Freehold vs Leasehold – what is the difference?

This is a question our conveyancing solicitors get asked on a daily basis. The blog post below breaks down the difference between the two forms of property ownership, the benefit of each form, as well as various other factors.

What is a freehold?

A freehold is when you own the building and the land that it stands on, although, there are restrictions on the depth of the land beneath the property and the extent of the sky above. The property is normally registered in your name at the land registry as the owner of the freeholder title in perpetuity. As a buyer, freehold is the optimal title.

Benefits of buying a freehold property

  • Unlimited period of ownership  

  • Not subject to annual ground rent fees

  •  You don’t have a freeholder failing to maintain the building, or charging you large amounts for it

  • You have sole responsibility for and control over the maintenance of the building, including the upkeep of the exterior

Whole houses are normally sold freehold, however, there is an increasing trend for leasehold  sales of houses (particularly with new build houses) so it is important that you check before you buy.

 What is a leasehold?

A leasehold property is the purchase of the property for a fixed term, but not the land that it is built on. You have an agreement with the freeholder which sets out the terms of your ownership, known as a lease.  Leases are usually long term and can range from 40 – 999 years.

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. Other leaseholders, however, might have claimed their “right to manage”, in which case it is their responsibility.

In most cases, leaseholders pay an annual “ground-rent” to the freeholder.

Benefits of leasehold

  •  Leases regulate responsibilities of the freeholder (landlord) and the leaseholder (tenant). The also regulate obligations between leaseholders in the same building

  • The responsibility and cost of repairs and maintenance is shared between leaseholders

  • There is still the possibility of buying the property outright, through enfranchisement, or share of the freehold.

Problems with leasehold

  • If leaseholders don’t fulfil the terms of the lease – for example, by not paying rent or service charges fees – then the lease can be terminated by the freeholder. (known as “forfeiture”)  

  • Leaseholders will have to obtain permission for any major work or alterations

  • Leaseholders will have to contribute to maintenance costs through a service charge and their share of the building’s insurance. In addition, most leases require the payment of ground rent which in some cases can be substantial.

  • Restrictions, such as not owning pets or subletting.

Disputes between leaseholders and freeholders

It is not uncommon for tensions to arise between freeholders and leaseholders.

In our experience, they often arise due to:

  • Service charge issues.

  • Building maintenance.

  • Breach of the lease terms           

The declining value of leaseholds

The value of a short-term lease will generally decline in value because once the lease comes to an end the leasehold title is extinguished and you no longer have the right to use the property.  Leases of less than 90 years can start to be problematic for leaseholders and should be approached with caution. If you have a short lease, the property can decline in value even if property prices in your area are 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. It can however be possible to agree an extension of a lease, but the landlord will normally expect a payment for agreeing to this.

Buying the freehold on a leasehold property

You may have the right to buy your house or flat outright this is called ‘enfranchisement’. While there are detailed  legal procedures and legal costs involved with the process of enfranchisement, it can be a very beneficial step for the leaseholder Ensure you get professional advice and assistance from one of our experienced property solicitors.

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 several 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 together. This prevents problems of short leases and unethical landlords.

Property Solicitors

Located in London, our property lawyers provide advice in relation to a wide range of commercial and residential property transactions and represent clients involved in property disputes. Our conveyancing services include, but are not limited to:

  • Purchase lease and sale of commercial premises such as offices, shops, restaurants, manufacturing and warehousing units.

  • Related funding and mortgage arrangements.

  • Property management and leasehold enfranchisement.

  • Development agreements and related planning requirements for the purchase, sale and granting options over development land and agricultural holdings.

  • Lease extensions, variations and options.

  • Resolution of property disputes.

 

For more information on leasehold and freehold contact our experienced conveyancing team. Louise O'Farrell, Mahak Mohsin & Peter Phillips will help guide you in making the best financial decision.

What is Conveyancing?

Buying or selling property can be tricky and extremely time consuming. Navigating the legal

field can be exhausting, and legal terminology can often prove confusing.

