The UK property market is quite idiosyncratic, and can be confusing for those buying from abroad. What is freehold, and what is leasehold, and how do these impact ownership rights? This week, in part six of Buying in the UK, we’re looking at these key legal elements of the process of buying a house in Britain, whether as a permanent residence or an investment.
Freehold vs Leasehold
One particularly important element in the UK property market is the difference between freehold and leasehold property. They are two different forms of legal ownership and offer both different ownership rights and different costs and profits for investors.
Owning the freehold means owning the property and the land on which it stands indefinitely. Most houses – detached or semi-detached – are sold freehold. For every property there will be a freeholder somewhere. It could be an old established landowner, possibly the Church of England or even the Royal Family, but is more likely to be a private investor. If you are buying investment property in the UK you may buy a freehold property where there are existing leaseholders. They will pay rent to you and any costs of maintaining the fabric of the building – roof, walls, entrance etc.
Leasehold means that you have a lease from the freeholder (sometimes called the landlord) to use the home for a number of years. The leases are usually 90 years or 120 years, but they can be as high as 999 years or as low as 40 years. There may be restrictions on what leaseholders may do with the property, such as owning pets or sub-letting to tenants.
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Leaseholders normally pay a small annual ground rent to the freeholder, which can be as little £100 per year, but a much larger amount for maintenance. The freeholder will normally be responsible for maintaining the common parts of the building, such as the entrance hall and staircase, as well as the exterior walls and roof. Any repairs and expenses, however, will be passed on to the leaseholder, usually in advance, and with a management fee on top, often reaching £1,000 per year even for a small flat.
Disputes between freeholders and leaseholders do occur, but there are legal protections. Leaseholders have the right to manage their own property if enough of them agree – usually half of the leaseholders in a building. They also have to right to extend their lease and even buy the freehold.
All of that is usually at their own expense, including both sides’ reasonable legal costs, but they are protected in law from being ripped off and unfairly treated by freeholders.
Beware the declining value of leaseholds.
When you buy leasehold you buy the remaining years on the lease. So if a flat’s 90-year lease began in 1976 and you buy it in 2017, you have a lease for the remaining 49 years. That means that in 49 years the property goes back to the freeholder and you have nothing. Such a property will be worth much less than when it had 90 years left on the lease.
When you buy leasehold you buy the remaining years on the lease. So if a flat’s 90-year lease began in 1976 and you buy it in 2017, you have a lease for the remaining 49 years.
As the years remaining on the lease run down, the value of the property therefore drops (depending on whatever is happening in the local property market). You normally have the legal right to extend the lease back to 90 years, but it will be expensive to do so – several thousand pounds for a flat valued at £200,000, for example. Do not agree to buy a leasehold property with less than 90 years without getting good legal advice.
Legal aspects of the buying process
Offer and acceptance
The buying process is called conveyancing.
When you have found a property, you tell the estate agent your offer and they communicate this to the seller. The offer can be at, below or above the asking price. When making the offer the agent will normally tell the seller that the offer will be dependent on a satisfactory survey being completed and a mortgage being obtained.
If the offer is accepted, you should now employ a solicitor.
Surveys and searches
It’s always best to choose a specialist property lawyer for the conveyancing process. You may have to pay the solicitor a deposit in advance, a normal level being 10% of their projected fee. Next you pay for a survey to be completed [see Costs, above] which can either be a full survey, checking for structural defects and serious issues, or a shorter survey known as a homebuyer’s report.
Depending on what turns up in the survey, an exchange of notes now takes place between your solicitor and the seller’s to iron out any difficulties and queries. If the survey uncovers problems you might make a lower offer. The solicitor also conducts “searches”, to uncover any potential issues in the local area such as environmental contamination or flooding, and whether the property is protected in any way, such as being “listed”.
At this point you can still change your mind about the purchase. Indeed, this is the most stressful time for both buyer and seller, both of whom will have made commitments and expenses, yet neither has any redress if the other side pulls out of the deal at this stage.
Gazumping and gazundering
The offer is not binding on either party.
This means that if, prior to exchange of contracts, the seller gets a better offer they can take that and ignore yours. This is called “gazumping” and is an infuriating feature of a rising market, where the value of the property can rise by thousands of pounds between the offer and the binding contracts.
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Another problem is “gazundering”, where a buyer suddenly says they will pay less than their initial offer at the last minute, in the hope that a seller will be so committed to the sale that they will have to accept the offer rather than start looking for a buyer again.
These are common occurrences in the UK market and the best defence against them is to move as fast as sensibly possible once you have chosen a property
When your solicitor is satisfied that all is in order and – after a discussion with your solicitor to answer any last-minute concerns and queries – you are ready to go ahead, you will be asked to sign a contract and pay a deposit, usually of around 10% but it can be less. The solicitors now exchange contracts.
It is very rare for a property sale to fail (“fall through,” as it is known) after this point. As the buyer, you should now take out buildings insurance on the property.
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You normally don’t take physical possession of the property for another one to four weeks. On completion you pay the balance of the money and all professional and bank fees. The estate agent will pass the keys to you and the property is yours. Stamp Duty has to be paid within 30 days.
Buying at auction
The difference here is that property is listed on the auction house’s website. Although the property will normally be available for a series of “open days” when you can visit with a surveyor, you can also conduct the whole process from overseas without visiting at all.
Having seen the potential for international sales, many auctioneers offer independent surveys online to attract international buyers.
You can also bid for property over the telephone and internet. The legal processes are just as rigorous. The exchange of contracts happens when the hammer falls – you are then legally committed to pay the 10% deposit and complete within four weeks (sometimes two weeks).