Here, we explain the facts about freeholds. After examining the background to freeholds, we explore:
- the advantages of buying a freehold property
- the marketing of leasehold and freehold houses
- the costs involved in buying a freehold
- registered freehold land
To find out more about freeholds, dive in!
Background to freeholds
The primary attraction of owning a freehold is that it gives control over the property in question; the freeholder owns the building and the land it stands on outright and in perpetuity. The owner’s name is registered at the Land Registry as the freeholder owning the `title absolute.’ Technically, all land in England and Wales belongs to the Crown, but, in reality, landowners enjoy a right to occupy their property known as an `estate in land.’
Modern land law is reliant on the Law of Property Act 1925, by which ownership is classed as freehold or leasehold. As a property type, freehold means that the owner has absolute ownership, with full rights to use and occupy the property, to the exclusion of all others except those holding a specific legal right over it such as a right of way.
Leasehold estates are another property type; they are those measured by reference to a length of time and effectively exist alongside a freehold from which they are created. Perhaps most people come across leases in relation to flats, where the freeholder owns the land and building standing on it and will grant long leases to the occupiers of the flats within, while often remaining responsible for the maintenance of the building’s exterior and common parts.
Advantages of buying a freehold
As mentioned, a freehold owner does not concern himself about the time that his interest in the property lasts for and accordingly may enjoy the property indefinitely. A leaseholder by comparison will be very aware of the finite term of his lease and the payments that he may have to make over the term of the lease to the freeholder by way of ground rent, or to others to ensure that the subject of the lease is maintained or managed in a certain manner.
Although leasehold interests can be bought and sold, as the timescale of the term shortens, the value of the leasehold interest may lessen. Because of this, many leaseholders may wish to try and extend their leases or even acquire the freehold interest on which they rest.
Extensive legislation governs the relationship concerning the extension of a leasehold; the Leasehold Reform Act 1967 allows qualifying tenants of houses to enfranchise or extend their lease. Under the Leasehold Reform Housing and Urban Development Act 1993, tenants of flats with long leases were granted the right under certain circumstances to obtain a new lease of their individual flat (known as a lease extension) or to act together with similar flat leaseholders to acquire the freehold of their building (known as collective enfranchisement).
These rights have been amended and extended by legislation including the Commonhold and Leasehold Reform Act 2002. Detailed criteria apply under these Acts regarding this process and for the individual, the premium payable, which is dependent on the value of the property, the remaining years of the lease and the ground rent payable to the freeholder annually, can represent a substantial investment.
Right to buy a freehold
The tenant of a house, before deciding whether to buy the freehold, must consider whether he qualifies for the statutory right to buy, for example by having owned the lease for at least two years and if he does qualify, how much the freehold is likely to cost.
For a residential flat leaseholder, the 1993 Act entitles the tenant to a right to an entirely new lease for a term of 90 years plus the unexpired remainder of the existing term at a peppercorn rent. A premium paid for this new lease compensates the landlord for the loss of rent for the remainder of term of the current lease and for being kept out of the reversion of the interest to him for 90 years.
Commonhold
Commonhold combines freehold ownership of a single property within a larger development, with membership of a company limited by guarantee that owns and manages the common parts of the development. The owners of each unit within a development are therefore in control of the development without a landlord or other third party able to control decisions.
As such Commonhold works for flats, mixed use developments as well as houses. The commonhold association comprising the limited company must be registered at Companies House and the Commonhold must be registered at the Land Registry.
The Law Commission reported in July 2021 on `Leasehold home ownership: buying your freehold or extending your lease’ and also on `Reinvigorating Commonhold: the alternative to leasehold ownership.’ The recommendations of the former report are extensive and include a new right to `buy out’ the ground rent under a lease, removing the two-year ownership barrier and allowing flat leaseholders to buy the freehold of a block where up to 50% of the building is commercial space.
The introduction of new legislation to place leaseholds on a comparable footing to freeholds is in process and consequently will in time widen the opportunity for freehold property for sale.
Marketing freehold and leasehold houses
Selling agents may often advertise a freehold for sale, but the title will still need to be checked to ensure this statement is correct. Although much of the residential property market is sold as freehold, recently some major housebuilders have sold houses on new build developments as leasehold which prompted a clamp down on the practice by Government.
