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Understanding Freehold Versus Leasehold in UK Real Estate · Merryn Talks Money

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  Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. Welcome to Myron Talks
• 0:14
  Speaker 1: Your Money, the personal finance edition of Meron Talks Money
• 0:16
  Speaker 1: and these bonus podcasts, we talk about the best strategies
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  Speaker 1: for making the most of your money. My Maren Sumspweb
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  Speaker 1: and with me Today's senior reporter and author of the
• 0:24
  Speaker 1: Money Distilled newsletters, John.
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  Speaker 2: Stappak Hi John him?
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  Speaker 1: Okay, John. So we are now doing a housing series
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  Speaker 1: and we've got one of our special guests with us.
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  Speaker 1: We was speaking to Anthony Emerson. Anthony is the director
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  Speaker 1: of mortgage brokers Trinity Financial, London based firms specialize in
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  Speaker 1: bespoke mortgage advice and all sorts of other things. And
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  Speaker 1: in this episode we are going to talk to him
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  Speaker 1: about freeholds and leaseholds, What is the difference, how did
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  Speaker 1: this happen and what is best for you now? Anthony, Hello, welcome, Hello,
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  Speaker 1: Thank you for having me Anthony. When people go out
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  Speaker 1: in the UK, or in this particular case, in England
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  Speaker 1: and Wales, John, do they do this in Wales? This
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  Speaker 1: is a good question.
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  Speaker 2: I think they do in Wales.
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  Speaker 1: It's terrible.
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  Speaker 2: I see I'm the talking squad here and we don't
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  Speaker 2: have lease hold, free hold, Yes, England and Wales.
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  Speaker 3: There is leasehold in Wales.
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  Speaker 1: Yeah, okay, so England and Wales. You go out, you
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  Speaker 1: buy a house or a flat, but very often you've
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  Speaker 1: bought something that you think you own in its entirety,
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  Speaker 1: but the truth is that you don't actually own the
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  Speaker 1: whole thing, do you? How does it work?
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  Speaker 3: There are two kinds of ownership of properties, right, We
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  Speaker 3: have a freehold, where you own the building and the
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  Speaker 3: land on which the building sits. And then you have lethold,
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  Speaker 3: where you own a part of the building demised by
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  Speaker 3: the outline of your title plan, but not actually the
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  Speaker 3: land on which that property sits. And I think it
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  Speaker 3: all heralds from the feudal days of all where royalty
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  Speaker 3: and gentry owned most of the land in England and
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  Speaker 3: they subdivided it and created properties for their people to
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  Speaker 3: live in, but didn't actually want to relinquish ownership of
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  Speaker 3: the land, so they created a lease allowed a property
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  Speaker 3: to be built on that land, and then the lease
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  Speaker 3: was granted for a period of one hundred and twenty
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  Speaker 3: five years or so, and at the end of that
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  Speaker 3: period the hand of the land back and whatever was
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  Speaker 3: on it and that has basically ended up in the
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  Speaker 3: situation that we're in today.
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  Speaker 1: It sort of makes sense if you think about it.
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  Speaker 1: If you're a landowner and you own a piece of
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  Speaker 1: land and you build flats on it, it's quite difficult
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  Speaker 1: to divvy up the land between the individual flat owners.
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  Speaker 1: So in some ways, when you look at it makes
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  Speaker 1: sense for the ownership of the land to be separate
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  Speaker 1: to the ownership of the flats.
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  Speaker 3: It does. Indeed, especially when you've got quite a number
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  Speaker 3: of flats on one particular parcel of land. The footprint
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  Speaker 3: of that land could be quite small and you could
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  Speaker 3: have fifty sixty flats up above it. Who owns it,
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  Speaker 3: who controls it, whose response for it? And that's kind
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  Speaker 3: of why the freeholder is responsible for the maintenance of
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  Speaker 3: the building and the outside areas and what have you,
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  Speaker 3: and the leaseholders are responsible for everything within the demise
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  Speaker 3: of their title plan, within their walls and their windows.
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  Speaker 1: Yeah, but this all came to something of ahead a
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  Speaker 1: few years ago when we found that the house builders
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  Speaker 1: were building actual houses as lease holds rather than freeholds. Right,
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  Speaker 1: So they were sticking up these houses. People were buying
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  Speaker 1: them thinking that they bought a house and they owned
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  Speaker 1: it out right, only to find that they actually bought
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  Speaker 1: a leasehold, and so they owed ground rent to the freeholder.
