property

London Property – Leasehold vs. Freehold

Heath Hall London

Leasehold v Freehold – what’s the difference?

It may seem like technical legal language, but there are few things more important about your home than whether it is freehold or leasehold. It makes the difference between owning your own home outright, and having a landlord

What are the different forms of home ownership?

There are two fundamentally different forms of legal ownership: freehold and leasehold. Although estate agents tend to gloss over it, the difference can be between a home that is worth buying and one that isn’t. Many people who don’t sort this out when they buy a home end up regretting it – getting it wrong can be hugely expensive.

What is freehold?

If you own the freehold, it means that you own the building and the land it stands on outright, in perpetuity. It is your name in the land registry as “freeholder”, owning the “title absolute”. Freehold is pretty much always the preferred option: you can’t really go wrong with it.

  • You won’t have to pay annual ground rent
  • You don’t have a freeholder either failing to maintain the building, or charging huge amounts for it
  • You have responsibility for maintaining the fabric of the building – the roof and the outside walls
  • Whole houses are normally sold freehold – there is no reason for a standalone house to be leasehold though there is an increasing trend for leasehold houses, so check before you buy

What is leasehold?

Leasehold means that you just have a lease from the freeholder (sometimes called the landlord) to use the home for a number of years. The leases are usually long term – often 90 years or 120 years but as high as 999 years – but can be short, such as 40 years.

  • A leaseholder has a contract with the freeholder, which sets down the legal rights and responsibilities of either side
  • The freeholder will normally be responsible for maintaining the common parts of the building, such as the entrance hall and staircase, as well as the exterior walls and roof. However, other leaseholders might have claimed their “right to manage”, in which case it is their responsibility
  • Leaseholders will have to pay maintenance fees, annual service charges and their share of the buildings insurance
  • Leaseholders normally pay an annual “ground rent” to the freeholder
  • Leaseholders will have to obtain permission for any majors works done to the property
  • Leaseholders may face other restrictions, such as not owning pets or subletting
  • If leaseholders don’t fulfil the terms of the lease – for example, by not paying the fees – then the lease can become forfeit

    Disputes between leaseholders and freeholders

    It is very common to have tension between freeholders and leaseholders.

    • Fees are a major source of contention, with leaseholders often feeling their freeholder is over charging, but being able to do little about it. While the ground rent usually costs in the region of £100-250, even on ordinary flats the annual charges can amount to over £1000 a year
    • Leaseholders often complain that freeholders don’t maintain the building to a sufficiently high standard, or keep common areas clean and tidy
    • Freeholders often complain that leaseholders breach the terms of their lease, for example by making too much noise or not getting permission for building works

      The declining value of leaseholds

      When the term of the leasehold goes down to zero years, then the property reverts to the freeholder. So, if you have a 40 year leasehold, you only have the right to use the property for 40 years before it goes back to the freeholder. A lease with a term of zero years is clearly worthless, and all other things being equal, the shorter the lease, the less it is worth. The value of long leases stays fairly stable, but the value of short leases can drop rapidly. For example, a flat with a lease of 60 years is worth more than 10 per cent less than if it had a lease of 99 years – you might think that a flat is worth £200,000, but actually it is worth less than £180,000, with the difference in value being owned by the freeholder.

      Should I avoid buying a property on a short leasehold?

      Leases of less than 90 years can start to be problematic for leaseholders, and should be approached warily. Certainly, any lease of less than 80 years can start to significantly affect the value of the house. If you have a short lease, the property can decline in value even if property prices in your area are generally rising. This means that fewer people will want to buy it when you resell; it also means that mortgage companies might be reluctant to lend on it.

      Extending your lease

      A series of Government acts have given leaseholders protection against short leases, by giving them the right to extend their lease or the right to buy the property – but this can be very expensive indeed. The law is slightly different depending on whether you have a house or flat:

      Flat:

      • You normally have the right to extend your lease by 90 years on top of your unexpired term
      • If so you won’t have to pay any more ground rent and you can negotiate new terms for the lease, like who pays for works on the flat
      • However, you only have the legal right to do this if you have held the lease on the property for 2 years and it was originally leased on a “long lease”, usually more than 21 years.
      • You will have to pay a premium for extending the leasehold.
      • Many people considering buying a short leasehold property (generally less than 80 years) insist that the leaseholder extends the lease before they buy it.
      • After you tell your landlord that you qualify for the right to extend the lease they can accept your offer, negotiate, or reject your offer. If they do the latter you can challenge them in court

      House:

