When a freehold is actually a leashold

harib0uk

Hello,

Does anyone know if there is a standard % difference in cost between freehold and leasehold. I.e if a house were for sale freehold And exactly the same house was for sale leasehold... what price difference would there be? 

The long story...

Prior to COVID-19 we were looking to buy a house, made an offer which was accepted, but we were not proceed-able at the time as our property wasn’t on the market.
Understandably someone else who was proceed-able made an offer which was accepted so we continued to look for something else. 

 At the time I had looked into past sales in the street and noticed some properties were listed as leasehold and some as freehold. I queried this at the viewing as it wasn’t listed in the particulars and was told the property was freehold.

Our property went on the Market when lockdown eased, and very quickly we sold, we enquired about the property we’d made an offer on as it was still showing on the agents site and right move (without and under offer/SSTC banner) but we’re told the sale was still going through.

Typically we made an offer on another property yesterday, which we are still waiting to hear back from, and we get an email from the agent saying the first property is back on the market.. when we asked why it fell through we were told that the buyer got cold feet as their solicitor had discovered the property is in fact leasehold.  We have been told that the freehold can be obtained by covering the freeholders legal fees, but this Is obviously just hearsay to us.  The lease is long (over 900 years) but there is the risk that we may not easily get the freehold.. the vendor is not interested in getting the freehold sorted.

So I’m thinking that we would now offer less as we will have to foot the bill for getting the freehold. But how much of a reduction would be reasonable? 

Many thanks 

davidmcn

If it's an ultra-long lease, the ground rent is insignificant and there are no onerous covenants, then it's virtually a freehold and will be worth much the same. Though it sounds like so far all you've been told is the length of the remaining term.

harib0uk

davidmcn said:

If it's an ultra-long lease, the ground rent is insignificant and there are no onerous covenants, then it's virtually a freehold and will be worth much the same. Though it sounds like so far all you've been told is the length of the remaining term.

Hopefully we’ll find out more tomorrow. 

rachel230

Check the ground rent terms - does it double at various intervals or increase by rpi? Also get proof of last few years of service charges.

harib0uk

rachel230 said:

Check the ground rent terms - does it double at various intervals or increase by rpi? Also get proof of last few years of service charges.

What effect would this have on the price? 

NameUnavailable

Avoid! If you buy a leasehold property you are effectively buying a long term rental agreement but one in which you are also responsible for all maintenance of the property. The freeholder can decide to do work on the property at any time, for which you will have to pay for. They may have a management company to handle such issues and insurances which you will pay over the odds for. OTOH it may be down to you to maintain the property but you will have stipulations as to what you must do and when and if you don't you will be in breach of your lease.

If the seller is telling you that it's just a case of paying 'legal fees' to get the freehold then ask your solicitors to arrange this as part of the purchase - I expect you will find it isn't so easy as that.

princeofpounds

NameUnavailable said:

Avoid! If you buy a leasehold property you are effectively buying a long term rental agreement but one in which you are also responsible for all maintenance of the property. The freeholder can decide to do work on the property at any time, for which you will have to pay for. They may have a management company to handle such issues and insurances which you will pay over the odds for. OTOH it may be down to you to maintain the property but you will have stipulations as to what you must do and when and if you don't you will be in breach of your lease.

If the seller is telling you that it's just a case of paying 'legal fees' to get the freehold then ask your solicitors to arrange this as part of the purchase - I expect you will find it isn't so easy as that.

Whilst is not exactly misinformation, there is quite a lot of misrepresentation in this post and I would approach it with a critical eye. It's an indication of the paranoia people can have about leases; the fact is that although there can be problems with leases that justify caution, most leases work perfectly fine and it's not that hard to tell a problematic one from a good one when you know what you're dealing with.

Visit LAS, the government-funded service, to educate yourself on leases:
https://www.lease-advice.org/

Assuming this is a standalone house... If you own a leasehold property, you do have the right to purchase the freehold after you have occupied the property for two years, subject to certain criteria. This is called collective enfranchisement. You can negotiate a price with the freeholder, but if that isn't smooth then you can go through the statutory process. A price will be determined by a tribunal according to a formula. A few variables go into it, but if you have a very long lease and minimal ground rent, the price will not be very high at all; the legal costs will probably be the biggest expense. 

https://www.lease-advice.org/advice-guide/collective-enfranchisement-valuation/

*Crude* estimates can be made using online calculators. The main variables are the value of the property, the length of the lease, and the value of any ground rent stream.

https://freeholdcalculator.com/freehold_simple.php

The difference in value between a leasehold house and a freehold house can vary hugely because of these variables. Play around with it - check out the difference between a 900 year lease, a 90 year lease and a 60 year lease (the calculators are not very useful for short terms for technical reasons so ignore those results). If your lease does not have any funny clauses or a high ground rent, then it should be valued very closely to a freehold house.

As for maintenance, insurance costs etc. - how these are handled will be explained in the lease. For a single property, it would actually be quite normal for all the responsibility for this to be put upon the leaseholder, as it would be for a normal freehold property. But you have to check.

