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Mortgages and homes guide: Leasehold vs freehold - right to buy,,,

Leasehold or freehold?

If you own a house then the chances are you own the freehold, meaning that you own the property and land it is on lock, stock and barrel.

However, if you own a flat chances are that you own it on a leasehold basis, (this is likely to be the case even if you have a share in the building's freehold.)

Home-ownership explained: Freehold and leasehold have different implications

Leasehold means that you have the right to occupy a property a property for a set period of time (the length of the lease), but do not own the building itself.

The advantage of owning property freehold, or having a share in the freehold of a property is that you are either totally in control, or have a say of what happens with the building, and in the latter case any repairs or service charges.

Leasehold

More than 2m people own a property on a leasehold basis, where they own the right to occupy, but not the building itself.

But thanks to changes made over the past decade, they have the right to get together with their neighbours and buy the landlord out, so owning the property together and exercising real control over their lives.

If you 'buy' a leasehold flat, you don't actually own the property. All you own is the right to live there for a specified period of time - however much time remains on the lease. Many leases are granted on a 99-year term while some run for 999 years. Most banks and building societies are happy to lend on property that has at least 75 years unexpired on the lease.

Share of freehold

In recent years the option to become a share of freehold owner has become much easier. This allows you to own your flat outright. Essentially it works by the owners of leasehold flats buying the freehold off the freeholder and then all owning a share of it.

Your property will still be owned leasehold but the new freehold organisation can grant new leases of long length, say 999 years, with a peppercorn ground rent.

This is preferable for technical reasons to owning a flat freehold, which causes problems with insurance companies and mortgage lenders.

Once you have a share of freehold flat you will then have a share in the common areas of the building - roof, walls, stairs and hallway - and be partly responsible with the other commonholders for the upkeep of those areas.

Previously, most flats were owned on a leasehold basis. This meant they were held on long leases that run for 99 years. After that their ownership reverts to the landlord of the building the flat is in, who pays no compensation to the tenant.

Leaseholders can also be prey to landlords who may demand exorbitant management fees, charge for building insurance at vastly inflated rates and threaten to evict anyone who refuses to pay up. Landlords can also stop leaseholders selling their flats.

Buying a property's freehold is a legal process and will require solicitors. The best way to find out more is to visit Government-funded Lease which gives free advice.

What happens in share of freehold

Under the new rules, upkeep of all the common areas of a building is the responsibility of the shared freeholders. The idea is that an association is set up to manage the communal areas of the building. Flat owners who do not want to get involved in the extra work this may involve can appoint a managing agent.

Share of freehold can work out cheaper as owners will not be prey to the over-charging endemic in the leasehold sector. They will be able to negotiate their own service fees with cleaners, find the best-value buildings insurance and get a better price for building repairs than landlords often do.

The price of a share of freehold flat could well be higher than a leasehold one, but any difference is likely to be small unless a leasehold flat has a short lease remaining. This would come from the fact that leaseholds dwindle over the years and so the nearer they get to the end, the less they are worth.

• The Government-funded Lease organisation gives free advice. Call 0845 3451993.

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