargon ‘‘freehold’ or ‘leasehold’ mean in layman’s terms? And what’s the difference between freehold and leasehold?
Here’s everything you need to know about leasehold vs freehold.
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Freehold describes a type of property ownership that means as well as owning all of a physical building (i.e. a house or a bungalow), the registered proprietor (freehold title owner) also owns the land the building sits on.
Sometimes a house can have a leasehold title instead of a freehold title where a property is bought through a shared ownership scheme.
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If you own the leasehold title to a property this means that you own part of a building (typically a flat or studio apartment) but you do not own the ground beneath it (i.e. the ground that the building [block of flats] sits on).
The land your flat or studio apartment sits on and the communal areas such as the entrance hall, stairwells, car parking and communal gardens (if any) is owned by the ‘freehold owner’ very often also referred to as the ‘landlord’.
Leasehold property owners usually have to pay what is called a ‘ground rent’ to the freeholder as a fee for ‘renting’ the ground a flat sits on. However, ground rent is going to be abolished on all new leases (and lease extensions - more on this below) from 30 June 2022.
Leasehold property owners also have to pay what is called a ‘service charge’ for the upkeep and maintenance of the communal areas that the freehold landlord owns and that is used and enjoyed by the various leasehold owners.
These payments are typically overseen (demanded and collected) by a ‘leasehold management company’ (also known as a property management company).
The freehold owner employs a management company to arrange for tradespeople to attend to the communal areas should they need repair, maintenance or cleaning.
For example, a regular gardener is usually employed to trim hedges, sweep a car park and/or cut communal grass areas, and a cleaner to hoover and dust the communal entrance hallways and stairwells.
Management companies will also oversee the maintenance, upkeep and testing of electrical fuse boxes or fire alarm systems. If fire alarm systems are not properly maintained and a fire breaks out, this can invalidate a buildings insurance policy.
Similar to how a traditional landlord rents out a property to a tenant for a short term of 6 or 12 months under a tenancy agreement, a freehold landlord will instead grant a lease to a leasehold purchaser for a much longer term that can run into centuries.
If you buy a brand new studio apartment or flat with a leasehold title, most modern leases will have a term of 999 years. However, if you buy a much older apartment, a lease term could have dwindled down to as little as 99 years.
Once the term of a lease ends, ownership of your apartment will return to the freehold owner and a renewal of lease will be necessary. However, most leasehold property owners will negotiate an extension of a lease before it expires but this can cost thousands of pounds.
Where a lease only has a short period of time before it expires (i.e. 99 to 125 years), you will struggle to get a mortgage loan to buy a leasehold property.
The good news is that the government is proposing to make changes to legislation to protect leasehold owners from being ripped off by freeholders or their managing agents. As well as the proposed abolishment of ground rent, it’s hoped that leaseholders will be able to extend their leases for much longer terms (or purchase the freehold title to their property) at a much more reasonable and affordable price.
For more detailed information about extending your lease and the government’s proposed law changes, we recommend you visit The Leasehold Advisory Service’s website and/or the gov.uk’s website.
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Not necessarily, no. Albeit much less common, you can sometimes buy a share of the freehold title for a flat.
This typically happens where an old house has been converted into individual units (flats or studios) and in addition to owning the flat, you own a share of the freehold with the remaining shares in the freehold title being partially owned by the other flat owners in the same building.
If you buy a flat with a freehold share, you and the other flat owners will together all be equally liable for the upkeep and maintenance of any communal areas.
Because there isn’t a separate freehold owner to oversee this, freehold flat owners will usually set up their own ‘management company’ (also known as a residents association) or if all owners agree, outsource this responsibility to a third party property management company.
However, employing a management company can be costly so freehold flat owners will typically have an arrangement whereby they all agree to ‘chip in’ towards the costs of the communal areas being maintained, cleaned and repaired.
In addition, where flat owners partly own a respective share of the freehold, then all owners are equally responsible for arranging and paying for buildings insurance for the whole building (so for all of the flats).
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All mortgaged properties or blocks of flats, whether freehold or leasehold, will usually need buildings insurance but home insurance requirements for freehold and leasehold property are different.
Whilst there is not a leasehold buildings insurance law as such, it’s a given that all FCA-regulated freehold owners of leasehold properties are responsible for arranging and paying for buildings insurance, the [reasonable] cost of which is then passed on to and shared by the leaseholders through service charges. So even though it’s usually the freehold owner’s responsibility to arrange buildings insurance, It is the leasehold owners who ‘bear the risk’.
Note: The Times newspaper reported that leaseholders can pay up to 60% more for buildings insurance arranged by management companies making buildings insurance for leasehold properties much more expensive than buildings insurance for freehold properties. If you’re a leaseholder and think your buildings insurance is disproportionately high, you should ask for full details of the buildings insurance from your managing agents including evidence of the premiums paid. If it transpires that you’re paying much more than you should, you should complain to your management company and if you’re unable to reach a satisfactory conclusion, you can report the management company to The Property Ombudsman or The Property Redress Scheme.
The leasehold insurance requirements for flat owners who partly own a freehold share to the building their flats form part of are they will collectively have to take on the responsibility to arrange and pay for buildings insurance themselves.
All mortgage lenders will usually require sight of a valid buildings insurance policy before they release funds to a property buyer.
GOOD TO KNOW
Under the Commonhold and Leasehold Reform Act 2002, leaseholders have the right to choose a different management company as long as 50% or more of leaseholders in a block agree to this. Under this Act, the current management company cannot object to or obstruct this process.
To conclude, in the table below we have summarised the key differences between freehold and leasehold property ownership so you can see, at a glance, the pros and cons for each type of ownership.
|You outright own the property and the ground beneath it||You only own the property, not the ground it’s built on|
|Freehold owners of blocks of flats can charge leasehold owners ground rent and service charges||You usually have to pay ground rent and service charges to the freehold owner|
|If you’re a freehold owner, you are responsible for arranging buildings insurance||It is the freehold owner’s (landlord’s) responsibility to arrange buildings insurance but you and all the other leaseholders in the same block will ultimately bear the cost|
|Freehold properties are usually more expensive to buy than leasehold||Leasehold properties are usually cheaper to buy than freehold properties|
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