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  Speaker 1: Because you have to pay a rent to the freeholder annually,
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  Speaker 1: which is called the ground rent. It's normally very low,
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  Speaker 1: but in these cases it ended up being rather higher
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  Speaker 1: than people expected. And then of course they were also
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  Speaker 1: best subject to service charges. Now that's been outlawed, Right,
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  Speaker 1: you're no longer allowed to sell a house as a leasehold?
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  Speaker 1: Is that right?
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  Speaker 3: In certain circumstances, I believe they're still allowed to do it.
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  Speaker 3: I can't give you the specifics of those circumstances, but
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  Speaker 3: in general now it is is not really seen as
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  Speaker 3: something that is done. Most of that new developments where
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  Speaker 3: there are houses being built are sold on a freehold title.
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  Speaker 1: Okay, so these days when you're thinking about this, it's
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  Speaker 1: really flat that you need to think about. Yeah, is
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  Speaker 1: it possible to buy a flat freehold?
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  Speaker 3: Generally speaking, lenders don't like freehold flats because of the
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  Speaker 3: fact that, by the nature of a flat, if you
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  Speaker 3: own the flat, there's generally a flat above you or
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  Speaker 3: another property within that parcel of land, and the lenders
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  Speaker 3: are very very cautious about lending against that flat in particular,
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  Speaker 3: because if they try and repossess that flat and the
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  Speaker 3: person is also the freeholder, they might also be a
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  Speaker 3: little bit more difficult in the repossession process. And generally speaking,
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  Speaker 3: the reason that lenders like leases where the owner doesn't
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  Speaker 3: own the freehold as well is because of the fact
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  Speaker 3: that they find it easier to go down the repossession
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  Speaker 3: route given the way UK law were.
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  Speaker 1: Okay, interesting, that was not the answer I was expecting. No,
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  Speaker 1: I didn't. I didn't know that was part of the
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  Speaker 1: land of thought process. So interesting, Okay, So what are
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  Speaker 1: the downsides of owning a lease hold flat? Why would
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  Speaker 1: you not want this?
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  Speaker 3: I think it comes down to control, all right. If
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  Speaker 3: you buy a lease hold flat and you have a
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  Speaker 3: management company or a separate freeholder who's in charge of
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  Speaker 3: the property, your reliance on a third party entity to
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  Speaker 3: do their required maintenance programs. They decide the service charges,
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  Speaker 3: they decide the upkeep of the building, and you're at
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  Speaker 3: their mercy. Whereas if you own the lease but you
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  Speaker 3: also own a share of the freehold itself, then you
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  Speaker 3: and the other parties within the units or the block
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  Speaker 3: should I so would be able to decide between yourselves,
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  Speaker 3: how you want to maintain the building, whether or not
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  Speaker 3: you want to repaint it on a five year rotating cycle.
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  Speaker 3: How you want the common areas maintained, how much that
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  Speaker 3: common area cost to maintain, Because all of the people
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  Speaker 3: who own the freeholds of these units make a margin
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  Speaker 3: of profit on top, because otherwise why would you be
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  Speaker 3: doing it, And that level of profit will vary from
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  Speaker 3: person to person depending on how unscrupulous that freeholder might be.
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  Speaker 3: The biggest thing is that control. If you own that freehold,
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  Speaker 3: you can decide all of those aspects. You could also
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  Speaker 3: decide fundamentally. The big thing is when you would like
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  Speaker 3: to extend that property. You'd like to put a loft
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  Speaker 3: on top, you'd like to extend out the back only
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  Speaker 3: you and the flat upstairs. If you're a Victorian house
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  Speaker 3: split into two flats, need to decide between you. If
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  Speaker 3: you're both okay to go ahead. You can extend the
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  Speaker 3: property in a way you go. You don't have to
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  Speaker 3: pay any amount of money over to the freeholder to
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  Speaker 3: get their permission to be able to do it.
