The different types of interests that can be sold or purchased, and the factors affecting value

Question 1

What is a freehold interest?

Answer 1

You completely own property and land it sits on (perpetual rights)

Total ownership = ‘title absolute’

You are responsible for all costs relating to property, e.g. repairs and buildings insurance

Usually no maintenance charges, unless you share any services (such as communal gardens) with neighbours

Most houses = freehold

With some flats, you may be able to share freehold with your neighbours as part of a management company

Question 2

What is a leasehold interest?

Answer 2

You own property for a set length of time = term of the lease

When term of lease runs out, ownership of property transfers to entity that owns the land (i.e. the freeholder)

Most leasehold properties = flats, though some = houses

You do not own the land the property is on, and if a flat you don’t own communal areas such as stairs or hall, nor the structure of the building itself

You will pay fees (e.g. ground rent) to freeholder

Question 3

What are the advantages of a leasehold?

Answer 3

Leasehold property = usually cheaper (because of the risks involved)

Freeholder = normally responsible for building maintenance in communal areas

Freeholder = responsible for structure and maintenance of the building

Freeholder arranges building insurance

Question 4

What are the disadvantages of a leasehold?

Answer 4

You pay SC and ground rent to freeholder, which can increase

You need written permission from freeholder to change property and may incur large fees

You may not be allowed pets

You might not be able to run a business from home

You may not be able to sub-let

The fewer years left on the lease, the harder it will be to sell the property

Conveyancing fees = typically higher when buying leasehold

You’re effectively renting and at mercy of freeholder

Question 5

What would you have regard to when disposing of a freehold or new lease over seven years?

Answer 5

Land Registration Act, 2002

Must now be registered the Land registry

Section 4 stipulates that registration of an estate in land = compulsory when one of following events occurs:

• Freehold estate = transferred, whether under a sale / gift / other circumstances;
• Legal lease for more than seven years is granted;
• Legal lease with more than seven years to run is transferred; or
• Grant of a first legal charge (mortgage).

Question 6

What factors affect the value of freehold?

Answer 6

Amount of ground rent payable by leaseholder(s) through duration of their lease and increase terms (i.e. RPI-linked etc)

Location of the property

Value of property

Number of unexpired years remaining on the lease

If freehold land has development potential i.e. could convert / construct additional dwellings and therefore create new leases = higher value freehold

Question 7

What factors affect the value of leasehold?

Answer 7

Remaining term of lease = important for 2 reasons;

• When outstanding term of lease drops <80 years, the premium to extend the lease increases because “marriage value” becomes payable.
• As a lease nears the end of its term its value drops markedly

SC payments

Ground rent payments

Major works required?

ENERGY PERFORMANCE in line with MEES!!!

Question 8

What is marriage value?

Answer 8

“Marriage value” = extra value released by marrying freehold reversion with the existing lease = difference in value between all existing interests of the long lessee, freeholder and any intermediate leases and their combined value after the grant of the extended lease.