I bought my first home from a new build developer three years ago and even though I was aware it was leasehold, I didn't fully understand the set up and the problems it could possibly cause me further down the line. If you are a first time buyer reading this, you may also not have a full understanding either.
There are two forms of legal ownership when buying a property; leasehold and freehold and it's so important to know the differences between the two before you sign on the dotted line.
Rewind three years
I was so excited about buying the house that I regretfully didn't do the full research. I could have been signing my life away and I wouldn't have known! I'll admit that I didn't even read my house contract properly because all the legal jargon made my brain give up. I just signed away. Little did I know it could have lead to potential problems further down the line.
Fast forward three years.
I put my house on the market this year in February and a couple of days later, news broke out about a number of developers selling the freeholds to private investment companies (including the one I had bought from). When you buy a leasehold property you can purchase the freehold after a minimum of two years, but this isn't necessary. By the time it got to this stage, many home owners found that the developer had sold the freehold to a private investment company without giving them the option to buy it first.
Some of the problems reported in the news included the following...
- Some developers had a clause in their contract which allowed them to double the ground rent every 10 years.
- Some of the investment companies (who purchased the freeholds from developers) had considerably increased the price of the freehold if any home owner wanted to buy it off them.
- The permission costs for making alterations to your property also considerably increased (such as an extension or loft conversion).
It was a very stressful experience not knowing whether this news would have a negative impact on my ability to sell my house, but thankfully it sold within four weeks. The only annoyance was that we incurred a charge of £100 just to get permission from the freeholder to actually sell the property!
In other cases and other developments, it has caused many problems for people who were looking to live there long term. Some people were receiving quotes of 13,000 pounds plus, to buy the freehold of their own home (which was often more than three times the original price quoted when they initially bought their property). Others were being charged around 4,000 just to get permission to build an extension.
I think the important thing to take from this is that it hasn't affected everyone in the same way, and it may not even affect you at all depending on your own personal needs and circumstances. I'd advise you to carry out your due diligence before you make that big investment and your solicitor will investigate it for you too, to uncover any possible hidden clauses in a contract. I'd also advise you to ask your solicitor to clarify anything you don't fully understand because contracts are so bloody complicated!
See below for some information on the differences between leasehold and freehold so that you can make the best informed choice when buying your first home.
Leasehold Vs Freehold - What does it mean?
(Resource Home Owners Alliance)
"If you own the freehold, it means that you own the building and the land it stands on outright, in perpetuity. It is your name in the land registry as “freeholder”, owning the “title absolute”. Freehold is pretty much always the preferred option: you can’t really go wrong with it.
- You won’t have to pay annual ground rent
- You don’t have a freeholder either failing to maintain the building, or charging huge amounts for it
- You have responsibility for maintaining the fabric of the building – the roof and the outside walls
- Whole houses are normally sold freehold – there is no reason for a standalone house to be leasehold though there is an increasing trend for leasehold houses, so check before you buy
"Leasehold means that you just have a lease from the freeholder (sometimes called the landlord) to use the home for a number of years. The leases are usually long term – often 90 years or 120 years but as high as 999 years – but can be short, such as 40 years.
- A leaseholder has a contract with the freeholder, which sets down the legal rights and responsibilities of either side
- The freeholder will normally be responsible for maintaining the common parts of the building (in apartments or houses that have been split into flats), such as the entrance hall and staircase, as well as the exterior walls and roof. However, other leaseholders might have claimed their “right to manage”, in which case it is their responsibility
- Leaseholders will have to pay maintenance fees, annual service charges and sometimes a fee for common areas such as garden landscaping
- Leaseholders normally pay an annual “ground rent” to the freeholder
- Leaseholders will have to obtain permission for any majors works done to the property
- Leaseholders may face other restrictions, such as not owning pets or subletting
- If leaseholders don’t fulfil the terms of the lease – for example, by not paying the fees – then the lease can become forfeit
I would love to know if you have been affected by a leasehold contract so please comment with your experience below. If you liked this post please share and subscribe to follow my next house project journey! I've bought a Victorian terraced property that needs completely renovating from top to bottom and hopefully it completes in two weeks time!