You may have heard a Conveyancer or Solicitor use the term ‘tenure’ when discussing a property and wondered what this meant. In England and Wales there are two main types of tenure; Freehold and Leasehold. The tenure of property you own/purchase will dictate the extent of your ownership.
There are a number of other differences between the two types of properties and we have set these out below; if you are purchasing a property it is very important that you are aware of whether the property is Freehold or Leasehold as you will need a full and informed breakdown of your obligations.
Owner v Tenant
The main difference between these two tenures is that if you purchase a Freehold Property, you are buying the whole plot outright, including the land the property stands on.
If you purchase a Leasehold property then you are only purchasing the right to live in the property for a certain length of time; the land the property stands on will be owned by a third party called a Freeholder (your Landlord). Essentially you are a tenant and as such the way you are permitted to deal with the property varies from that of a Freehold owner.
Ground Rent Charges.
Most Leasehold properties are subject to a Ground Rent. This is an annual sum you pay to your Freeholder (or their representative) in return for them leasing the plot of land that your house stands on.
Ground Rents can range from as little as a ‘peppercorn’ (no financial value) to hundreds of pounds and can increase throughout the term of the Lease.
In newer build Leasehold properties (both flats and houses), it is very common to have a ‘rent review’ clause which cause the ground rent to be increased at set intervals throughout the term of the Lease. These increases are sometimes index linked but some allow for the ground rent to double at the rent review date (usually every five or ten years) which can mean sharp and unaffordable increases**. If you are buying a Leasehold property you should ask your Conveyancer/Solicitor to confirm the ground rent with you as soon as they have received the legal documents from the Seller.
If you own a Freehold Property you will not have to pay Ground Rent however, there may be other fees payable such as Maintenance Charges or Service Charges if you are living on an estate with managed communal areas or Rent Charges (also referred to as ‘chief rent’). A rent charge is an annual sum paid by a freehold homeowner to a third party who normally has no other interest in the property.
** it is worth noting that doubling clauses are now illegal but they are still present in existing Leases so it is very important that your Solicitor/Conveyancer examines the ground rent clause in a Lease thoroughly.
A service charge is a fee payable by a Leaseholder for the maintenance of a property. This is most common in flats and apartment buildings where there are both interior and exterior communal areas that require upkeep. They can however apply to houses as well if that house is part of a development or estate; newer developments often maintain private roads and have communal landscapes areas etc. and therefore the Freeholder will charge all properties within that estate a fee for the cost of this maintenance.
As stated above, a Freehold property may also be subject to Service Charges but this is not that common.
Many Leasehold properties contain a clause within the Lease stating that a Buyer must pay a fee to their Freeholder on completion of their purchase along with a Notice of Charge and Transfer. This is to inform the Freeholder of the change in ownership and of any mortgage that will be registered against the property. These fees will vary depending on who your Freeholder is; your Conveyancer/Solicitor will enquire as to these fees with your Seller and inform you of the same.
Completion fees can apply to Freehold properties as well although it is less common and mostly applies to newer build properties.
Restrictions on how you can deal with your property.
Leasehold Properties are usually more restricted than Freeholds in terms of what you can and cannot do with your property. The property is governed by the Lease which will contain ‘covenants’. A covenant can be described in very basic terms as an agreement or promise to do or not to do something; as such there are both negative (restrictive) and positive covenants. If a Leaseholder fails to comply with these covenants then the Freeholder can take legal action resulting in quite severe penalties, the worst of these being that they can apply to the courts to bring the Lease to an end.
Common covenants within Leases are restrictions on development of the property without the Freeholders permission, having to keep the property in good condition and not being able to use the property for any trade or business purposes.
Freehold properties are also subject covenants but they are, on the whole, less restrictive.
This is a very brief overview of the difference between the two types of tenure. If you have any questions surrounding leasehold or freehold issues, our expert solicitors can provide you with personalised advice that can help you to understand your rights and what steps you can make to avoid any unsuitable arrangements.