Home buyers have been persuaded to buy leasehold houses, often purchased with a mortgage, that were liable to pay both ground rent to the freehold developer and were often also charged large sums by the developer for permission to extend or improve their homes.
While some buyers were promised the chance to buy the freehold interest for a small fee, in some cases the freehold reversion was sold to a third party by the developer with the consequence of an increase for the leasehold owner; it is estimated that around 100,000 owners have been affected in this manner.
Costs of buying a freehold property
Apart from the investigation of title, a freehold house buyer will also make a range of related searches and enquiries concerning the property ranging from water to environmental matters and from tree preservation orders to bat surveys for outbuildings.
The purchase of any freehold property brings with it responsibilities for the owner to ensure that he complies with the legal requirements relating to it. In purchasing a freehold house for sale, the buyer will accordingly seek advice from experts in relation to all issues that need to be considered, not least the home’s worth.
The importance for both the intended buyer as well as any lender, who will rely on the property for their security, to satisfy themselves as to all of these matters is essential; financial institutions will normally require a satisfactory report on title covering the status of the property and any issues connected with it, before releasing any funds; specialist knowledge will be needed.
Proof of ownership
The entire structure of land ownership and the substantial values attributed to it is reliant on the proof of ownership. Enquiry of the Land Registry will normally establish whether any parcel of land is freehold with the relevant details being shown on the individual title that records the extent of the land, the registered proprietor and the nature of any benefits or burdens affecting this, as well as any charges registered against it. Because proof of ownership is so important, any changes to the registers of titles are dealt with at the Land Registry in real time.
Inevitably the cost of buying any freehold land for sale will involve the purchase price, legal fees and disbursements and include Stamp Duty Land Tax (SDLT). Purchases above £40,000 will need to be reported on a SDLT return while SDLT is currently payable on residential property purchases above £125,000 on a sliding scale. Freehold land is of course, not restricted specifically to residential property but rather, extends to all land, including agricultural and commercial land, although SDLT payments may vary in respect of these purchases.
Registered freehold land
Although introduced in 1925, the compulsory registration of land on purchase did not become obligatory for the whole country for over half a century; today, approximately 85% of land in England and Wales is registered at the Land Registry.
The transfer of land triggers such compulsory registration and the Land Registry aims to see all land registered by 2030; although extensive tracts of land owned by the Crown, landed estates and the church are still not currently registered, having never been sold and the ownership of this remains reliant on evidence contained in historic title deeds. Consequently, at present, a freehold for sale may be evidenced by either a registered title or by virtue of an unregistered title reliant on the deeds, but in either case the ownership of a freehold is the best interest in land that an owner can hold.
References
GOV.UK. 2021. Leasehold property. [Online]. Available from: https://www.gov.uk/leaseholdproperty/buying-the-freehold (Accessed 23rd August 2021)
The Leasehold Advisory Service. 2021. I own a leasehold house; how do I buy the freehold? [Online]. Available from: https://www.lease-advice.org/faq/i-own-a-leasehold-house-how-do-i-buy-the-freehold/(Accessed 23rd August 2021)
The Leasehold Advisory Service. 2021. Leasehold Houses. [Online]. Available from: https://www.lease-advice.org/advice-guide/houses-qualification-valuation/#s-3 (Accessed 23rd August 2021)
Home Owners Alliance. 2121. Guides for homeowners. [Online]. Available from: https://hoa.org.uk/advice/guides-for-homeowners/for-owners/should-i-buy-the-freehold/ (Accessed 23rd August 2021)
Property Mark. 2021. Professional Standards. [Online]. Available from: https://www.propertymark.co.uk/professional-standards/consumer-guides/buying-selling-houses/buying-the-freehold-to-your-flat.html (Accessed 23rd August 2021)
BBC News. 2020. Court threat to housebuilders over leasehold `trap’. [Online]. Available from: https://www.bbc.co.uk/news/business-54023631
Land Registry. 2021. Freehold land and property title information. [Online]. Available from: https://www.land-registry-documents.co.uk/information/freehold-title-estate/ (Accessed 23rd August 2021)..
