Freehold And Leasehold Ownership Within Property Investment

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    freehold-leasehold

    Freehold versus Leasehold, not many first time buyers really think about the type of ownership they have on the property they are about to purchase.

    Result:

    They are caught with surprise on expenses involved on longer run depending on type of ownership they hold on the property.

    Do you come across following terms?

    • Freehold Property
    • Leasehold Property
    • Commonhold Property
    • Flying Freehold Property

    Have you looked at the restrictions and expenses involved on the properties you are looking to purchase based on type of ownership applicable?

    If not:

    Then this post is definitely one that’s going to help understand the types of ownership and potentially understand the risks involved.

    Here we go then:

    1) Freehold Property

    In simplest terms, you have freedom on what you want to do with the property as long as you abide by the planning rules and regulations.

    i.e.

    You have complete ownership on the property and the land it is built on and the right to live in the property for as long as you want to.

    Here is the deal:

    Buying a property on a freehold will mean…..

    You are responsible for maintaining your property and land and you don’t have to worry about any additional charges to be paid other than the regular self-maintenance.

    2) Leasehold Property

    In not so simple terms, you are actually buying the property for a period of time and hence would not have any permanent ownership on the property or the land the property is built on.

    You own the property for as long as the length of the lease defined within the lease agreement.

    Given this is a leased ownership, you are going to incur ground rent and additionally service charges to hold against maintenance of communal areas.

    Apartments and high-rise building being constructed by development companies usually sell properties to buyers as leasehold, providing another income stream to the owners.

    Most apartments come with greater than 250 years of agreed leasehold and some going up to 999 years.

    However:

    The risk to your investment or purchase is if the lease is close to 75 years or under, where most of the financial institutions will not be willing to lend the mortgage.

    In other words the property loses its true value should the lease go below 75 years of remaining lease period.

    Having said that the lease can be extended at an extra cost, but typically is a situation that plays into hands of the landlord who owns the lease.

    Leasehold Property – Things To Know

    Reserve Or Sinking Fund

    A portion of your service charge which will be attributed into building up a reserve fund or sinking fund.

    This fund will be used in any emergency situation or an unforeseen issues that have been reported within the building that needs significant funds.

    Service Charge

    Block of flats or apartments will always have communal areas including parking, gardens and like which needs regular maintenance.

    In some cases water bill, cosmetic refurbs within the property are all included within the service charge.

    Service charge mostly is collected on yearly or half year basis to ensure such maintenance activities are performed regularly.

    Ground Rent

    Given the buyers do not own the land on which the property is build on, there is a rent that the leaseholder has to pay to the freeholder.

    Ground rent is exactly that and mostly charged on yearly basis.

    Lease Restrictions

    The leasehold agreement lists the do’s and dont’s within, that needs to be adhered to at all costs.

    A buyer has to ensure they review the agreement for any clauses that restrict them to rent the property to someone else or the points highlighted on modifying the property anytime in future in anyway.

    One other key thing that needs to be looked at is the number of years the lease is valid for.

    The longer the lease the better.

    3) Commonhold Property

    In its simplest form, commonhold is nothing but an association formed by respective owners of the property as a limited company who will assume the overall ownership collectively.

    i.e.

    There is no leaseholder landlord anymore.

    For Ex:

    Individual apartment owners or owners within block of flats will form a group who will determine how the apartments should be run as a management company.

    They collectively decide on the processes, costs, maintenance work and manage the property together.

    The restrictions mentioned within leasehold section are not applicable and the property does not lose the value as such given the collective ownership.

    4) Flying Freehold Property

    At a definition level, flying freehold is nothing but a portion of one freehold property that extends or hangs into another freehold property.

    Usually:

    The rooms above a shared passageway as the most common example.

    Flying freehold does not necessarily be flying into other freehold property but other common scenarios include a portion of room from one property extending into the next property on the first floor.

    Not many know or notice this scenario, observing the property externally but the properties are still sold as freehold.

    Issues are masked as long as no repairs are required.

    However:

    When a portion of property considered as flying freehold requires repairs, you will require permission of the next freehold property to be able to do so.

    A thorough review with your legal teams is necessary to agree on the restrictions and opportunities whilst purchasing a property with flying freehold and word with neighbours can only help.

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