The debate of whether to live in an apartment or house is nothing new. For many, renting may seem like the only option when considering an apartment, but ownership may also be something you can achieve with this type of housing.
Can you own an apartment? You can buy an apartment, but it’s a more complicated process than buying a house. This is because when you buy an apartment, you don’t buy the land outright. A house, unlike an apartment, is a freehold property, which means you own the home as well as the land on which it is built, whereas a leasehold is where you purchase the right to occupy a property that you share in one way or another with someone else. Apartments are leasehold because you share a complex or building with other people, and the same goes for all shared ownership properties, which you share with a housing association. Furthermore, as a leaseholder, you own the property for a set period, which can be centuries, decades, or a number of years. If this period runs out, ownership of the property technically passes to the freeholder.
Owning an apartment, like with any other property, is an investment and a great way to build equity, but the responsibilities it involves should also be taken into consideration. Read on to discover what owning an apartment entails.
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What are the different forms of legal homeownership?
There are two main forms of legal ownership: leasehold and freehold.
What is freehold?
If you own the freehold of a property, it means that you own the building as well as the land on which it stands on outright, in perpetuity. Therefore, your name in the land registry appears as “freeholder”, and you own the “title absolute”. In most cases, freehold is aways the preferred option, for several reasons:
- If you own the freehold, you don’t have to pay the annual ground rent
- You don’t have to worry about a freeholder either charging you huge amounts of money to maintain a building, or failing to do it all together, as with a leasehold.
- You are responsible for maintaining the outside walls and roof of the building.
What is leasehold?
When you have a leasehold, it simply means that you have a lease from the freeholder (sometimes referred to as the landlord) to use the home for an agree upon number of years. It’s worth noting that you don’t own the land on which the property is built. The leases are typically long term – often 90 years or 120 years, and can even be as high as 999 years – but be short term in some cases, such as 40 years.
- A leaseholder has a legal agreement with the freeholder, which spells out the rights and responsibilities of either party.
- The freeholder is usually responsible for maintaining the common areas of the building, such as the roof and exterior walls, as well as the staircase and etrance hall. However, in some instances, a leaseholder might have claimed their “right to manage”, in which it falls on them to do maintenance.
- Leaseholders are required to pay maintenance fees, their share of the building insurance, and annual service charges.
- Leaseholders must seek permission of the freeholder for any major works to be carried out on the property.
- Leaseholders usually pay an annual ground rent to the freeholder.
- There may be some restrictions that the leaseholder has to contend with, such as not subletting or owning pets.
- If the leaseholder fails to fulfill the terms of the contract, then the lease can become forfeit.
Does the value of leaseholds decline?
When the term of the leasehold comes to an end, then the ownership of the property reverts to the freeholder. Therefore, if you have a leasehold of 40 years, you have the right to use the property for 40 years before its ownership goes back to the freeholder. The shorter the lease, the less it’s worth. The value of long leaseholds is relatively stable, but the value of short leases can decline rapidly.
Can you buy the freehold on a property that is on leasehold?
Leaseholders of apartments have a joint right, with other apartment owners in the building, to buy the freehold of the property. This is referred to as the right of “freehold enfranchisement”, and it means that the leaseholders get to become their own freeholder.
Buying the freehold isn’t something that you can do on your own – you have to convince your neighbors involved too. According to the law, at least half of the leaseholders can buy the freehold of the building together from the freeholder/landlord. Upon doing this, the apartment owners would:
- Own the freehold of the building. They may have to form a limited company that they own and control.
- They would still have a long lease – but instead of it being from the previous freeholder, it would now be from the new entity that owns the freehold that they now control.
Once you and your neighbors jointly own the freehold, you can take it upon yourselves to set ground rents and look for the most suitable insurance.
Do you qualify to buy the freehold?
Some of the general requirements that a group of leaseholders have to meet to buy the freehold include:
- The building must contain at least two apartments.
- At least two-thirds of the apartments need to be owned by leaseholders who have long leases
- At least half of the total number of apartments in the building must be under the ownership of leaseholders who want to buy a share of the freehold. If there are only two apartments in the building, then both leaseholders must be willing to buy the freehold.
Should you buy the freehold?
It may be worth considering buying the freehold if:
- You have a difficult relationship with your current freeholder or you simply prefer not to have to deal with a non-resident freeholder
- You’re willing to go through the process of buying a share of the freehold with your neighbors and manage all that needs to be done as a group.
- Your lease has around 85 years or less to expire. When a lease hits the 80-year mark, it gets much more expensive to extend, and it becomes harder to buy the freehold, which makes your apartment much less valuable and more difficult to sell. Buying the freehold can add value to the lease, especially to one that is under or close to 80 years.