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  Speaker 1: Okay, so that it works for Anthony. For a Victorian
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  Speaker 1: house with two or three flats in it, you own
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  Speaker 1: the freehold together, you divided up between the flats based
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  Speaker 1: pro rauter or floor space or whatever it is. However
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  Speaker 1: you decide to do that, do you only share the
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  Speaker 1: freehold each? You can chat with your neighbors above you
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  Speaker 1: or below you to work stuff out. But what if
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  Speaker 1: you're in a large nineteen thirties block of flats in
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  Speaker 1: central London and there are two hundred and eighty of you?
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  Speaker 1: How are you going to organize it then as a
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  Speaker 1: share of freehold.
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  Speaker 3: So the share of freehold company can themselves appoint a
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  Speaker 3: management company to look after the management of that block.
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  Speaker 3: So you then become the clients if you like. Who
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  Speaker 3: then decides the management company's service criteria. They keep performance
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  Speaker 3: indicators and all the other bits and pieces and decide
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  Speaker 3: how much you want done, how much of the garden
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  Speaker 3: work you want done, how often you want the lift service,
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  Speaker 3: how much you want the common areas cleaned, et cetera.
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  Speaker 3: You have that ability to control it, and you'll have
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  Speaker 3: like a body corporate kind of setup where you could
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  Speaker 3: have an annual general meeting and decide for the year
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  Speaker 3: ahead what kind of insurances upgrades you want to make,
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  Speaker 3: what kind of maintenance programs, you want to have, and
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  Speaker 3: you'll know what those costs are, Whereas if you don't
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  Speaker 3: own a share of the freehold and you are reliant
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  Speaker 3: on a totally separate third party, they get to make
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  Speaker 3: all of those decisions on your behalf, irrelevant to what
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  Speaker 3: those costs might be.
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  Speaker 1: The other really important thing when you buy a leasehold
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  Speaker 1: is how long the lease is. Right, So, if you've
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  Speaker 1: got a lease that is nine hundred years long or
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  Speaker 1: one hundred and fifty years long, or however many years,
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  Speaker 1: it wouldn't necessarily affect the value of the flat as
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  Speaker 1: the years take away. But if you find yourself holding
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  Speaker 1: a leasehold that has only say sixty or seventy years
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  Speaker 1: left on it, then suddenly you really are just renting
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  Speaker 1: somewhere right as opposed to owning somewhere, and you need
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  Speaker 1: to start thinking about extending that lease, which is if
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  Speaker 1: it's going to cost a lot, because you've got to
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  Speaker 1: buy another forty years, fifty years, one hundred years, nine
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  Speaker 1: hundred years of the right to reside off a freeholder.
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  Speaker 1: So the length of the lease affects the value of
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  Speaker 1: the flat.
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  Speaker 3: That's entirely true. Yes, there is a point in which
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  Speaker 3: there is the term called a marriage value, and that
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  Speaker 3: timeline is generally seventy nine years of lease length remaining
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  Speaker 3: where marriage value happens when if you extend the lease
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  Speaker 3: on the property at that point or below that point,
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  Speaker 3: from seventy nine downwards, there is a fundamental change in
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  Speaker 3: the value of the property because of the fact that
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  Speaker 3: you now have a longer, more desirable lease. So although
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  Speaker 3: you are paying to extend the lease when it's below
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  Speaker 3: seventy nine years, your value of your home should fundamentally change.
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  Speaker 3: Whereas if you've got a ninety year lease and you
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  Speaker 3: want to extend it out to two hundred years, nine
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  Speaker 3: hundred years or whatever it might be, there isn't necessarily
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  Speaker 3: a change in the valuation of your property, but there
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  Speaker 3: is obviously a change in the desirability of your property.
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  Speaker 1: And there is a new Leasehold Reform Act coming through
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  Speaker 1: right for England and Wales correct which is going to
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  Speaker 1: change a lot of the infrastructure inside which leaseholds work
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  Speaker 1: and attempt to make it easier to extend your lease,
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  Speaker 1: removing marriage value completely, which seems a lot fair on
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  Speaker 1: the freeholders. Maybe ground rent being slashed so you can't
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  Speaker 1: charge people these ratcheting up fees every year, and changing
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  Speaker 1: some of the qualifying criteria to make it easier to
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  Speaker 1: get the right to extend your lease. All this kind
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  Speaker 1: of thing, and I think also a full ban on
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  Speaker 1: leasehold houses as discussed earlier. So all these things that
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  Speaker 1: are coming down the road, and that should mean that
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  Speaker 1: it's easier or maybe more desirable to buy a lease
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  Speaker 1: hold flat in future.