Luckily, we are here to help simplify the concept to ensure you know exactly what

conveyancing is and how it effects the buying and selling of your property.

What is conveyancing?

In a nutshell, conveyancing can be best described as a legal process by which property is

transferred from one owner to another. The process involves a conveyancing solicitor or a

licenced conveyancer who acts on behalf of the buyer to ensure their clients receive the

legal title to the property.

Conveyancing effectively encapsulates the entirety of the legal and administrative work

required to ensure your home or commercial property is transferred to you and any

mortgage is registered correctly.

The process typically has two main phases; exchange of contracts and completion.

What does Exchange of Contracts mean?

Exchange of contracts can be described as the point at which the contract for the sale

becomes legally binding. Before the exchange, the solicitor or licensed conveyancer will

need to conduct various searches and legal tasks. Only after this is carried out, can exchange

of contracts take place. It is usually conducted over the telephone and it is important to

note that both the buyer and the seller can withdraw from the transaction up until this

point without being held financially liable.

What happens on the Completion date?

The completion date is the point at which the ownership of the property is transferred to

the buyer. On completion day, the buyers’ solicitor will arrange for the purchase money to

be sent to the sellers’ solicitor, who will arrange for the keys to the property to be handed

over to the buyer.

How long does the conveyancing process take?

Typically the conveyancing process can take around 8 to 12 weeks, however, it is important

to note that conveyancing deals with people and not just property; each situation and

transaction is unique and unless you find experts such as our team at Philips Lewis Smith, it

can be a difficult and stressful process.

Our conveyancing team, made up of; Louise O'Farrell, Mahak Mohsin and Peter Phillips

have many years of experience in commercial and residential property and will be

there to guide and keep you in the know every step of the way.

Why do you need us?

Whether you are buying or selling a property, getting in touch with one of our

conveyancing solicitors will ensure you get the right advice, at the right time.

Phillips Lewis Smith Solicitors

Our conveyancing solicitors are situated just five minutes away from Charing Cross

Station. We are in the heart of the West End of London and are accredited members of

the Law Society’s Conveyancing Quality Scheme .

At Phillips Lewis Smith, not only do we recognise the importance on the providing legal

services of an exceptional standard, but also, the importance of keeping you informed and

guiding you through the conveyancing process. For specialist Conveyancing legal advice, visit

our website, or contact us on Tel +44 (0)20 7925 2244.

Mediation Of Commercial Disputes – How it works and tips for getting the right result

Mediation became a recognised method for resolving commercial disputes nearly 15 years ago. The initial impetus for mediation came via a review of the rules governing civil litigation in 2000. Since then there have been further changes to the rules and various court cases on the subject, which together have cemented the position of mediation as an important method for resolving most types of commercial dispute.

In principle almost all forms of commercial dispute are amenable to resolution through mediation. Rare exceptions are for example those cases where it is essential to obtain an urgent injunction in order to protect assets or prevent some form of significant and imminent harm.

The main driver behind the popularity of mediation has been the saving of cost and time that would otherwise be involved in the litigation process.

Nevertheless, many mediations take place under the umbrella of ongoing litigation. This is because typically the parties will want to gain a reasonable understanding of the nature of the dispute before engaging in mediation. The litigation process facilitates this, so that many mediations take place once the parties have exchanged statements of case and completed the disclosure process. Other mediations do not take place until a later stage, for example following the exchange of at least some evidence including expert evidence.

Even though cost and time may have been expended in the litigation process by the time that mediation takes place, a successful mediation will of course avoid the further cost and risks involved in taking the case onward to trial.

Despite the popularity of mediation, many commercial organisations still have little experience of the process or how best to prepare for it.

The nature and key stages of mediation are as follows:

Legal foundation

First and foremost, mediation is a consensual process, meaning that the parties and the mediator have a degree of flexibility as to how the mediation should be carried out. Whilst neither party is absolutely required to engage in mediation, the court may impose heavy cost sanctions on a party who unreasonably refuses mediation. In practice the question for the parties is therefore not whether to mediate but when to do so.