      • You might have the right to extend your lease by 50 years on your house
      • If so you can renegotiate the terms of your lease, like who pays for works on the house
      • However, you only have the legal right to do this if you have held the lease on the property for 2 years and it was originally leased on a “long lease”, usually more than 21 years
      • Unlike flats, you don’t have to buy a lease extension for a house, but your ground rent is likely to go up
      • You should get a professional to help you extend the lease. For example, if you live in a converted house the rules for extending a lease on a flat might apply instead
      • After you tell your landlord that you qualify for the right to extend the lease they can accept your offer, negotiate, or reject your offer. If they do the latter you can challenge them in court

        Buying the freehold on a leasehold property

        You might also have the right to buy your house or flat outright, so that you own the freehold. This is called ‘enfranchisement’. While there are complicated legal procedures and legal costs involved this process of enfranchisement can be invaluable. Again, the law depends on whether you have a house or flat. Ensure you get professional advice and assistance.

        What is commonhold? 

          • Commonhold is a variant of freehold, created by the Leasehold Reform Act of 2002, which overcomes some of the worst aspects of leaseholds.
          • Commonhold is where a multi-occupancy building is divided into a number of freehold units, so each individual flat owns its own freehold. The common parts (staircases and hallways etc) are owned and managed by a Commonhold Association, a company that is itself owned by the freeholders of the flats.
          • This means there is no superior freeholder, but rather the owners of the flats manage the common and external parts of the property jointly. This protects people both from greedy landlords, and from the problems of short leases.
          • But, as with any form of community ownership, problems and conflicts can arise between members of the Commonhold Association. Moreover, only about 15 to 20 commonholds have been completed in the UK.

article originally published by hoa.org.uk

Dubai Freehold Property

dubai freehold property

Dubai has become one of the world’s most sought after places for foreign investors. In the last few years there have been changes to the law which have made Dubai freehold property available to foreign investors. It is now fairly easy to purchase real estate in Dubai, subject to the usual conditions such as the ability to finance. Always get expert advice to help you negotiate the local laws and regulations in this booming middle east country.

Buying Dubai Freehold Property

Determine what type of property you are interested in. Foreign buyers often choose to purchase either apartments, townhouses, or villas, which are generally located in secure complexes with elaborate leisure facilities such as tennis courts, swimming pools and gyms.

  • In 2002, by royal decree, foreign nationals became eligible to buy and own property in Dubai.
  • Ensure you are looking at an area in which foreigners are allowed to buy property.
  • Some of the most popular, luxurious and expensive developments include Emaar Towers, Jumeirah Gardens, International City and Al Hamra Village.

Start your search online. As with any property search, a good place to start is online. There are numerous agencies and real estate agents that list properties for sale in Dubai online. You can buy properties through a real estate agent or direct from a developer. Real estate agents generally sell resale properties, which are properties that have been built and have previous owners. Developers sell pre-construction properties off of a plan, and these may be prior to any construction, or still under-construction.

Contact a local real estate agent. If you want help with your search, you will need to speak to someone with specialist local knowledge about the property market in Dubai. It’s always best to employ a real estate agent to work with, as they can help you to find properties and explain your options to you. Big real estate companies are used to dealing with foreign buyers and will speak English.

  • Laws and regulations can change quickly in Dubai, so hiring an agent will help you avoid any potential pitfalls.
  • In Dubai, the buyer pays the real estate commission; you can expect to pay a fee of between 2% and 5% of the value of the property.
  • You should always check the credentials of anyone you hire. The regulatory body for Real Estate in Dubai is the Real Estate Regulatory Agency (RERA).

Attend property fairs. The property market in Dubai is still relatively young, although growing fast. As a result, a significant amount of property bought by foreigners is bought pre-construction from developers. Property fairs are a popular way for developers to present their proposals and meet potential buyers. These property fairs are held all over the world, so look for one visiting a city near you.

Visit Dubai. Before you think about making a move for a property be sure that you have spent a little time in Dubai. If you are buying a resale property ensure that you view as many properties as you can, and ask the same questions you would ask if you were buying property anywhere else in the world.

  • If you are buying off-plan or construction is not complete, make sure you go to see similar properties by the same developer that are finished.
  • When you are in Dubai, you will also have access to paper listings in specialist local newspapers and magazines, and be able to attend the property fairs that continue all year.

 

Meeting Eligibility and Financial Requirements

 

Have the required ID and visa documents. Since a change to the law in 2002, it has become possible for foreigners to buy and rent Dubai freehold property. You will, however, still need to present a valid passport to prove your identity. You are not required to hold any type of residency permit in order to buy property, but assuming you want to stay there you will have to have this available.

