Buying the Freehold of a house – is it worth it?

When buying a property there are two types of ownership that you will often come across which are freehold and leasehold. Freehold properties mean that you own the property and the land that it sits on while leasehold means that you own the property but not the land that it sits on. In this article, we’ll look at differences between leasehold and freehold properties and why you might want to purchase the freehold.

Are all houses sold on a freehold basis?

Most people often assume that houses are sold on a freehold basis and flats on a leasehold basis but there are plenty of new-build houses that are sold on a leasehold basis. When you purchase a leasehold property, a lease is agreed between the freeholder or landlord and the leaseholder to enable the use of the land upon which the property is situated for a fixed period of time. Common lease agreements are 99, 125, 500 or 999 years. Anything below 80 years is considered to be a short lease and this can be expensive to extend – often making the change to freehold an attractive option.

Eligibility of buying the freehold

The Leasehold Reform Act 1967 Legislation gives leaseholders the right to buy the freehold of a property, as long as a few requirements are met. To be eligible the current lease must not be a commercial lease and it must have a duration of at least 21 years. The property in questions must meet the following eligibility criteria:

  • If the property is split into flats, it must contain at least two flats
  • At least 2/3rds of the property should be owned on a leasehold basis (or both flats if there are only two)
  • The property must not be part of a charitable housing trust, National Trust or cathedral precinct

If all of the eligibility criteria have been met, then the freehold of the property will need to be valued which is known as collective enfranchisement for flats and freehold enfranchisement for houses.

Costs of purchasing the freehold

There are three factors that will be used to calculate the cost of the freehold of a property which are:

  • The current value of the property
  • The annual cost of ground rent
  • The number of years remaining on the lease

Valuing the freehold of a property is a complex process that will require the help of qualified and experienced solicitors as well as surveyors. There are two methods that will be used to value the property under the rules of the 1967 Act which are:

  • • Original Valuation – The property will be valued based on the original value of the site and properties will need to meet the value limits and the lease would need to qualify under the original low-rest test.
  • Special Valuation – If the property doesn’t meet the criteria of the original valuation method, then it would be valued on a Special Valuation basis using a marriage value. The marriage value is an increase in the market value of a property following a lease extension. When purchasing the freehold, 50% of the marriage value is added on top of the cost of the Freehold.

The freehold valuation is complicated and requires the assistance of professionals in order to help determine what the costs will be. On top of the cost of the freehold cost there will also be additional costs such as legal fees, property valuation fees, stamp duty and Freeholder’s fees that will need to be considered.

Is it worth buying the Freehold of a house?

When it comes to houses, it usually makes sense to purchase the Freehold as it gives you more control of the property and the maintenance of it. You will be free from paying annual ground rent and gain independence from any landlord. As you will own the ground that your property sits on you will also be free to make any alterations such as building an extension without seeking permission from the owner of the leasehold.