If you’re thinking about buying a freehold with leasehold properties, there’s a lot you need to take into consideration. Owning this type of freehold property isn’t like traditional freehold home ownership, as you will have a range of responsibilities toward a number of leasehold properties and leaseholders.
What’s the difference between freehold and leasehold?
If you own a freehold property, you have complete ownership of the property and the land on which it stands upon. There are many different types of freehold property, including:
- Freehold of a converted house containing several leasehold properties
- Freehold of a purpose-built block containing many flats
- Block of freehold garages
- Commercial freehold i.e. public houses, car parks, office buildings etc
- Freehold land
- Residential freehold (homes)
With a leasehold property, the owner does not own the land on which the property is built, and they are governed by the terms set out in their lease. Each flat within a freehold property may have a different lease and varying terms.
Stated within the lease is the lease term (the number of years they can reside in their property), the ground rent payable (annual rent to be paid to you, the landlord) and the rights and responsibilities of both the leaseholder and the freeholder.
The lease is created when a leasehold property is sold for the first time, with the terms of the lease largely determined by the freeholder. When the leasehold property is sold on to another party, the lease will be transferred to the new owner.
This means that you won’t be able to change any lease terms or issue new leases when you purchase a freehold property, nor when one of the flats is sold to a new owner. However, it is possible to change the terms of the lease if both you and the leaseholder agree, or at the point when the leaseholder requests your consent to vary their lease.
So, before purchasing a freehold property containing leasehold properties, it’s important to look through the terms of each lease to ensure that you fully understand what you would be taking on and that the terms set out in the leases are favourable to you.
Rely on legal expertise
There are many responsibilities and legal obligations that you will acquire when buying a freehold property. So, the first thing that you should do is employ the services of a qualified solicitor with experience in conveyancing and property. They will check through each lease to look for conflicts and any grey areas which require clarification before you complete the purchase.
Make a point of asking your solicitor about the responsibilities of the landlord. These can include insuring the building, maintenance work, decorating communal areas every few years, and providing management accounts amongst other things. Ask yourself if you can manage all of those tasks and if you can afford the associated upfront costs.
There will likely be instances where you will have to collect fees, rent or charges from each leaseholder on a regular basis. These could be for ground rent, maintenance to the property or insurance. If you have difficult tenants, this can become a stressful and challenging task, not to mention costly if you find yourself out of pocket or have to take the legal route to retrieve monies owed.
You may also find that disputes arise between you and your tenants or even between the tenants themselves. It’s all too common for these events to occur and they can make ownership and management of your property very tough. If issues cannot be resolved, you could find yourself taking legal action, which comes with a lot of hassle and expenditure.
Be aware of flying freeholds. A flying freehold exists when two freeholds overlap. For example, you could have a cellar, loft space or balcony which extends beyond the boundary of your freehold and over the boundary of the neighbouring freehold. You could also have a first-floor premises with a driveway passing underneath giving access to another freeholder. It goes without saying that these circumstances will create more work for your solicitor and therefore, a higher legal bill.
One last crucial factor that you should know about owning a freehold property, is that your leaseholders will have the right to buy the freehold from you. This is known as Collective Enfranchisement and will mean that you will no longer have the right to earn money from ground rent, nor will you own the property or the land on which it sits upon. However, you will be able to charge tenants a fair premium for the purchase.
So, should you purchase a freehold with leasehold properties?
Owning freeholds can be stressful and time-consuming, but we love the business of owning them because we have a good team of people here at Freehold Sale to help with the management and maintenance of the properties. They are great investments which don’t lose value like other property might in a buyers’ market.
The most important thing is to do your own research and carry out full due diligence on yourself, your management, and your circumstances to understand if it is feasible before you get too carried away. And don’t underestimate the importance of appointing a good solicitor to help you understand every aspect of the purchase.
If you do decide to go ahead with the purchase of a freehold, the first thing that you must do is inform any leaseholders that you are their new landlord. This is a legal requirement under Section 3 of the Landlord and Tenant Act 1985, which also defines a prescribed format in which leaseholders should be notified.
Failure to comply with Section 3 is a summary offence which can lead to a criminal conviction and a fine of up to £2500. So, it’s important to ensure that this notice is served to your tenants within the set time frames and in the correct format.
To help you comply with your legal obligations, we offer a free Section 3 Notice template, which you can obtain directly from our website. Simply complete the request form and we will send you the template via email together with instructions on how to complete the template.
Free resources for freeholders
As part of their lease terms, your new leaseholders may have to pay you a yearly ground rent. In order to obtain the payments, landlords must use a Section 166 Ground Rent Demand Notice. If you fail to serve this notice to your leaseholders, and in the prescribed format as set out by the Commonhold and Leasehold Reform Act 2002, your leaseholders will not be liable to make any payments.
However, when the Section 166 Ground Rent Demand Notice is served correctly, you’ll be able to demand unpaid ground rent for up to six previous years. So, if you’re purchasing a freehold property with ground rent arrears, you might be able to retrieve a large sum of money from the debtors.
If at any point your freehold property requires large scale maintenance or improvements, you’ll need to follow the Section 20 consultation procedure for major works. This will only be required when carrying out qualifying works where the contribution from any one leaseholder exceeds £250.
This is a three-stage process which provides leaseholders with clarity on the intended works, the costs involved and who will carry out the works. It will also help to ensure that you are able to recover the costs for the works from your leaseholders.
This resource was originally published on 10th April 2015 and updated on 11 September 2019