A leasehold refers to the ownership of the land on which a property lies, and mostly applies to flats or apartments.
Previously on this site we’ve covered subjects such as whether or not to extend a lease and your rights as a freeholder or leaseholder, but now we’re talking about buying a freehold specifically, and what to consider before you go through with it.
Buying a freehold might seem like a way to gain some freedom from the landlord once you have purchased a property. After all, when your lease runs out, ownership of the property reverts to them, which – in you, the owner’s, eyes – will seem very unfair. But it’s not a decision you should rush into. Consider these factors before investing in the purchase of the freehold.
This has an effect on the value of the property, as we mentioned in our blog about extending a lease. Once the length of a lease has dropped below 80 years, the value of the property will also drop, and the cost of extending the lease will increase. At this point, you can either extend the lease or buy the freehold. But if you have many years left on the lease – enough, for example, that you probably won’t need to extend the lease for the duration of your occupancy – then you might want to ask yourself if it’s financially advantageous to purchase the freehold.
You might be quite comfortable in your property, but are you sure you’ll be staying there long? Perhaps you plan on having a family, or there’s a chance you could be moving for work? Whatever the reason, buying the freehold on a property may make less sense if you’re planning on moving from the property within the next couple of years. We can make this mathematical by comparing the ground rent to the price of the lease.
For instance, if buying the lease is £10,000, and the ground rent is £250pa, then you can calculate the difference in money depending on how long you stay there. If you’re planning on staying at the property for 20 years, the ground rent would come to about £5000 overall (assuming the ground rent stays roughly the same), and at that point it’s simply a case of figuring out if having a say in the management of the building is worth the extra £5000 you’ll be spending. On the other hand, by owning the freehold on the property, you could increase the value of your property by about 1%. If the property is worth £500,000, that would increase the value by about £5,000, which, in total, might make owning the lease better value.
When you consider that a leasehold is a wasting asset – it loses value over time – it could work in your favour to buy the freehold. Just make sure you’ve done your calculations and considered the many variables!
Of course, what the above calculation doesn’t take into account are the expenses that come with being the freeholder. The freeholder is responsible for the maintenance of the property and the land on which the property resides. That means any gardens or – if you are in an apartment building – any communal areas. This can be particularly costly when dealing with shared communal areas such as playgrounds, which can be expensive to maintain. The previous freeholder should be able to give you an idea of the costs you should be expecting to pay for this maintenance. Conveniently, if you’re in an apartment building, you would probably be splitting that cost with other freeholders in the building, with whom you might share ownership of the land.
If you’re looking to buy the freehold of your property, the chances are you are living in an apartment building, as most houses come with the freehold as part of the package. In this case, the land on which your apartment lies is not the only property on that land. In an apartment build, the owners of the property can come together to share the cost of the lease (which can be much higher in an apartment building), and then they will also share the cost of the building maintenance. If at least 50% percent of tenants in the building agree to be involved in the purchase, the landlord must sell the lease. There are some eligibility factors to consider before you and your block of flats agree to this, though.
For the building to qualify for collective enfranchisement it must contain at least two flats and have at least two-thirds of the flats owned by qualifying tenants (basically, leaseholders that had more than 21 years left on the lease when it was first granted – this should be most people who own a property in the building). A collective enfranchisement is a complicated process and can be confusing to actually purchase and share the freehold. We would recommend that you speak to a professional about the logistics and commitments before making a decision.
If you’d like to know more about purchasing a freehold or collective enfranchisement, please feel free to contact us – we’d love to hear from you. Or keep your eyes peeled on our blog by following the Coreco Home Twitter account for future advice!