It is very important that property investors, landlords and property owners understand the differences between freehold property, leasehold property and commonhold property and what these differences mean for them and the value of their investments.
The terms freehold, leasehold and commonhold describe the three common forms of property ownership that exist in England and Wales. In Scotland, Scottish law has its own version of freehold property which is known as “feuhold”, and while there are some leasehold properties north of the border it is much less common than in England and Wales.
Investment Property Partners investors guide to property ownership examines the three alternative ownership models of freehold, leasehold and commonhold and outlines the differences. It also looks at other matters including leasehold values, ground rents, service charges, lease agreements and responsibilities.
What is Freehold Property?
First of all, if a property is freehold it means that the property owner or the freeholder owns both the property and the land on which it is built.
This means that when the freeholder dies they are able to leave the freehold property to their heirs because it is recognised as being part of estate.
The limitations to its use are generally constrained only by planning laws and the like, and although property repairs are the freeholders’ responsibility it is up to them whether they have them carried out or not… and while it would be unwise not to keep their property in good repair, it is their prerogative not someone else’s.
It is for these reasons that freehold property is often seen to be more desirable than leasehold property, and a further consequence of that is that they are therefore often more valuable.
What is Leasehold Property?
If a property is leasehold the owner of the lease or the leaseholder owns the right to occupy the internal space of the property but does not own the structural fabric of the building or the land on which it is built.
Ownership of leasehold property is for a specified period which will be stated in the lease agreement and if the leaseholder allows that period to expire then the property in its entirety will revert back to the freeholder.
This is why leasehold property ownership usually applies to flats rather than houses, although there are plenty of exceptions.
In summary, the leaseholder leases property from the freeholder… the freeholder owns the property and land on which the property is built outright; but agrees to hand it over to the leaseholder for an agreed length of time… at the end of the lease the ownership of the property reverts back to the freeholder.
It is also worth noting that the duration of such leases can vary and that will inevitably be reflected in the value of the property.
Under certain circumstances leaseholders have the right to extend the length of their lease, or in some cases, purchase the freehold from the freeholder outright.
This extension or purchase process is known as “enfranchisement”, and it can be a long, drawn-out and costly affair.
You should also understand that different rules apply to houses and flats.
Leasehold Advisory Service
A body known as the Leasehold Advisory Service, which is a non-departmental public body (NDPB) funded by the UK Government exists to provide free advice on the laws affecting residential leasehold property in England and Wales… Leasehold Advisory Service →
The Leasehold Advisory Service provide assistance on several matters relating to residential leasehold property including service charges, lease extensions, purchase of freeholds, tenants right to manage and applying to the Leasehold Valuation Tribunal (LVT).
What about Ground Rents?
As you will see, leasehold property is really a form of tenancy, and that being so, a rent in the form of ground rent will normally be due, paid annually to the landlord (the freeholder).
What about Service Charge?
This ground rent is often a nominal sum, but in addition there may with some properties be a service charge to cover the management and maintenance of the building, outside repairs, redecoration, window cleaning, possibly gardening if applicable, and insurance – for the building only, not the contents.
In some cases, a freeholder or residents’ management committee deals directly with such management issues.
In other situations, a property management company can be appointed to take care of these on-going issues and in such cases a management fee will also be included in the service charge, with each leaseholder paying a share of the total costs.
As with all things you may find these annual charges increasing year on year, but they are required by law to be “reasonable”.
If further assistance on service charges is required the Leasehold Advisory Service offers an excellent service.
Leasehold vs Freehold
Always remember that it is the leaseholder who owns all of the interior of the property, whilst the freeholder owns the structure itself and the land on which the property is built.
So is there any advantage to owing property leasehold?
Indeed there is… upkeep of the property, repairs and maintenance activities are often the responsibility of the freeholder, so you have nothing to worry about on that score.
However, on the downside it can sometimes be more difficult to obtain a mortgage for a leasehold property, a lot depending on the length of time the lease will have left to run at the end of the mortgage term.
Leaseholders commit to a lease which is a legally binding document which sets out in detail the rights, as well as the responsibilities, of both the freeholder and leaseholder.
The lease will also clearly identify the terms and conditions under which the property is occupied.
The signing of this lease agreement means that the interests of all parties are safeguarded.
So what about the respective responsibilities of the two parties?
What is Commonhold Property?
The third form of property ownership we consider here is a relatively new system based on the joint ownership of property introduced in 2004.
Known as commonhold property it is a new type of property ownership that many commentators consider to be better than leasehold for certain types of multi-tenanted property, including blocks of flats.
Commonhold property was created by the Commonhold and Leasehold Reform Act 2002 (CLRA 2002) as a possible alternative to leasehold property.
The CLRA 2002, together with the Commonhold Regulations 2004, came into force on 27 September 2004.
Under commonhold arrangements, a company known as a “Commonhold Association” is created to own the freehold of the building.
This Commonhold Association is responsible for maintaining the internal and external common parts of the building.
The owner of each commonhold title (usually an apartment or flat) is a member of the association and must agree to certain terms and conditions (usually similar to those of a lease).
Like leasehold property, commonhold property has both advantages and disadvantages.
Again, the Leasehold Advisory Service is an excellent source of further information on this form of property title.
Getting Expert Legal Advice
Finally, if you are an property investor considering the purchase of a leasehold or multi-tenanted freehold or commonhold property we strongly recommend you seek expert legal advice from an experienced property solicitor… it will undoubtedly pay you in the long term.
Property Investment Solutions
As a leading independent property and land investment specialists Investment Property Partners offer expert advice and support to clients across our specialist areas of expertise helping them to achieve their investment objectives.
If you are a property investor searching for freehold or leasehold investment opportunities please contact us today to discuss how Investment Property Partners can help you.
More information about freehold property… here →
More information about leasehold property… here →
More information about commonhold property… here →