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