In England and Wales, there are 3 types of homeownerships, or otherwise known as tenure*. These are freehold, leasehold and commonhold (which is in effect a different way of holding freehold property).
Knowing the differences between these homeownerships is important, particularly for those who are intending to purchase a property.
We will breakdown the meaning behind freehold, leasehold and commonhold and the emphasis its places on costs and their associated responsibilities.
*“the conditions under which land or buildings are held or occupied”.
WHAT IS FREEHOLD?
The term “freehold” refers to the ownership of the property and the land it is built on. Management and maintenance of the entire building, the internal and external parts, and the land itself falls to the owner, otherwise known as the freeholder. The freeholder is also responsible for the building’s insurance.
The freeholder has the ability to erect a building, whether that is a house or a block of flats, on the land they own.
A freehold house can quite often lie in private estates. For more modern estates, it is the homeowner’s responsibility to pay towards the upkeep of the communal areas within the estate, by way of an estate rent charge. For example, this could include the maintenance of private roads, landscaped gardens, electrical gates, street lighting, refuse areas and sewage pumps.
Benefits of freehold:
- You do not have to worry if the lease is running out, as you own the property outright
- Complete ownership, means more control over the property and land
- Removal of ground rent, services charges, or other freeholder (landlord) charges
The term “leasehold” refers to the ownership of a property, excluding the land on which it sits, for a fixed term. The conditions under which the property is held and the duration of the term are governed under a lease agreement provided by the freeholder or landlord. The freeholder (often referred to as the landlord) retains ownership of the land and has overall responsibility for the structure of the property i.e. the external walls and communal areas. The landlord can be an individual or a company, a local authority or housing association.
A leasehold property is one in which the buyer and landlord enter into a contract stipulating that the buyer will hold title (conditional ownership) to the property for a fixed period of time – the term of the lease. This will be referenced in your lease agreement. Typically, most leases tend to be 99 or 125 years in length although it is not uncommon these days for leases to be as long as 999 years. Quite simply put, the leaseholder is the owner of a paper, which is the lease agreement, granting them the right to occupy the property. Once the lease ends, ownership would technically return to the freeholder, although it is possible to extend the lease. It is important for the leaseholder to understand the terms of the lease, as the lease can place certain conditions on the use and occupation of the property.
Leasehold properties tend to be maisonettes, flats, or apartments. It is possible for houses to be owned on a leasehold basis although this is less common today.
Leaseholders are responsible for all assets contained within the walls of their property. Leaseholders will be required to contribute towards the running costs of the building i.e. the maintenance and management of the communal areas. They do this by paying a “service charge”. This charge is paid directly to the freeholder/landlord or the appointed managing agent. The details of chargeable items and the proportion the leaseholder is required to pay will be noted in the lease.
Modern leases make provision for a management company to take on the freeholder/landlord’s management obligations. This is generally a company owned and run by the leaseholders and is more commonly referred to as a Resident’s Management Company (RMC). A leaseholder can apply to become a Director of the RMC, giving them joint responsibility for the maintenance and management of the property. Much like freeholder/landlords, the RMC may be able to instruct a managing agent to advise them and provide support on management matters.
Subject to qualification, leaseholders can collectively purchase the freehold of their building and would effectively become their own landlord. This process is referred to as Collective Enfranchisement.
More guidance and information on Resident Management Companies and the responsibilities that fall to the Director can be found here – Resident Management Companies – HML (hmlgroup.com)
Benefits of leasehold:
- The value of a leasehold property is typically less costly (due to the risks involved)
- The freeholder is responsible for the building management and maintenance of the communal areas, structural work, shared facilities, and buildings insurance. The leaseholder is subject to service charges, which contributes towards these works
- It is a good Buy-To-Let investment opportunity
Under the leasehold system, a leaseholder will own their property for a fixed period of time. The term ‘commonhold’ refers to the ownership of the property as a freehold indefinitely. With commonhold, property owners, or unit holders, within a multi-occupancy building own the property “in common” with the other unit holders and are collectively responsible for the management of their building.
Providing the building shares communal areas and services, leaseholders can apply for ownership of the freehold.
HML have amassed a vast portfolio across the UK and are in a strong position to collaborate and advise Resident Management Company (RMC) Directors, leaseholders and freeholders to facilitate and assist with the management of your property. If you have any questions or would like to find out more information, please visit our Contact Us page and a member of the team will be in touch as soon as possible to discuss your requirements – Contact Us – HML (hmlgroup.com)