  • The UAE government has a six month visa for property buyers, called the “Property Holders Visa.”
  • This allows foreign investors to stay in Dubai for six months while they investigate possible purchases.
  • To qualify for this, the property you buy must have a value greater than 1 million dirhams, which is equal to about $272,000 U.S. dollars.
  • You must be buying as an individual, and not as a company.

Determine the full costs. You need to be certain that you can afford the property and meet all of the costs attached to the purchase. When you are determining the overall cost of the property you should include the purchase price, the deposit, transfer fees, real estate agent fees and the potential for currency exchange rates to fluctuate.

  • It is not legally necessary, but it is highly advisable to employ a lawyer to help you negotiate all the paperwork.
  • Include the costs of a lawyer in your calculations.
  • A new-build property will likely require a land registration fee of around 2%

Get a mortgage in Dubai. Mortgages can be difficult to obtain in Dubai. Non-status/self-certification mortgages are not available and the amount of red tape and paperwork involved can be off-putting to those accustomed to a less rigorous system. In some cases, buyers may be required to put down between 20% and 50% of the value of the mortgage in cash.

  • Mortgages in Dubai are paid in monthly installments, with 15 year terms the most common. Residents of India cannot mortgage their property in Dubai and raise loans. Indian residents are also not permitted to give a guarantee to any loan from a non-resident.
  • The maximum length of mortgage term in Dubai is 25 years.
  • Mortgage repayments, combined with any other monthly expenses, must not exceed 35% of net monthly income.
  • As foreign exchange can be tricky, it is advisable to obtain professional advice before deciding to take out any mortgage in a foreign currency.
  • Mortgage rules have been known to change in Dubai, so try to keep up-to-date by consulting local news and the Central Bank of the UAE.

Buying Pre-Construction in Dubai

 

Submit an application form to the Developer. If you are buying pre-construction property, the first step once you have decided on the property you want and secured all the financing, is to submit a completed builder’s form. This form will summarize the basic terms and conditions of the sales agreement, including information on the payment plan, and personal information from all parties.

  • You will be required to submit your passport along with the reservation form.
  • Be aware that some developers are still selling leasehold rather than freehold titles. If this is the case, the title is valid for the period stipulated in the lease agreement.
  • Ensure you fully understand the details of the contract and have it checked by your lawyer.
  • If the property is not yet complete, make sure you know what responsibilities the developer has if it is delayed for any reason.

Pay the deposit. Once the reservation document has been accepted you will have to pay the reservation deposit. The amount will be stipulated in your application, but it will typically range between 5% and 15% of the purchase price. Developers will often not draw up the official sales and purchase agreement until this deposit has been paid, and will sometimes charge up to 20% or more.

  • When buying pre-construction, you should ensure that the deposits and payments you make are paid into a RERA-approved trust account.
  • These payments are then transferred to the developer as the construction work is completed.

Complete a formal sales and purchase agreement. The formal and legally binding contract is the sales and purchase agreement. Make sure this specifies the date by which the property should be completed, and what penalties the developer will incur if it is delayed. Have a lawyer look over the contract with you, and check all the details, terms and conditions.

  • If the property is supposed to be furnished, ensure that a date for when that will be done is included in the agreement.

Transfer of the deed. To complete the purchase there is a transfer of deed into your name. This is the point at which you will be required to pay 100% of the purchase price. The deed will not be transferred, and you will not own the property until you have paid, so you must have financing in place.

  • If the property has been fully completed, the transfer will happen at the Land Department Office.
  • If it is yet to be finished, you will transfer the deeds at the developer’s office.
  • You will then generally be invited to inspect the property and highlight any final issues or deficiencies that the developer needs to address.

Buying Resale Property

 

Sign a Memorandum of Understanding. To purchase resale property in Dubai you must agree to terms with the seller, and record this in a Memorandum of Understanding (MOU). This is a basic document that outlines the terms and conditions, including the price and closing date of the purchase. It is not legally binding, but is a necessary first step to buying resale property.

Pay the initial deposit. Once the MOU is signed, the purchaser will have to pay the deposit, typically around 10% of the purchase price. This deposit is normally non-refundable, unless there is a particular reason why the seller is unable to bring the transaction forward.

  • At this point you will also have to pay the real estate commission, normally between 2% and 5%.

Obtain the deed. Once you have an agreement and financing in place, you can move on and complete the purchase. As an expat you will be required to pay 100% of the purchase price before the deed is transferred, just as if you were buying a pre-construction development. To do this, you may need to attend an appointment at the Land Department and present all the paperwork.

  • The buyer, the real estate agent, and the loan officer from the lender who is financing the purchase may all be required to attend the meeting at the Land Department.

We hope you have found this guide to buying Dubai freehold property both useful and interesting.