I agree with rachel that you should confirm the ground rent and service charge arrangements (if any) with the vendor/EA early on. These are not complicated things to confirm and will give you a great initial insight into the most important factors.

Higher ground rent can lower the value of the property - how much? If it's £1000, you know your mortgage rate - think about how much extra property that £1000 would buy if used to fund your mortgage interest instead.. Unusual escalation clauses in ground rent can also lower the value of the property (specifically, many lenders don't like clauses where ground rent doubles ever X years - inflation-linked indexation is more accepted now). Service charges are only a problem if they look unreasonable in some way - inappropriate work being done or inappropriate prices.

Finally; these are general comments. If you get that far, get your solicitor to talk you through all of this as it applies to the specific property and any other important clauses in the lease. They should be able to help you understand exactly what you are looking at.

cattie

In the area I live in there are some really quite substantial properties (houses)  that are held on 999yr leases with no ground rent to pay or service charges. There's absolutely no difference if you compare them to a similar house that is freehold. 999yr leases are actually considered virtual freehold & nothing to be afraid of if there is a peppercorn ground rent & no service charge, with the owners being responsible for maintenance, buidings insurance etc just the same as a freehold house.

Many people who really know nothing about leasehold property love to warn people not to buy & to stick to freehold. However, all flats are leasehold & leasehold isn't the big bad wolf some like to make it out to be. As long as ground rent & service charges are not ridiculously high, there is nothing to fear. It's the job of the solicitor to warn you against anything they feel needs to be taken into account or considered, so that's the best person to listen to.

blue_max_3

cattie said:

In the area I live in there are some really quite substantial properties (houses)  that are held on 999yr leases with no ground rent to pay or service charges. There's absolutely no difference if you compare them to a similar house that is freehold. 999yr leases are actually considered virtual freehold & nothing to be afraid of if there is a peppercorn ground rent & no service charge, with the owners being responsible for maintenance, buidings insurance etc just the same as a freehold house.

Many people who really know nothing about leasehold property love to warn people not to buy & to stick to freehold. However, all flats are leasehold & leasehold isn't the big bad wolf some like to make it out to be. As long as ground rent & service charges are not ridiculously high, there is nothing to fear. It's the job of the solicitor to warn you against anything they feel needs to be taken into account or considered, so that's the best person to listen to.

I'm curious why those properties were not sold as freehold then. There absolutely has to be a reason. And until I understood that reason, I'd still be very hesitant.

eidand

blue_max_3 said:

cattie said:

In the area I live in there are some really quite substantial properties (houses)  that are held on 999yr leases with no ground rent to pay or service charges. There's absolutely no difference if you compare them to a similar house that is freehold. 999yr leases are actually considered virtual freehold & nothing to be afraid of if there is a peppercorn ground rent & no service charge, with the owners being responsible for maintenance, buidings insurance etc just the same as a freehold house.

Many people who really know nothing about leasehold property love to warn people not to buy & to stick to freehold. However, all flats are leasehold & leasehold isn't the big bad wolf some like to make it out to be. As long as ground rent & service charges are not ridiculously high, there is nothing to fear. It's the job of the solicitor to warn you against anything they feel needs to be taken into account or considered, so that's the best person to listen to.

I'm curious why those properties were not sold as freehold then. There absolutely has to be a reason. And until I understood that reason, I'd still be very hesitant.

I think it depends on the details of each area.
My house was also leasehold when we bought it, with a long lease, owned by the council. 
We asked them how much to buy the freehold, it was about £800 so we did it straight away. Other areas may not be so simple though.

davidmcn

blue_max_3 said:

cattie said:

In the area I live in there are some really quite substantial properties (houses)  that are held on 999yr leases with no ground rent to pay or service charges. There's absolutely no difference if you compare them to a similar house that is freehold. 999yr leases are actually considered virtual freehold & nothing to be afraid of if there is a peppercorn ground rent & no service charge, with the owners being responsible for maintenance, buidings insurance etc just the same as a freehold house.

Many people who really know nothing about leasehold property love to warn people not to buy & to stick to freehold. However, all flats are leasehold & leasehold isn't the big bad wolf some like to make it out to be. As long as ground rent & service charges are not ridiculously high, there is nothing to fear. It's the job of the solicitor to warn you against anything they feel needs to be taken into account or considered, so that's the best person to listen to.

I'm curious why those properties were not sold as freehold then. There absolutely has to be a reason. And until I understood that reason, I'd still be very hesitant.

I think in many cases it's simply because they were developed before the modern planning system, and if a developer for example wanted to have any control over the use of a site then they'd want to put it in the deeds, and leasehold has (perhaps) some advantages over freehold for such purposes. But any covenants may now be archaic, and relate to the original construction layout or materials etc, not things which are relevant now.

You may also get ground rents which had some investment value originally but didn't have any mechanism for increase, and have long since become uneconomic to bother collecting.