When you purchase a property with a leasehold, rather than a freehold (usually apartments or new build houses in large developments), "you'll have a legal agreement with the landlord (sometimes known as the 'freeholder') called a 'lease'. This tells you how many years you'll own the property. Ownership of the property returns to the landlord when the lease comes to an end" - UK.gov.
A major difference between owning a leasehold or freehold property is that on a leasehold property you may have to pay a service charge and ground rent for a specified term. The service charge is often more expensive than the ground rent, and covers things such as maintenance on communal areas. All of your service charge costs and what you can expect to receive for this fee should be outlined in your legal documents. Ground rent is slightly different, and isn't a necessary payment unless outlined by your landlord as a requirement.
What is a service charge?
Service charges are often paid quarterly to the freeholder, and cover fees for the maintenance of the general building. The service charge will often cover tasks such as the maintenance and repair of driveways, parking areas, gardens, communal lounges, postal areas, but can also include insurance of the building.
"Service charges may vary from year to year and all costs must be met by the leaseholder with the landlord generally giving no financial contribution. However, the landlord can only recover the costs of the services which are reasonable and leaseholders can challenge service charges they feel are unreasonable at the Leasehold Violation Tribunal (LVT)" (In Deed).
What is ground rent?
"Ground rent is a regular payment by the leaseholder or freeholder under the terms of the lease. Usually it is a small amount, such as £100 a year or is sometimes called 'peppercorn' rent which means no money is payable (historically a peppercorn would be the payment)" (In Deed).
The ground rent is a payment which accounts for (mainly in apartments) the lease of the land that the property sits on, that is owned by the builder or developer. The average ground rent in the UK (2018) is £319 per annum.
"Did you know that four in 10 new properties in England and Wales are now sold as leasehold, ranging from one bedroom flats in city centres, to four bedroom detached houses in rural areas" (Property Mark).
Most apartments will be sold as leasehold properties, as they have communal areas and a 'shared ground' on which the properties sit. The majority of freeholds for these apartments will be held by the builder or developer of the site, or a firm if they have sold the freehold on. However, this isn't always the case. If you are purchasing an apartment which is in a conversion of a large house, there are some instances where the property owners of all apartments in this block will share the freehold.
For off-plan or new build properties, you will almost always find that the developer will own the freehold. It is possible to purchase this from them, however this is something that can end up being quite expensive dependent on the number of years left in the lease, how long you plan on keeping the property for, and how many other investors or owner-occupiers wish to purchase their freeholds.
Living in or renting out a leasehold property gives you the right to live in or let the property for a set period of time, legally - which is often decades or centuries. While you can sell the physical property, in the eyes of the law, you don't technically own the property - just the lease. While this has little effect on the purchase or sale of the property, it's important to check how long is left on the lease, as if the lease is short, this could affect you if you wish to sell on or need to re-mortgage the property. Generally speaking, a lease you are looking to purchase should have at least 80 years left.
So, should you buy the freehold? There are, however, a number of advantages to not owning the freehold of the property. One of the main benefits, especially if you're an investor looking to rent out your property, is that you aren't responsible for any of the maintenance of communal areas such as driveways, gardens and lounges. You will also not have to negotiate with neighbours should any issues arise that concern these communal areas. There is often no need for you to consider buildings insurance as many developers will include this cost in the leasehold.
One of the only instances that owning your properties freehold would be an advantage is if you are considering purchasing a whole block or a whole development, in which you can then have control of the site.
Not sure if you want to purchase the freehold of your investment property or not? Get in touch with our sales team today on firstname.lastname@example.org to discuss your options on any of our sites!