Freehold, Leasehold or Commonhold ?
By Martin Moore, member of the Institute of Residential Property Management
Freehold, Leasehold or Commonhold ? - we frequently find property buyers are confused by the alternative forms of property tenure and their implications, hopefully if we look at each of these terms individually it will make some sense.
Please note: This applies in England and Wales, Scotland has a different legal system. Registered social landlords (housing associations) are also treated in a different way.
Why do we define tenure? The UK legal system was established over many years by common practice, hence the term Common Law. One result of this historical development is that all land in the UK is, in principle, owned by the Crown, so it is necessary to define the rights an occupier of the land may have, this is their Tenure.
Freehold this is the most common and strongest form of Tenure giving outright use of the land, forever and without payment of any ground rent. This does not mean you are free to do anything you want, restrictions, easements and wayleaves added to the property deeds may prevent or insist you undertake activities and you must comply with laws and legislation like planning permission.
Can my freehold ever be taken away? Yes, a compulsory purchase order for example would force you out of your freehold in return for compensation or you could lose your freehold if it has been used as security for an unpaid loan or mortgage.
Where the freehold system has a problem is when he single piece of land is occupied by two or more separate parties, for example in a block of flats. Leasehold provides a solution to the flat problem however it wasn’t the original purpose.
Historically large landowners would give permission to build on their land or to use the land for some purpose by agreeing a long lease. This gives them limited ownership and the right to use the land as agreed for a fixed period frequently a very long time, 999-year leaseholds are not uncommon. The benefit to the landowner is that they can still claim ownership of a large estate of land, which was important in the past for political power.
The usual arrangement for a block of flats is for the land and building to be owned by a Freeholder or “outright owner” and they grant a tenancy to other parties allowing them the right to occupy a part of the property. The Leaseholder or Tenant* is responsible for ensuring internal repairs and maintenance of their own property but not individually for the common areas such as roofs, walls drains and common access, halls landings, staircases or gardens.
These are the responsibility of the Freeholder as no single Leaseholder would be able to carry out the work. The cost of all building that has maintenance and insurance will be charged back to each flat owner in the form of the service charge and the role of organising this is frequently contracted out to a third-party management company or resident’s association, who would make a charge for the service provided.
For most of the time this works well but the involvement of an outright owner and management organisations can create opportunity for bad practice or excessive charges which would impact on the Leaseholders. Recently some of the national housebuilders started selling their new properties Leasehold when there was no necessity for it, they were simply trying to create the opportunity for a secondary income, a practice the Government has now stopped then doing. It is important that anyone considering the purchase of a Leasehold property fully understands what is involved, the costs and gets reassurance that everything is managed properly.
In recent years the Government has been looking into reform of the Leasehold system and it is very likely that they will put in place reforms which will restrict the control of Freeholders and give greater rights to Leaseholders, including making it easier to buy the Freehold or take over the management.
Also, professionals within the property industry have been promoting the use of a more recent form of Tenure known as Commonhold (or Freehold in Common / Shared Freehold). For example, in the case of a block of flats under a Commonhold the individual units would remain Leasehold in the usual way. The difference is that the Freehold would be owned outright by the Leaseholders as a collective group, each would have an equal share of the Freehold. As they are both Leaseholder and Freeholder there is no outside party who can dictate terms to them, they can run the property as they see fit.
To some extent this puts greater responsibility on the Leaseholders but they could still appoint an external management organisation for day to day business if they wish to. The benefit is that they retain full control and cannot be subject to unreasonable demands or charges.
At Morris Marshall and Poole we have specialists able to advise you on Leasehold concerns so, if you need any help, make contact with your nearest branch.
*Confusingly, the term Tenant is also used in short term Assured Shorthold Tenancies but the legal implications are quite different.
20th July 2018