Buying freehold or leasehold property
For the UK expat buying property in the UK, it is important to note that each of the individual countries making up the United Kingdom each have slightly different laws and rules that affect how property title is held. England Wales and Northern Ireland operate in a very similar way in that property is held as freehold or leasehold. Scotland is slightly different in that it had a feudal system that operated in a similar way to leasehold but in recent years, the Scottish government changed the rules and now all property in Scotland is held as freehold.
Where a UK expat is planning to purchase UK property whether for personal residential purposes or as a buy to let (BTL) investment for the rental market, the type of title you hold on the property may affect the future value of your property and may also have an impact on a lenders willingness to provide an expat mortgage on the property.
Freehold and leasehold are two fundamentally different forms of legal ownership of property and although estate agents sometimes tend to gloss over the meaning of these, the difference can be between acquiring a property that is worth buying and one that is not. Making the wrong choice can be hugely expensive. In preparing this guide, expatriates.co.uk hope that any UK expat reading this guide will at least be sufficiently aware of the potential pitfalls of getting this wrong that they will carry out their own research and take advice from their solicitor when making the purchase.
UK expats buying freehold property
Holding property under freehold title means that you have complete and absolute ownership of the land and all buildings that stand on that land which means that you are always in a position to do what you wish with the property always subject to local planning regulations and building regulations.
Freehold is pretty much always the preferred option as you cannot really go very far wrong with it.
Advantages of holding freehold title to a property
- Annual ground rent – Owning freehold title means that you will not be liable to pay annual ground rent as you are the owner of the land.
- Building maintenance – As a freeholder, maintenance of the building is your responsibility and you will therefore be free of the usual arguments that can arise on leasehold property where the leaseholder would have this responsibility and charge you heavily for it but would probably fail to do the work properly.
- Property value – freehold property will almost always be more expensive to buy on a like for like basis but will almost certainly hold its value better than a similar leasehold property unless the terms of the lease are very long and not financially strenuous.
UK expats buying a leasehold property
When a UK expat purchases a leasehold property in the UK what you are buying is the right to the use of the buildings and land for the period of the lease. Leases are usually quite long often in the range of 90 to 125 years but can be for 999 years in some cases and can also be for quite short periods such as 40 or 50 years or less. The lease that you have is held by the freeholder of the land, sometimes referred to as the landlord who will have the legal power to ensure that you comply at all times with the terms of your lease.
When the lease ends ownership of all of the buildings standing on the land which constitute the property will revert to the freeholder or landlord with no compensation being due to the leaseholder, you.
It is therefore essential if you are buying a leasehold property and expect to be able to sell it in the future for a sum consistent with general property values that you ensure that the term of the lease is sufficiently long that when you come to sell the lease has sufficient remaining years left that will still make the property attractive to a buyer.
Once the remaining term of lease drops below certain levels such as 70 to 80 years for example the value of the property to a potential buyer will be reduced and will continue to reduce the closer you get to the lease running out. When the lease does run out you will lose your ownership of the property.
General conditions normally associated with leasehold contracts
The lease is a legal contract between the leaseholder and the freeholder or landlord and contains all of the set out conditions that will govern the leaseholder and freeholders responsibilities to each other while the lease is in force.
- The leasehold contract – the leaseholder has a contract with the freeholder, which will set down the legal rights and responsibilities of either side. This document should be considered as being specific to this particular property and although it may cover all of the usual expected situations it is likely to contain some very specific clauses which it is imperative that you as the leaseholder review carefully with your legal representative prior to signing the lease. Failure to do this could cost you dearly.
- Freeholder or landlord general duties – The freeholder or landlord will normally be responsible for maintaining the common parts of the building such as the entrance hall and staircase if it is a flatted building as well as the exterior walls and roof. Ground maintenance such as grass cutting and tidying may also be included.
- Property maintenance fees – If the lease states that the freeholder retains responsibility for carrying out this maintenance work then you will have little say in how it is carried out but you will be presented with the bill for it being carried out. It is therefore essential that you ensure sufficient protection is written into the contract to provide you with some safeguards.
- Buildings insurance – Depending on the type of property and particularly in the case of flatted property it is likely that the leaseholder will have responsibility for arranging the buildings insurance but will charge you for your share of the premiums. Note that this policy is unlikely to cover any damage to the contents of the home such as furniture and décor and personal items. You will usually be expected to take out your own contents insurance policy to cover this.
- Ground Rent – Due to the fact that leasehold is a form of tenancy there will usually be a a charge for rent. This is usually a nominal sum paid to the freeholder or landlord but remember that ground rent will likely be a specific requisite of the lease and needs to be paid on an arranged date.
- Landlord reserve funds – The majority of leases enable the freeholder or landlord to collect sums in advance to create a reserve or sinking fund to make sure that enough money is available for future scheduled major works such as external decorations or lift replacement. The lease should clarify the sums that are involved and when regular maintenance works and payments will be due. Any contributions made to the reserve fund are not usually reimbursed when the flat is sold.
- Landlord permissions – Generally should you wish to make alterations to the property you will need to seek the permission of the freeholder or landlord. This will all be set out in the lease agreement but be aware that permission may not always be forthcoming.
- Leaseholder risks – Should you fail to fulfil the terms of the lease you could find the lease becoming forfeit. As it is the leaseholders obligation to pay the service charges and ground rent promptly under the terms of the lease, should they not be paid and the freeholder or landlord is able to show that the charges are reasonable then he or she would be able to commence with forfeiture proceedings. Should a court approve this then this can lead to the landlord repossessing the flat.