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  Speaker 3: There's nothing fundamentally wrong with the lease hold flat. If
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  Speaker 3: you've got a good management company and you've got the
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  Speaker 3: right length of lease, etc. A lease holder really doesn't
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  Speaker 3: have that much of a negative effect on ownership and
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  Speaker 3: enjoyment and all the other bits and pieces. I think
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  Speaker 3: the problem really comes when you have a poor freeholder
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  Speaker 3: who doesn't really do their required portion. And I think
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  Speaker 3: the leasehold Reform Bill will make it easier for people
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  Speaker 3: who are in a position where they haven't got a
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  Speaker 3: decent freeholder to be able to get out of that
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  Speaker 3: position and be able to get to a point where
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  Speaker 3: they could extend their own lease, start their own management company.
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  Speaker 3: The least extensions are going to go from extending by
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  Speaker 3: ninety years to nine nine hundred and ninety years. We
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  Speaker 3: are going to make it cheaper easier to extend the
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  Speaker 3: lease and buy the freehold. Like you said, remove that
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  Speaker 3: requirement to pay the marriage value, because one of the
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  Speaker 3: biggest arguments is always exactly what is that marriage value worth?
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  Speaker 3: Is the freeholder who decides the marriage value and then
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  Speaker 3: you have to go to arbitration to be able to
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  Speaker 3: try and work out between you a number that everyone
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  Speaker 3: agreed upon. And I think that is really what puts
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  Speaker 3: a sour taste in everyone's mouth to be able to say, actually,
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  Speaker 3: you know what, now, when I come to this point
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  Speaker 3: with my leasehold flat and I need to extend it,
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  Speaker 3: there should be more of a structure that is allowing
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  Speaker 3: me to be able to achieve what I want to
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  Speaker 3: achieve without all the nonsense that goes with it. That
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  Speaker 3: Leasehold Reform Bill is also going to remove the presumption
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  Speaker 3: that lease holders have to pay the landlords legal costs.
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  Speaker 3: You know, we have to extend the access to redress
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  Speaker 3: schemes for lease holders where the freeholder managers the property directly.
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  Speaker 3: We have to ensure that there's relevant property sales information
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  Speaker 3: is provided to base holders in a timely fashion from
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  Speaker 3: the freeholder, et cetera. So there are things in that
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  Speaker 3: Leasehold Reform Bill that will help. It just hasn't yet
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  Speaker 3: been put in place fully to my knowledge, I think
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  Speaker 3: it's still pending.
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  Speaker 2: So let's say I am a a fostained buyout or
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  Speaker 2: someone in the market for a flight to leaven rather
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  Speaker 2: than as an investment property. What would you see is
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  Speaker 2: the minimum viable lease hold? You know, if I go
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  Speaker 2: and rate move, should I be saying that I'm not
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  Speaker 2: taking that unless it's at least one hundred and twenty
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  Speaker 2: five years or you know, one hundred years. Is that
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  Speaker 2: a consensus on those.
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  Speaker 3: The general consensus is that lenders aren't overly comfortable lending
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  Speaker 3: on a property where the underlying lease at the point
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  Speaker 3: of application is eighty five years or under. So it's
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  Speaker 3: not quite the seventy nine And because of the fact
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  Speaker 3: that it's eighty five is because there was a qualifying
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  Speaker 3: period where you had to own the property for a
• 13:35
  Speaker 3: two year period before you're allowed to apply for a
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  Speaker 3: lease extension. You know, the lease whold reformable will do
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  Speaker 3: away with that qualifying period. But it's eighty to eighty
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  Speaker 3: five years at the start of the term, and then
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  Speaker 3: a lot of lenders have a minimum period remaining at
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  Speaker 3: the end of that more wach term. So when you said,
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  Speaker 3: what am I looking at, which one should I get
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  Speaker 3: away from? The shorter the lease, the more a narrow
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  Speaker 3: the field of lenders that you can pick your finance
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  Speaker 3: from because of the fact that their criteria might not
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  Speaker 3: allow you to apply to them because of the underlying
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  Speaker 3: least lend.
