MYTH #14: When it comes to buying a property, freehold is always better than leasehold.
You are about to purchase your first home — a proud and momentous occasion. Currently, there are many options available in the Bermuda real estate market and determining the perfect property for you can take some time and effort.
One of your first considerations might be whether to purchase a freehold property or a leasehold property.
If you choose a “freehold” property then you will become the outright and permanent owner of both the property itself and the land on which it stands, whereas with a “leasehold” property you will own the interior of the property for a fixed period of time subject to terms and conditions included in the lease.
Typically, freehold properties tend to be stand-alone houses or cottages whereas leasehold properties are usually condominium units.
However, leasehold ownership may be more common than you think. For example, townhouses on smaller development sites are often unable to get planning permission for sub-division into individual freehold lots, and so the developer will often use a leasehold structure instead.
The type of property being purchased should be one of the first questions that you ask as a purchaser.
But is leasehold property an inferior product to freehold?
Are there any pitfalls to buying a leasehold home by comparison with freehold?
In this simple guide to buying leasehold, we take a look at some of the main issues to consider when buying this type of property.
What is a lease?
A lease is a contract between the leaseholder and the landlord that gives you ownership for a fixed period, subject to the terms stated therein.
The common term of the lease is 999 years, so there is usually no danger of the lease expiring during the owner’s lifetime or otherwise running down to a point where the value of the property is reduced.
You will typically find that a company is incorporated to hold the freehold of the land on which the property stands, with leaseholders being given an equal share in the company following the sale of the last property in the development. The benefit being that the leaseholders will collectively own and control the property as a whole and, if the need arises, can extend the term of their leases.
What does it mean to be a leaseholder?
Leaseholders own the interior non-structural parts of the property with the structure of the building and external grounds being retained by the freeholder.
It means that you own, and are responsible for, the maintenance of everything within the property (e.g. internal surfaces, fixtures and fittings and typically the doors and windows).
The landlord is responsible for the maintenance, repair and management of the building structure, common areas (e.g. hallways, stairways) and exterior grounds.
The lease will outline your obligations as tenant, and will include keeping the property in good condition, behaving in a ‘neighbourly’ fashion and not doing certain things (e.g. alterations to the property) without the landlord’s consent. Rules and regulations included in leases can be pretty restrictive, but they are intended to benefit all owners.
Be careful not to breach the terms of your lease; your neighbours will not be happy, and the landlord ultimately has the power to forfeit (i.e. terminate) your lease if you don’t remedy a breach.
What about maintenance fees?
Maintenance fees are payable by the leaseholder to the landlord for the services provided to maintain the property, and typically cover maintenance and repairs, building insurance and cleaning of common areas.
There may also be a charge for managing the building, which is typically performed by the landlord or an agent.
You may also be required to pay into a reserve (sinking) fund each year to cover any major expenditure for the property.
What services the landlord will perform and how the fee will be split between leaseholders is set out in the lease.
Maintenance fees are variable on an annual basis, and the level at which they are set is controlled by the landlord.
Watch for expensive upcoming costs, for example an elevator or roof replacement, as owners must contribute toward those costs unless there is an adequate sinking fund.
It is advisable to check the landlord’s accounts for the last few years and ask questions of the landlord to ensure you understand how the maintenance fee is calculated and what charges are likely to arise.
Leaseholder owners may also be invited to sit on an association or board, which can be formed to make decisions related to the maintenance and governance of the development.
Be pro-active and see if you can get involved — it may give you the chance to play a part in some of the important decisions being made as to how your hard-earned money is spent.
Leasehold: a sound investment?
When considering your options, you should keep in mind the principal differences between leasehold and freehold ownership.
With leasehold properties, you don’t own the property forever. You own it for the length of time stated in the lease (typically 999 years as stated above).
There will be more rules about what you can and cannot do with the property and in some cases it is possible to lose your property if you break them.
However, these cases are rare, and you will be given the opportunity to remedy any breach and/or challenge any such action.
You will have to pay a maintenance fee for the upkeep of facilities shared with other owners.
However, when compared to the typical costs paid by freehold owners for the upkeep of their entire properties, costs may well be comparable, and payment towards a sensibly administered maintenance scheme should be seen as a benefit and not a penalty.
Some people would urge caution when buying leasehold property, but provided that the lease is well drafted and the building is properly managed, there’s no reason why a leasehold property shouldn’t be a good home and a secure long-term investment.
The important thing is to ensure that the lease protects your interests.
No two leases are the same so it’s important that you seek legal advice to clarify your rights and responsibilities as the leaseholder.
Darren Donnithorne is a Senior Associate at Marshall Diel & Myers Limited and the Head of the Property and Estate Planning Team. He may be contacted at firstname.lastname@example.org or by calling 1-441-295-7105.