What are Freehold, Leasehold, and Commonhold?
In England, Wales, and Northern Ireland there are two main ways in which property can be owned – freehold and leasehold. In this blog post, we look at the differences between the two and at a third type of ownership, known as commonhold. This topic could potentially be examined in the CII’s R01, CF1, CF6, or R07 assessments.
Freehold
From a mortgage perspective, this is generally deemed to be the most favourable form of land ownership. When a property is bought freehold, it means that the purchaser owns both the property and the land it stands on. Ownership is ‘in perpetuity’, which means it continues until the purchaser disposes of the property. On death, the property forms part of the deceased’s estate and will be left to the beneficiary of their estate or according to the rules of intestacy if no valid will is in place.
Usually, it is easier to get a mortgage for a freehold property than it is for a leasehold property. There is, however, one exception. Most lenders will only lend on leasehold flats. Freehold flats are deemed to be riskier. For example, if a repair is needed in a freehold flat, it can be tricky to ensure that all freeholders make a contribution for their share of the costs. In contrast, a leaseholder will be obliged to do so under the terms of their lease.
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Leasehold
Buying a property leasehold essentially means that while you own the property you have purchased, you do not own the land on which the property is built. You have the right to occupy the land for the term of your lease. The length remaining on your lease will depend on how many years there were at outset and how many years have passed since then.
The longer the term remaining on the lease, the easier it will be to obtain a mortgage. Lenders require a safety margin so that if the borrower defaults, the lender will be able to sell the property easily to recoup their costs. Most lenders demand that there are a least 25 years left to run on the lease after the expiry of the mortgage term.
Thanks to the Commonhold and Leasehold Reform Act of 2002, some leaseholders now have the right to either buy out the freehold or extend their lease. Conditions apply, including that they have lived in their property on a full-time basis for the last 2 years and that the lease must have had an initial term of 21 years or more.
In January 2021, the Government took further steps aimed at protecting leaseholders from effectively being held to ransom by their freeholders. As a result, leaseholders who choose to extend their leases will no longer be required to pay ground rent to freeholders.
A quick word on commonhold
Commonhold was introduced some 20 years ago with the intention of its providing an alternative to leasehold. It allows individuals to own the freehold of a property in perpetuity. Joint areas, such as entrance halls and stairways, are owned and managed jointly by the freeholders who are individually known as ‘unit-holders’. Despite being a popular method of ownership overseas, it has not yet taken off in the UK.
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Information in this article is correct as at 27 January 2021.