The mediator will be independent of the parties and qualified to act as mediator. The parties’ lawyers will be able to suggest appropriate mediators for a given case and the identity of the mediator must be agreed by all parties.

The mediator will prepare a formal agreement to mediate, setting out the role of the mediator, the status of information produced during the process and other matters. Once signed, the parties and mediator will be bound by the agreement. The key elements of the agreement to mediate will be that nothing raised in the mediation can be referred to in any ongoing litigation, the mediator cannot be called to give evidence in the litigation, and no settlement will be created until a formal settlement agreement has been drawn up and signed.

Once they have engaged in a mediation the parties are not required to conclude a settlement – however if a settlement is not possible it may nevertheless be possible to narrow some of the issues in dispute.

Format

Most mediations follow a fairly well-trodden path, comprising:

Opening

Although the parties will be housed in separate rooms during the mediation, the mediator will normally invite them to join in an opening session. In this session the mediator has the opportunity to introduce the parties, to explain the format of the mediation and build a rapport with them.

The mediator will also ask the parties if they wish to make an opening statement. This can be useful to help the parties engage with each other and provide their perspective of the dispute. However the practice of opening statements is now somewhat in decline since they can often be no more than a generic statement of the approach that the party intends to take to the mediation – which is not of particular benefit to the process.

Nevertheless, a joint opening session can be of benefit in that it can enable all concerned to establish a connection to enable discussion and to focus attention on the key issues in dispute and how best to approach them through the mediation.

Investigation

Once the parties have returned to their separate rooms the mediator will hold private sessions with each. These are on a confidential basis: nothing said in them can be reported to the other party unless the mediator is specifically authorised to do so.

At this stage the mediator will be aiming to fully understand each party’s key motivations, concerns and objectives, and to help them discuss openly the strengths and weaknesses of their case.

Negotiation

During this phase the mediator will encourage the parties to exchange offers and counter-offers for

settlement. These are put via the mediator and although the mediator will therefore be acting as a conduit, he or she will also try to increase the prospects of the parties finding common ground. This can  be done by reality testing the parties’ positions with them and if necessary mentoring them in the negotiation process.

The parties will also be encouraged to explore creative options for settlement, many of which would not be potential outcomes of the litigation should it proceed to trial.

Settlement

If it is possible to reach agreement in principle, it is then necessary for the agreement to be formalised through the drafting and negotiation of a settlement agreement. This process may take several hours since the agreement will need to cover all issues and deal realistically with all contingencies that may arise.

Normally all concerned will want the agreement to be completed and signed by all parties at the mediation itself. The settlement agreement will be a legally binding agreement, enforceable through proceedings if necessary.

Following the mediation an order can be made by consent in the litigation that will either bring the case to an end there and then, or to defer that step until the terms of the settlement agreement have been performed.

Tips for getting the right result at mediation:

  • Pick the right mediator

    There are many qualified mediators, ranging across most professions and areas of expertise.

    Consider any particular expertise that the case might require (accountant, surveyor, engineer, lawyer) and nominate accordingly. Mediators also vary in style and approach so it is helpful to take guidance and judge who is most likely to facilitate settlement bearing in mind the characteristics of the parties.

  • Play the right team It is essential to have a representative who has authority to agree any likely terms of settlement. Secondly it is important to have representative who is fully familiar with the detail of the issues in the case so that these can be addressed if necessary. Finally in practice it is often helpful to also have a senior representative who has not had day to day involvement in the case and who is therefore able to take a dispassionate and objective approach to both the dispute itself and the negotiations. This person may also be able to open a separate channel of communication with the other party that is not confined to the issues in the case.

  • Be prepared

Ensure that the team is fully aware of the format that the mediation will take and the contributions they are expected to make to the process. Review key documents from the case and those prepared for the mediation. Consider and identify the essential “bottom line” settlement terms you are aiming for and those that are desirable but not essential.