- You (plus the leaseholders) need to be able to afford to buy the freehold. It’s important to have a freehold valuation done so that you have an idea of the freehold purchase price.
What’s the cost of buying the freehold?
Just like with property prices, freehold prices also vary. That said, the shorter the lease, the pricier the freehold. To purchase your share of the freehold, you will need to pay your apartment’s share of:
- The buying price for the freehold
- The cost of a valuation surveyor
- Legal fees for the leaseholders
- Stamp duty land tax
- The legal and valuation fees of the freeholder
What is the “Right to Manage”?
If you and other apartment owners in the building are unable or unwilling to buy the freehold, you may still be able to get the right to manage your building. You can form a “right to manage” company that is made up of you and fellow leaseholders to take over the management of the block, or to appoint your own managing agent. However, the freeholder still owns the building.
As with the process of buying the freehold, the eligibility requirements are the same, and you’ll need legal assistance as well. However, there are some key differences:
- Exercising the “right to manage” is much cheaper as you don’t have to buy the freehold
- The value of your apartment won’t increase with this option
- The freeholder still needs to be informed of modifications and lettings as required under the lease. Additionally, the freeholder still deals with lease extensions and can also serve as a member of the right to manage company.
Pros and cons of owning an apartment
Buying an apartment may not seem worth the hassle when you consider the fact that it may be leasehold, but there may be some pros to this venture especially if you’re dealing with a reliable freeholder. They include:
- You don’t have to worry about dealing with the upkeep and repairs of communal areas of the building as it is the responsibility of the freeholder.
- The terms in your lease agreement mean that if you encounter any issues, for example, rowdy neighbors, you can rely on the freeholder to deal with it.
- The building’s insurance is typically paid by the freeholder (though you’ll still have to contribute to the cost in the form of a service charge.
There are some issues that leaseholders may have to deal with which renters and owners of freehold properties don’t:
- You might need to pay an annual service charge or ground rent, both of which can be costly.
- You may not have permission to carry out major renovations or extension works.
- If your freeholder intends to carry out major works to the property, you may have to share the cost if this is what your lease stipulates.
What are some common disputes between leaseholders and freeholders?
Tensions frequently flare between leaseholders and freeholders for a variety of reasons:
- Leaseholder charges – This is the most common dispute, where the leaseholder feels that the freeholder is overcharging them. There are three main types of fees that a leaseholder is expected to pay:
- Ground rent – This is payable as rent for sharing the land that the building is on. This is usually a nominal fee that goes straight to the freeholder.
- Service charges – These are spent on the maintenance of the land, building, and any common areas. For a sizeable building, the service charges may include building insurance, surveyors fees. legal/admin expenses, special contracts (lifts and parking control, for example, cleaning and gardening of communal areas, and repairs and maintenance to the communal areas and grounds.
As a leaseholder, you have the right to know what the service charges are spent on, how they’re calculated, and have the right to access and view any paperwork related to your service charges.
- Major works – Any major work undertaken by the freeholder must follow a well-defined consultation process.
- The freeholder failing to comply with the code of practice – It’s not uncommon for the freehol of a building to be bought and sold by third party investors. This can make it difficult for a leaseholder to engage the freeholder directly in regards to fulfillment of their obligations, especially if the freeholder has appointed a managing agent who is performing poorly.
- The leaseholder failing to maintain the property to acceptable standard – With an increasing number of buy-to-let properties in recent years, this can happen when the property is sub-let. In such cases, the leaseholder is still responsible for maintaining the property and paying the service charges, even though they’re renting out to a tenant.
- The leaseholder breaking the conditions of the lease – Another common issue is the leaseholder or the tenant they’re renting out to behaves in a manner that is contrary to the terms of the lease, for example by making too much noise or not obtaining permission before carrying out building works.
What can you do if you face issues as a leaseholder?
If you run into issues with your freeholder, you may have the following options:
- Speak to other leaseholders – If you live in a block of apartments, other leaseholders may have had the same issues with the freeholder. It may be worth talking to your neighbors, because if they have had the same problem, you’ll be able to build a stronger case to the freeholder if you raise the issue together.
- Make the freeholder aware of your complaints – Some issues, especially those that are not significant, may be resolved by communicating with the freeholder. You can either write a letter or try to resolve the issue face-to-face.
- Use an independent mediator to settle the dispute – Another option is to use an independent and impartial mediator to help work out issues between you and the freeholder so that you don’t have to go to court.
Owning an apartment is a possibility, but it’s not the same as owning a house. Owning a leasehold property is common, but this unique type of homeownership is complex. Therefore, it’s important to do as much research as you can so that you’re prepared to handle it.