What is the difference between freehold and leasehold?
When you begin the process of buying or selling a property, you may get asked – is the property leasehold or freehold? This can be confusing if you aren’t aware of the difference.
A freehold property is where the ‘superior’ title is held by you. Meaning that you own the property absolutely.
Whereas in terms of a leasehold property, the ‘superior’ title is held by someone else, this may be a management company or an individual landlord. You still own the property itself, but not the land it is built on. The length of the lease is call the “Term”. Nowadays most new leases are for a Term of 999 years. It is important that the remainder of the Term is not less than 85 years as this can effect the ability of the property to be mortgaged.
Leasehold properties are more often flats situated in a larger building. The main building having a freehold title and each individual flat having its own leasehold title.
There are fees which are payable under a leasehold and these typically include ground rent and service charges, however, can also include other costs for example “insurance rent”.
What is ground rent?
Ground rent is usually an annual payment given to the management company or landlord that owns your freehold title. A sum must be paid in order to create a legal contract between the landlord and the tenant and historically this has been a very nominal sum referred to as a peppercorn rent within the lease. This is not collected. Should there be a sum payable for the ground rent then it will be detailed in the lease but will also be explained to you when buying your property.
From 30 June 2022 (or 1 April 2023 for leases of retirement homes) the Leasehold Reform (Ground Rent) Act 2022 came into force for new leases. This Act has defined peppercorn rent for the first time as ‘an annual rent of one peppercorn’. This means that it now restricts the ground rent on new leases that have come into force after the above date.
This Act bans landlords or freeholders from charging anything above one peppercorn per year and further bans them from charging an admin fee to collect the peppercorn rent.
If you are an existing leaseholder, with a lease pre-existing 30 June 2022, unfortunately there is no change at the moment in relation to the ground rent being charged. If you are subject to paying ground rent, you must pay this, or the landlord/freeholder may be able to take action against you.
If the ground rent exceeds or may in the future exceed £250 per annum (or £1,000 pa for London) this results in the lease falling into the Assured Shorthold Tenancies category. This is a major issue and can result in the landlord gaining possession of the property.
Should this effect your lease or where the lease contains a provision for the ground rent to increase there can be significant problems and you must seek immediate legal advice.
What is the service charge?
The service charge is payable by the leaseholder for the landlord’s services covering general maintenance of the building and land. For example, if you are in a block of flats, the service charge would cover the maintenance of the stairwell, the corridors, common areas, and most importantly the insurance of the building.
The service charge will usually be a varying amount depending on the costs that the landlord incurs. They are often split between the leaseholders in accordance with the terms of the lease.
At Progression, our experts are used to dealing with freehold and leasehold properties, for further advice on these matters, contact us on 0333 305 7777.
The content of this article does not constitute legal advice and should not be relied upon. Content may be subject to change and we accept no liability for individuals relying on the information within this article. Contact a member of our team for legal advice tailored to your individual needs.