Be prepared to compromise – settlement via mediation inevitably involves each side making certain concessions in order to find common ground. The art is to secure your essential settlement terms.

  • Don’t be bounced

Parties will sometimes seek to apply pressure for the conclusion of settlement terms on the day of the mediation. Whilst it is best to try to conclude a settlement there and then if possible, this is not a requirement. It is perfectly feasible to agree terms in principle on the understanding that time is needed to reflect before finally completing a settlement agreement. The settlement can then be concluded at a later stage.

  • Work with the mediator

Show the mediator why your position is reasonable and get him or her on side. If you can have the mediator believe in your position and approach, he or she is much more likely to persuade the other party to make concessions to achieve settlement.

Preparing for and completing a successful mediation therefore requires thorough preparation and often intense work at the mediation itself. Such investment is however often rewarded either by the settlement of the dispute at the mediation or subsequently, or failing that, at least the establishment of a dialogue, a better understanding of the other party’s position or the narrowing of issues in the case.

Minority Shareholder Protection – What Redress Can The Minority Shareholder Obtain?

As explained in the article “Protection for Minority Shareholders – Courts prepared to Shift the Balance of Power”, where minority shareholders have suffered unfair prejudice due to the mis-management of the company, the Courts are now prepared to provide redress in a wide variety of circumstances and against a broad range of parties.

However, any minority shareholder considering such a claim will want to focus clearly on the potential benefit in bringing the claim. Under the Companies Act 2006 the Court has wide powers: it can make such order as it thinks fit for giving relief in respect of the issues complained of. The Act goes on to give examples of relief that can be granted – the most common of which is an order for the purchase of the of the minority member’s shares either by other members or the company itself.

Other (less frequently granted) relief includes an order that the other members restore money that they have improperly diverted away from the company or to pay the company compensation for the damage caused by their wrongdoing.

If the Court orders that the minority shareholder’s shares are to be bought out, the immediate question arises as to the basis on which those shares are to be valued. This subject has been dealt with by the Courts in many cases and the key points regarding the basis of valuation can be drawn from them as follows:

  • If assets have been misappropriated, their value can be added back for the purpose of valuing thecompany and therefore the minority shareholding

  • There is no general rule that the valuation of the shareholding should either be on a pro rata basis o ron the basis that it is discounted due to the fact that it is a minority holding. However, a pro rata basis will generally be exceptional and there will normally be a discount for minority unless there are exceptional circumstances or the company was run as a quasi-partnership

  •  If the company was run as a quasi-partnership, the shareholding will normally be valued on a pro rata basis. The logic here is that the claim in a quasi-partnership is normally founded on a breakdown in trust and confidence between the parties and that in order to be free of those obligations the majority must buy the entire business.

  • Even if the shareholding is a fraction under 50% (in one case it was 49.96%) it is still a minority holding and will be valued as such – generally with a discount for minority

  • If the shareholders are investors it is more likely that the court will make a discount for minority

  • The date of valuation will normally be the date on which the purchase order is made. However the Court will consider an earlier valuation date (for example the date on which the proceedings were commenced or the date of the acts complained of). Some examples of instances where the Court has ordered an early valuation date are:

  • Where the company has been deprived of its business and it is fair to the minority shareholder that the valuation should be at a point in time before this occurred

  • Where the company has been reconstructed or the business has changed significantly prior to the order. This can occur where for example the business has been built up significantly after the minority shareholder ceased to be involved and in that situation the Court may deem it unfair that the valuation should include the post – departure improvement in value

  • If there has been a general fall in the market since the claim was brought, and the Court has registered strong disapproval of the respondents’ conduct If the respondents have been guilty of severely prejudicing the minority shareholder(s) and/or have refused to engage constructively in negotiations aimed at resolving the minority shareholder’s claim

  • Generally interest will not be awarded. The key parameters for valuation under a purchase order are therefore reasonably clear. In principle at least, a minority shareholder who is considering an “unfair prejudice” claim can therefore make a reasonable estimate of the value of the shareholding and hence the claim before embarking on the claim process itself.

