leasehold and Freehold property

LEASEHOLD AND FREEHOLD
There is an important legal distinction in the way flats and houses
are owned in the UK. Flats (whether conversions or purpose
built) are invariably leasehold, while houses are freehold. The flat
owner, in effect, buys a lease on the property. In return he or she
pays a ground rent to the landlord who retains the freehold of the
building. The distinction is important because the leaseholder is
bound by the terms and conditions of the lease. Great care needs
to be taken to avoid being unnecessarily restricted by unexpected
conditions. It is your solicitor’s task to examine the lease. In
practice, however, most solicitors are unaware of the particular
requirements of investors (as opposed to residential purchasers)
and can easily miss quite crucial details. Look out in particular
for the following.
Permission to sublet
The lease may require permission from the freeholder before the
property can be let. He can refuse permission. Your solicitor
should request this permission in writing before exchanging
contracts. It is worth noting that when you, in turn, come to sell,
your purchaser will be faced with the same problem.
Unusual letting restrictions
New leases should be checked with great care. A developer may
have some strange ideas about their new block and its future
occupants. He may, for example, try to control the tone of the
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building by restricting sublets to couples only (thus avoiding the
more volatile sharer market). If you buy a three-bedroom flat with
a lease like that, you are in trouble. Even a one or two-bedroom
flat in these circumstances should be avoided. Breach of the terms
of the lease is a hanging offence. You could lose the property.
LEASE TERM
Typical lease terms are 99 years at the outset. Unless the flat is a
new build, therefore, the term will have shrunk by the time you
come to buy it. Does it matter how many years are left on the
lease at the time of purchase? Yes, for three reasons:
􀁘 Lenders require that there should be at least 25 years left after
the mortgage has been repaid. In the case of a 25-year
mortgage, therefore, only a 50-year plus term will be
acceptable.
􀁘 In the marketplace, residential purchasers do not like leases of
less than 80 years and will generally avoid them. If you buy a
flat with a lease of, say, 82 years and plan to sell after five, you
will be faced with this problem. Residential purchasers may be
your primary market at that time.
􀁘 A lease can be extended with permission of the freeholder who
cannot legally withhold this permission. He will, however,
charge for the privilege and the cost could be significant. The
shorter the remaining term, the higher the cost. Disputes are
common in this area and the matter is frequently resolved by a
tribunal. In essence the freeholder sees lease extensions, along
with any service charges (see Chapter 16), as a useful source of
additional revenue. The question for you is whether you want
to help him get rich at your expense. In the case of the 82-year
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lease above, you will almost certainly need to extend this before
you sell.
COMMONHOLD
Only recently created by the Commonhold and Leasehold Reform
Act 2002 and implemented in 2004, this form of flat ownership
sweeps aside the traditional leasehold system altogether and gives
the owner absolute title to the flat. There is no landlord and no
lease. The owner becomes a ‘unit-holder’ in the block and a
member of the ‘commonhold association’ which manages the
building. It is a vast improvement on the leasehold system and
removes all the disadvantages associated with it. It is, however,
extremely rare and will take many years to become established.
THE FREEHOLDFLAT
Not to be confused with share of freehold (see Chapter 15) or
‘commonhold’ (see above), this is a rare creature in the property
world but it can be encountered from time to time. In this case
there is no lease at all and the flat itself is freehold. While this
might sound ideal it is, in fact, a complete headache for the
purchaser. The problem is that there is no common freeholder for
all the flats in the block and therefore no one responsible for
maintaining the building itself. Unlike the new commonhold
system there is no ‘commonhold association’ and there are no
‘unit-holders’. As a result, lenders will not lend on such
properties.