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  Speaker 2: Let's see, I'm thinking I'm going to live in the
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  Speaker 2: flat for five years, I should be conscious of the
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  Speaker 2: fact that the lease is going to be five years
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  Speaker 2: shorter by the time I come to sale. So for example,
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  Speaker 2: if I bought one at ninety, then I'd be getting
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  Speaker 2: to the eighty five by the time I was going
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  Speaker 2: to sell my flight, And unless I wanted to go
• 14:30
  Speaker 2: through the rig midle of actually extending the lease, that
• 14:33
  Speaker 2: would present me probably with smaller market potential buyers. Is
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  Speaker 2: that fair to say?
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  Speaker 3: That's absolutely right. It's something that you don't think of
• 14:41
  Speaker 3: every day because of the fact that you only tend
• 14:44
  Speaker 3: to think about these things that either the point of
• 14:46
  Speaker 3: purchase or the point of sale, but not in between.
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  Speaker 3: And a lot of people find out to their detriment
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  Speaker 3: that they're now in this position where they have to
• 14:56
  Speaker 3: either apply it for the least extension to the freeholder
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  Speaker 3: because of the fact that they are beyond the qualifying period,
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  Speaker 3: and then they can allocate that extension to the purchaser,
• 15:06
  Speaker 3: and then the purchaser has to extend the lease at
• 15:10
  Speaker 3: the point of completion to allow them to have full
• 15:14
  Speaker 3: choice of lenders, etc. It extends the purchase journey, it
• 15:17
  Speaker 3: extends that cost of that purchase, and a lot of
• 15:20
  Speaker 3: people just can't be bothered to actually go down that
• 15:23
  Speaker 3: road because as a first time buyer, everything's new to you,
• 15:27
  Speaker 3: and then to throw this added level of complexity in
• 15:30
  Speaker 3: might make your property less desirable and therefore achieve a
• 15:34
  Speaker 3: much lower sales price. You could always extend the lease
• 15:37
  Speaker 3: yourself and then put it on the market with a
• 15:40
  Speaker 3: long lease, but again you're probably looking at the fair
• 15:42
  Speaker 3: few thousand pounds of costs to be able to extend
• 15:46
  Speaker 3: that lease, and then if you are below that sort
• 15:49
  Speaker 3: of seventy nine years and whatever you then they might
• 15:52
  Speaker 3: still be a marriage value at this point in time,
• 15:54
  Speaker 3: and you don't quite know what that cost is. There
• 15:58
  Speaker 3: are calculators on the web where you can go and
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  Speaker 3: you can enter in your ground rent and your service
• 16:02
  Speaker 3: charge and all the other lease lengths, and they can
• 16:05
  Speaker 3: give you an approximation of what it might be, but
• 16:08
  Speaker 3: it is just an approximation. And like I was saying earlier,
• 16:10
  Speaker 3: you've got that situation where people have to then maybe
• 16:15
  Speaker 3: possibly go to arbitration between the freeholder and yourself to
• 16:19
  Speaker 3: work out exactly what that price is. And that's where
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  Speaker 3: I think lease holders who are trying to sell into
• 16:25
  Speaker 3: the market need to do their homework and need to
• 16:27
  Speaker 3: get the property right from a legal perspective and put
• 16:31
  Speaker 3: it into the market in its best light to be
• 16:34
  Speaker 3: able to achieve the best sales price.
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  Speaker 2: Yeah, and a lot of this sounds like the really
• 16:39
  Speaker 2: fundamental issue is whether or not your freeholder is a
• 16:45
  Speaker 2: decent individual or not or a professional. Is there any
• 16:50
  Speaker 2: way to find out more about the situation where the
• 16:54
  Speaker 2: freeholders other than by asking other people? Well, asking other
• 16:58
  Speaker 2: people in the flights may be a good way to
• 16:59
  Speaker 2: do it, But is that anything you would can said
• 17:02
  Speaker 2: of in terms of I did due diligence If you're
• 17:04
  Speaker 2: looking at a lease old flat.
