Do you know your Flying Freehold from your Private Ownership? Your Commonhold from your Joint Ownership?
Understanding the ins and outs of different models of property ownership is important from a legal perspective, as the different types carry with them various rights and obligations.
But it also matters from an investment and operational point of view. Depending on what you wish to do with your property, certain ownership models will have benefits over others in terms of the decisions you can make and the returns they make possible.
Over the next couple of blogs, we shall look at the advantages and disadvantages of different property ownership types for commercial investors, starting with freehold and leasehold.
Freehold vs Leasehold
These two terms describe a fundamental distinction applicable to forms of property ownership or tenancy – whether the rights to the land/property are held outright by named parties (Freehold), or whether rights of ownership or occupancy are let from a freehold owner (Leasehold).
Leasehold covers a wide range of different arrangements, including many occupancy agreements made between a landlord and a tenant. However, particularly in their longer forms (999 years is not uncommon), leaseholds operate more like an alternative ownership model to freehold, providing the holder with virtually the same rights and responsibilities as an outright owner in return for a (often nominal) ‘ground rent’.
Leasehold is considered a type of ownership because, for the length of its duration, the lease gives the holder rights to the property as stipulated in the contract. The lease, and the rights it provides, can be sold on the open market. As an investment opportunity, leasehold therefore offers the same opportunities to get a return as a freehold – you can rent/sublet the property out to generate income, or you can sell the lease on.
In addition, leasehold offers lower capital outlay than outright purchase, while properties with a good rental yield offer good ROI and strong resale value. However, the devil is in the detail of the leasehold contract – the length of the lease, the rights and responsibilities of the leaseholder versus the freeholder, payment arrangements and renewal dates.
Freehold affords much greater control over a property, especially if you want to purchase for redevelopment. There is also a question of who takes responsibility for what. With certain leaseholds, the freeholder can still retain rights over repair and maintenance, which can suit some people, but also introduces the risk of disputes. In arrangements involving three different parties – the freeholder, leaseholder and tenant – who pays for and does what can be a common cause for headaches.
Another thing to be aware of with leaseholds is that the owner retains the right to sell the freehold on, regardless of the situation with the lease. It is not unknown for freeholds to be sold without the leaseholder having any knowledge, and then the new owners immediately looking to renegotiate the terms of the lease.
A Flying Freehold refers to any part of a property which overhangs, or literally ‘flies over’, an adjoining property. It describes ownership situations with walkways, external staircases, rooms over shared passageways and balconies.
Flying freeholds are considered problematic because the owner may not have rights of access. This anomaly in ownership law has led to some investors and mortgage lenders shying away from properties with a flying freehold.
Fairhurst Estates has decades of experience in property investment and asset management. If you would like to learn more about the comprehensive list of services we offer to commercial property partners, call us on 0844 879 3613 or email email@example.com