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In broad terms there are just two ways in which any residential property in England and Wales can be owned – freehold or leasehold. But what is the difference? Is one better than the other?
Legally the two forms of ownership are completely different. If you own a freehold, technically you do not just own a house and garden, but a piece of land, defined by boundaries on a two-dimensional map, along with everything directly above it stretching into space, and below it to the centre of the Earth – subject to all the rights that others will have in respect of use of airspace and mining.
If you own a leasehold property, technically you do not actually own any land, building or part of a building, but a right to use a specified part of a building (such as a flat) or other property for a certain number of years.
Another way to look at it is that freeholds are divided vertically from neighbouring properties, while a leasehold is a right to use a part of a building that could be divided from its neighbours horizontally or vertically, or a mixture of both.
That is not to say all houses are freehold and all flats are leasehold. There are several houses that are owned on leases. There are even a few freehold flats, though generally mortgage lenders will not accept them.
In the case of a block of flats, typically each flat will be sold by a lease giving the buyer the exclusive right to occupy it for a term of years (say 99, 150 or 999 years). The land beneath the block, and the structure of the block itself, will be owned by another party as a freehold title, but subject to all the leases of the flats in the building. Under the terms of the leases, the freehold owner will be responsible for maintaining the structure of the building, but with the owners of the flats contributing to the maintenance costs by a service charge.
The maintenance and service charge provisions are often the subject of issues that arise between the owners of flats in a block and the freeholder or their managing agent. Despite some protective legislation, many flat-owners feel they have little control over maintenance decisions, the quality of the work, and the level of the service charge. Often the best arrangement for a block of flats is what is sometimes called ‘share of freehold’, where the freehold is owned by a residents’ company, which is itself owned by all the flat-owners. However for that to work it does require proactive involvement by sufficient residents to make the right management decisions for the block on behalf of the company.
Perhaps the main disadvantage of a lease is that it is a wasting asset. As the years go by, so the term left on the lease declines. Some mortgage lenders will not accept a flat where there are less than 70 years left to run. In most circumstances flat-owners do have a legal right to buy an extended lease, and usually the owners of flats in a block will have a right to collectively buy the freehold. However that is a significant additional capital outlay.
There are also technical legal reasons why flats cannot usually be sold as a freehold. These relate to the positive obligations or ‘covenants’ that are required, for instance the obligations to pay a service charge and maintain the interior of the flat and its own pipework and other services. When a flat is sold, the buyer automatically takes on all the covenants in the lease. When a freehold is sold, under English and Welsh law any positive covenants will not pass to the buyer unless special provisions are made.
Over several decades Governments have tried to bring in legislation that will allow owners of flats to have a freehold rather than a lease, but as yet none of the proposed solutions has caught on, largely because most mortgage lenders will insist that any flat must be owned on the basis of a lease. A change would involve amending a fundamental principle of property law, rather than simply introducing a new option.
If you would like advice on freehold and leasehold or any other matters please contact our team.