Even if you’ve bought your property and have become its legal owner, you might only own the bricks and mortar, not the land it’s built on.
Most flats in England and Wales are sold on this leasehold basis, but until a change of rules in 2019, many new build houses were sold in this way too.
For some homeowners, the arrangement isn’t ideal – you don’t have full control over your investment and you might have to spend large sums on ground rent or service charges.
However, you may have the opportunity to buy the freehold of your property. Here Telegraph Money explains what you need to know. This guide will cover:
When you buy a property, it will either be sold on a freehold or leasehold basis.
If you own the freehold, you own the property and the ground it’s built on – indefinitely.
This compares to leasehold, where you only own the property and not the land. Your ownership will also be limited to the length of the lease agreement that you have with the freeholder.
As such, it’s preferable to own the freehold if you can – especially if you own a house. You won’t have to pay ground rent – which has spiralled to thousands of pounds a year for some homeowners – nor will you have to pay contentious services charges for the maintenance of outside spaces and shared areas.
As such, buying the freehold may increase your property’s value and make it easier to sell.
Buying the freehold might feel like a no-brainer, if you can afford to do so.
However, the situation is currently being complicated by leasehold reforms.
The Leasehold and Freehold Act has been passed but has yet to come into effect, while draft legislation for a new Leasehold and Commonhold Reform Bill was proposed in the King’s Speech.
The reforms should greatly increase rights for leaseholders – tackling problems such as spiralling ground rents and high maintenance charges.
Some leaseholders could also see the cost of extending their lease or buying the freehold fall.
But Paula Higgins, chief executive of the HomeOwners Alliance, warns change won’t come fast: “You might be hearing a great deal of noise around changes to leasehold law and this can make it difficult to figure out whether to wait for changes which may make it cheaper to buy the freehold later.
“Individual circumstances are unique and it’s best to get advice from a leasehold specialist solicitor, but nothing will change quickly for the majority of leaseholders.
“Although the new Government has promised to be swift in implementing the Leasehold Reform Act that was passed in May, the reality is that there is a suite of secondary legislation that will need to be written.”
To buy the freehold of your home, you will first need to find out if you are eligible to do so.
Lease, the leasehold advisory service, says that to buy the freehold of a house you will need to meet certain criteria:
If you would like to buy the freehold of a block of flats, leaseholders can group together to buy the freehold. You would then own a “share of freehold”.
This right is referred to as “collective enfranchisement” but both leaseholders and the building will have to meet certain criteria.
The leaseholders:
The building:
If you want to buy the freehold for your flat, you’ll need to join forces with your neighbours and get at least half the owners on board.
How easy that will be depends on the situation with the current freeholder – but, if you’re all unhappy with high charges, it might not be too hard of a sell.
Before you go any further, you’ll need to find out what you are up against, cost wise. There’s a huge variation in cost but the HomeOwners Alliance says that the shorter the lease, the more expensive it’s likely to be. A solicitor will be able to help.
You can also try an online cost of freehold calculator that can estimate the cost for you. Lease, which is affiliated with the Ministry of Housing, has a calculator and is a good place to start.
On top of the freehold itself, you will also have to bear in mind additional costs including legal advice and surveyors’ fees. Unfortunately, the leaseholder has to cover the freeholder’s costs as well.
Stamp duty may also be an unwelcome surprise, but only if the freehold costs over £250,000.
With an idea of cost, you will be much better placed to work out whether or not you can afford to buy the freehold.
It might not matter if you don’t have the cash up front – many lenders will agree to extend a mortgage for the purpose of buying a freehold. Talk to your mortgage lender or a broker to find out whether this is likely to be a sensible option for you.
Once you’ve decided to proceed, you will need to instruct a solicitor that specialises in this area. The HomeOwners Alliance recommends using a solicitor that is a member of the Association of Leasehold Enfranchisement Practitioners.
If you are buying the freehold for a block of flats, you will need to get all the leaseholders involved to sign a participation agreement. This is a contract that commits them to the purchase, preventing problems that may arise if someone decides to drop out last minute.
Next you will need to get a surveyor to value your freehold. Again it makes sense to hire one with experience in this field.
The HomeOwners Alliance recommends setting up a company to buy the freehold for a block of flats.
You can, alternatively, agree a “nominee purchaser” to lead the process but this can result in disagreements or disputes if there’s lots of people involved.
When you are ready, your solicitor will issue a “tenants notice”, signed by all the leaseholders involved. This is a formal way of requesting your purchase of the freehold.
The freeholder then has two months to supply a “notice in reply” in which they either agree or disagree to the sale. Should they reject your application they will need to say why.
Only at this point can negotiations on price begin.
The Homeowners Alliance also warns that you may have to pay a deposit at this point, which could be as much as three times the annual rent.
If negotiations collapse or the freeholder refuses to sell, it is possible to turn to the First Tier Tribunal to settle the dispute.
Unfortunately, this is a bit of a “how long is a piece of string” question – with freehold costs varying hugely between properties. The length of the lease will be a factor too.
Estate agency GLP estimates that it’s likely to cost between £15,000 and £20,000 to buy the freehold on a £500,000 property with 80 years on the lease.