- Property managing agents or factors – In many situations the freeholder or landlord will undertake the management of the property themselves. Alternatively, they may appoint a managing agent to handle the maintenance of the building in accordance with the terms of the lease and the current relevant legislation and codes of practice. Where a managing agent or factor is appointed hey will take their instructions from the freeholder or landlord and not from the leaseholders.
- Property managing agent fees – the managing agent will usually receive fees paid by the leaseholders as a portion of the service charges. Usually as a percentage of the daily or monthly service charges or as a fixed annual fee.
- Major works – Where major works are being undertaken the managing agent or factor can charge an additional fee which would normally be a percentage of the total cost of such works.
Expat rights to extend your lease
Over recent years there have been a series of UK Government acts aimed at providing leaseholders with some protection against short leases. This has resulted in leaseholders being given the right to extend their lease or have the right to buy the lease but although this may appear a good solution the cost of doing so can be very expensive. The law covering this is slightly different depending on whether you have a house or flat.
- Extending the term of the lease– If you have a flat you will be entitled to extend the lease by 90 years on top of the unexpired period of lease you have left. For houses the period you can extend for is 50 years on top of the unexpired period you have left. If you take this route you may be able to negotiate new terms for the lease to improve your overall position.
- Conditions for extending the term of the lease – To be able to claim your right to extend your lease you must have held the lease on the property for 2 years and if it were originally leased on a long lease basis that period may be extended to 21 years or more. Extending your lease will usually involve you paying a premium to the freeholder or landlord which could be quite substantial.
- Extending the term of the lease before buying – Where expats are considering buying a leasehold property that has a short lease generally less than 80 years it would be worth insisting that the freeholder or landlord extends the lease before you purchase the property. This may also give you an opportunity to alter the conditions of the lease to your advantage.
- Notifying your freeholder to extend the lease – When you inform your freeholder or landlord that you qualify for the right to extend the lease the freeholder or landlord can either accept your offer and negotiate terms with you or they can reject your offer. If they reject your offer you can challenge them in court.
- Professional legal assistance – Due to the potential complexity of the lease conditions it is always wise to seek assistance from you solicitor to ensure everything s properly arranged.
Expat mortgages for leasehold property
Where the property you are buying is freehold then normal lending rules apply. Where the property is leasehold then the period that is left on the lease will be taken into account by any lender. Where the lease is still sufficiently long then you can expect normal lending rules to apply but if the lease term remaining is short then difficulties can start to arise and can mean that the property cannot be mortgages.
Expat mortgage lenders will differ in their lending criteria. Some will draw the line at 75 years remaining on the lease while others may be happy with anything over 70 years. Below 60 years, it may be difficult to get an expat mortgage for the property.
Buying the freehold of a property
Many homeowners in the UK live in leasehold property and may have if they so wish the possibility to buy out the freehold on the property from the freeholder or landlord. Where flatted property is owned then this can often be arranged in conjunction with other leaseholders.
- Rules covering buying freehold – the rules that apply to the purchase of a leasehold property are subject to the terms of a law called the leasehold reform housing and urban development act 1993. This act stipulates that a minimum of half of qualifying leaseholders have to participate in the scheme. Leaseholders usually qualify if they have owned their lease for two years and above. Therefore, if you live in a building with two leasehold flats, both leaseholders need to participate in purchasing the freehold in order to apply.
- Buying the freehold as a group – In order to purchase the freehold as a collective group all of the leaseholders in the building will need to meet certain requirements.
- Collective enfranchisement – Where a group of leaseholders intend to purchase the freehold of a property together the process is generally known as collective enfranchisement. Often the group of leaseholders will form a company to hold the freehold and hold the property as a nominee.
- Cost of buying the freehold – Depending on how much lease is left on the property, the amount that it costs to purchase the freehold will vary considerably. Landlords who are prepared to sell their leasehold must be compensated for their expected losses. Some of the things considered under the act are a follows.
- Loss of value – The freeholder must be compensated for their loss of value when leasehold reverts to freehold. This could be quite a sizeable sum and may be controversial in how it is applied.
- Loss of income – The freeholder must be compensated for the loss of any ground rent that had applied to the property under the original lease.
- The marriage value of the property- The marriage value will be a key part of the compensation owed to the freeholder or landlord. The marriage value relates to the potential for the property to increase in value between time purchased and the date the original lease expires. The Leasehold Reform Act stipulates that in the event of the leasehold being sold this value should be split half and half between owner and purchaser. However if the length of unexpired time left on the lease is greater than eighty years the marriage value is ignored under the act. The owner of the property may also make a case for development potential of the property and any money owed regarding this.
Should expats buy leasehold property?
Current property law in England and Wales effectively demands that most flats be leasehold. While leasehold flats in England and wales are usually preferable to other forms of freehold flats where similar rights and obligations as found in a lease may not exist. This can mean that enforceability between flat owners in the same building can become difficult as there is no separate landlord to enforce rules.
Scotland is a bit different as most buildings and flats are now held freehold although the problem of arranging the building maintenance can still exist. In Scotland many flatted properties are managed on behalf of the owners by property factors. Where property factors are in place the owners have the knowledge that the building will be maintained in a sensible way with the costs being shared between the owners.
Should you be considering buying a leasehold flat in the UK then as long as you know and appreciate your rights and obligations and take full account of the lease conditions and the outstanding term of the lease then buying a leasehold property should not be a problem.
Given that you have a well-written lease on a properly managed building a leasehold flat ought to provide a perfectly good home for its occupants and continue to be a secure investment.