Nevertheless, the Court will need to be guided by independent expert valuation evidence. Fairness would suggest that each side ought to be able to bring forward expert evidence. However, there have been cases recently where the opposing expert evidence has been wholly at odds, leading the Court to comment that this is unhelpful and that it is preferable for there to be a single joint expert. In this way the potential for the experts to present opposing extremes is avoided.

A minority shareholder considering the option of an unfair prejudice claim can therefore take these valuation points in to account when assessing the risk/reward ration of actually pursuing the claim

E U Succession Regulation: A Guide For Clients

Which country’s law will govern your estate when you die?

If you own a property in the EU or have other connections there, then the answer to that question may have changed on 17 August 2015 when the EU Succession Regulation (also known as Brussels IV) came into force. It is important to review your will and estate planning in the light of this major change in succession law.

What does the Regulation do?

If you have connections with more than one country, you need to know which country’s law will govern who inherits your estate when you die. This is important because the laws of many countries in continental Europe (and some further afield) provide that certain shares in your estate are reserved for close family members. This is known as forced heirship. For example, under English law, you can usually leave your property to whoever you want in your will, but under French law, forced heirship provisions may apply: if you leave both a surviving spouse and children, there are restrictions on how much of your estate you are allowed to leave to your spouse. If a person dies with connections to both England and France, to which assets will English or French law apply? Each country has its own rules to decide which law applies (known as conflict of law rules), but the interaction of these rules is often complicated and unclear, making it uncertain who will inherit your estate.

The Regulation aims to reduce this uncertainty by introducing common conflict of laws rules for the EU member states to which it applies.

Does the Regulation affect me?

The UK has in fact opted out of the Regulation, but the Regulation still affects the way that UK conflict of laws rules interact with the rules of EU member states where it does apply.

In summary, the Regulation affects you if both of the following apply:

(1) You have connections with more than one country (for example, you have a property abroad or you are a national of one country but live in another), and

(2) At least one of the countries concerned is an EU member state where the Regulation applies; that is, any member state except the UK, Ireland or Denmark.

The Regulation applies when someone dies on or after 17 August 2015, but may change the effect of wills or other estate planning put in place before that date.

Which country’s law applies to my Estate under the Regulation?

Because the UK has opted out of the Regulation, the default position for UK nationals is that the existing conflict of laws rules still apply. This may not have the effect you want. Under English conflict of law rules, for example, succession to land (“immovable property”) abroad is governed by the law of the country where it is located, and the succession to any other assets is governed by the law of the country where the deceased was domiciled at his death.

The default position under the Regulation (in its application to any UK national) is that their property situated in any EU Regulation State, i.e. outside the UK, Ireland and Denmark, will pass in accordance with the law of the EU state in which they are habitually resident. But of course if they are resident in England, the law here says that the succession to land is governed by the country where it is situated. It is to avoid such problems that the Regulation allows people who own property in any Regulation State to elect in their will that the law of their nationality should apply to the succession to all of their relevant EU property.

For example, a person with UK residence and nationality who owns holiday homes in France and Italy (which also has forced heirship rules) can elect in their will for UK law to apply to the entirety of their estate. Such an election then overrides any provision to the contrary under either French or Italian law.

Do I need to change my will?

If the Regulation affects you, we strongly recommend that you review your will (or make a will if you don’t have one) to ensure that your estate will pass to your chosen beneficiaries in the most tax-efficient way and to minimise the risk of costly disputes.

It is particularly important to be aware that your existing will may be treated as making a choice of law, even if it does not mention this. This may mean that your will does not have the effect that you expected.

We can advise on wills and other estate planning tailored to your specific circumstances, taking into account your residence, domicile and nationality status as well as any changes that you expect in the future. For more details, please contact Tessa Manisty or any member of our private client team - our e-mail addresses are in the section “our people” or call 0207 925 2244 (if calling from

abroad, +44 207 925 2244).