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  Speaker 3: We've always said to our clients, and it's something that
• 17:10
  Speaker 3: some people do and some people absolutely shy away from,
• 17:13
  Speaker 3: but go to the building, go knock on some of
• 17:16
  Speaker 3: the other doors, because you're probably not going to get
• 17:20
  Speaker 3: the most honest answer from your vendor, the person selling
• 17:23
  Speaker 3: the house. But if you knock on the doors of
• 17:25
  Speaker 3: maybe it's a unit with three or four flats on it,
• 17:28
  Speaker 3: go knock on the other doors, find out if they
• 17:30
  Speaker 3: are the owners, and ask what their opinion is of
• 17:32
  Speaker 3: the free order, Have they done anything that they required
• 17:35
  Speaker 3: permission from? What was the journey like? Because that's the
• 17:39
  Speaker 3: only way that you find out any feedback, because there's
• 17:42
  Speaker 3: no register, if you like, as to what that person
• 17:46
  Speaker 3: and how they handle their duty. And people change. They
• 17:49
  Speaker 3: might be great for a couple of years and then
• 17:51
  Speaker 3: have personal circumstances that change, and then they might not
• 17:54
  Speaker 3: be so great. And that's kind of why that whole
• 17:56
  Speaker 3: ability with the leasehold re format to be able to
• 17:59
  Speaker 3: get out of that situation and buy your freehold and
• 18:02
  Speaker 3: become your own sort of managing agents, if you like,
• 18:04
  Speaker 3: would be much much better for clients.
• 18:07
  Speaker 1: Interesting, isn't it. I mean, although you say that you
• 18:10
  Speaker 1: might not get the full truth from the vendor, they're
• 18:11
  Speaker 1: kind of legally obliged to tell you all this stuff, now,
• 18:13
  Speaker 1: aren't they. I remember the story we've had recently and
• 18:16
  Speaker 1: the press about the people who had to take back
• 18:18
  Speaker 1: the house with the moths in central London because they
• 18:20
  Speaker 1: hadn't been told the full truth about the moth infestation.
• 18:23
  Speaker 3: I get that, but I think it depends whether or
• 18:26
  Speaker 3: not your seller has actually had any dealings with them
• 18:30
  Speaker 3: other than just paying their ground rent. If you want
• 18:33
  Speaker 3: to buy the flat right and it hasn't been improved
• 18:36
  Speaker 3: upon or extended or anything like that of the course
• 18:39
  Speaker 3: of the last twenty thirty years or whatever it might be,
• 18:41
  Speaker 3: that person might not have had any dealings with that
• 18:44
  Speaker 3: freeholder on extensions, lease extensions, you know, changes, and find
• 18:49
  Speaker 3: out how engaged they are. Because other than you receiving
• 18:53
  Speaker 3: a notification in the post saying your ground renters do
• 18:56
  Speaker 3: this year and this is what it is and this
• 18:58
  Speaker 3: is your service charge paying those two figures, that's the
• 19:02
  Speaker 3: only interaction that you might have with the freeholder. Obviously,
• 19:06
  Speaker 3: you can look at common areas and outside and see
• 19:09
  Speaker 3: how that looks and how that's maintained, and you can
• 19:11
  Speaker 3: make a judgment call of how the freeholder runs their
• 19:14
  Speaker 3: property from that side of it. But you might be
• 19:17
  Speaker 3: four and a half years into a five year start
• 19:18
  Speaker 3: or where they update that. So you need to find
• 19:21
  Speaker 3: these things out.
• 19:22
  Speaker 1: All right, brilliant. I think we better edit there, but
• 19:24
  Speaker 1: the key messages this is quite complicated when you're looking
• 19:28
  Speaker 1: to buy a flat, do so really very carefully. Indeed, Anthony,
• 19:32
  Speaker 1: thank you so much for joining us today. We really
• 19:34
  Speaker 1: appreciate it, absolute pleasure. Thanks for listening to this week's
• 19:41
  Speaker 1: Maren Talk to Your Money. If you like us show, rate, review,
• 19:43
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• 19:46
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• 19:48
  Speaker 1: Marinus w and John Underscore STEPIC. This episode was produced
• 19:52
  Speaker 1: by Summersiety and Moses Andams. Sound designed by Blake Maples Bettal.
• 19:55
  Speaker 1: Thanks of course to Anthony Emerson. Questions and comments on
• 19:59
  Speaker 1: this show and all our shows are always welcome. I'll
• 20:01
  Speaker 1: show email Azmerinmoney at Bloomberg dot net