Leasehold vs freehold: What are the differences?
Home buyers can buy one of two types of property: leasehold or freehold. It’s important to understand the difference between the two as each one comes with its own responsibilities and financial obligations. There is also a difference in the right of ownership if you buy a freehold versus a leasehold.
There are an estimated 4.86 million leasehold dwellings in England, 71% of which are flats. For this reason, most people think of houses when they are referring to freehold properties and flats when they refer to leasehold properties, although this isn’t always the case.
Leasehold tenures have received negative press in the past, but the UK government is introducing new measures to make it financially easier for leasehold owners.
There are various legal and financial obligations for freehold and leasehold properties, so we’ve made this guide to help you decide which is the better option for you.
What is a freehold?
A freehold property means that you own the building, the land that it stands on and 500 feet of the airspace above the property. However, the mortgage company could still repossess it if you don’t keep up with your repayments. The majority of houses are freehold, although some flats may be owned by a group of neighbours as part of a freehold deal with a management company
It is your responsibility to maintain the property and land, including your possessions in and around the building and the walls and roof of the structure. You will also need to pay for repairs and property insurance.
Owning a freehold property allows you to make changes to its structure, including building extensions. However, you will still need planning permission from your local council before you can do so.
You may be able to buy the freehold of your property if you are currently the leaseholder of it. A flat can be bought as a share of the freehold, which means that you will share ownership with the other flat owners. A house can be bought as a full freehold. However, you can expect to pay more for a freehold if your previous lease was relatively short.
Flying freeholds
Some freehold properties are built over land that isn’t part of the same freehold. Most flying freeholds are found in the following circumstances:
on steep hillsbuilt across passagewaysarchesbalconies that overhang onto other propertybasements underneath neighbouring properties
Renovation work can be difficult for flying freeholds as multiple parties may not be able to agree on the ownership. This can lead to issues with cost and refusal of access which can halt the progress of renovations until an agreement can be reached.
Due to the issues associated with flying freeholds, some mortgage providers won’t make lending agreements or may place restrictions on their mortgage deals.
How much does a freehold cost?
As with house prices, the cost of a freehold property can vary. There are also additional costs that you will have to pay along with the price of the property, including:
Legal feesValuationStamp DutyLand Registry fees
What is a leasehold?
Unlike freehold ownership, a leasehold means that you own the property but not the land that the property stands on. The land is owned by a freeholder. Your ownership of the property is limited to a set number of years, decades or centuries. The exact time period will depend on the length of your lease. Once your lease expires, the ownership of the property will revert to the freeholder.
The majority of flats are sold as leasehold properties, and the freehold is owned by the builder — or the firm that the builder sold the freehold to. This is because there are multiple properties on the same piece of land. Houses, on the other hand, are simpler as there only tends to be a single property on each piece of freehold land.
Owning a leasehold enables you to live in the property for a set number of years. However, you are still legally viewed as the freeholder’s tenant for the length of the contract. In addition, you don’t technically own the property, even though you can buy and sell the house or flat.
It’s advisable to look for leasehold contracts that last for over 100 years. A lease that is under 80 years should be avoided, as it can make it difficult to sell the property or remortgage it. Lenders may also be reluctant to offer a mortgage to individuals who are looking to buy the property.
It can be expensive to extend a lease’s length, especially as the lease gets closer to expiring. If you let your lease drop below 80 years, you will have to pay 50% of the property’s ‘marriage value’, in addition to the usual lease extension price. The marriage value is how much the extension to the lease will add to the property’s worth.
What are the obligations of the leaseholder?
Leaseholders will be given a contract that states their rights and responsibilities, along with the responsibilities of the freeholder. The following are some of the conditions that are usually given in leasehold contracts:
service charge for the property’s maintenancepermissions needed from the freeholder for alterationswho is responsible for repairs (leaseholder or freeholder)any pet restrictionswho deals with disturbance issues (e.g. loud neighbours)
The leasehold contract is legally binding. In severe circumstances, you could be evicted if you breach these conditions. You might also be summoned to court and ordered to pay a fine if you damage the property.
Ground rent
Ground rent is a payment (sometimes included in the lease) that leaseholders may have to pay to their landlord. If your lease was granted before 30 June 2022, you won’t have to pay ground rent unless your landlord has sent a formal, written demand.
The landlord can take legal action if you fail to pay the ground rent after you receive the demand for it. They have up to six years to claim unpaid rent and can make you pay for it in one lump sum. Your landlord may want to increase the ground rent, but they have to confirm the new amount with you first.
If your lease was granted on or after 30 June 2022, you likely won’t be charged anything above a ‘peppercorn’ ground rent. This has a base rate of zero, which means that you won’t be expected to pay ground rent. However, it will form a legally binding contract between you and your landlord.
You will still have to pay ground rent if your lease was granted by another leaseholder before or on 30 June 2022. The charges are only applicable to new leases on or after this date.
What are the pros and cons of leasehold properties?
Pros
Most leaseholders don’t have to organise or pay for the upkeep or repairs of the property’s communal areas, both internally and externally. Your lease may also state that the freeholder has to deal with noisy neighbours or other issues rather than you. The building insurance should also be sorted out by the freeholder.
Leaseholders tend to pay a lower down payment, and the cost of purchase is usually more affordable too. Many leasehold properties have communal spaces, including gyms and large car parks that residents can use as part of their tenancy.
Cons
Ground rent is often cited as one of the main issues with leasehold properties. Leaseholders sometimes report that the cost of ground rent is so high they struggle to remortgage or sell the property. It can also cost thousands of pounds to have the ground rent removed or amended.
Service charges are also increasing and can cost some leaseholders £100s or even £1000s each year. Leaseholders usually have to pay service charges to the freeholder on a monthly or annual basis. The service charge will be written into the lease and could increase if there isn’t a cap explicitly stated.
Another problem that leaseholders may face is knowing how to extend their lease. It can cost thousands of pounds to extend a lease or buy the freehold. Some leaseholders find that they aren’t told how to extend a lease or how they can buy the freehold property.
What are the pros and cons of freehold properties?
Pros
A big advantage to being a freeholder is that you will have complete ownership of the land and property. You also won’t have to pay ground rent or service charges to a landlord. Freeholders don’t have to ask permission to do things such as extend, make home improvements or keep pets on the property. However, you will still need to get planning permission from the local council or authority.
It’s usually easier to remortgage or obtain a bank loan for freehold properties. They also tend to have better financial appreciation in the long term. You won’t have to keep an eye on the length of a lease to see when it runs out or pay to extend it (which can be very expensive).
Cons
Freehold properties can be expensive to purchase because the cost covers both the property and the land that it is located on. This also means that you could be paying out a lot on maintenance costs as you are responsible for the whole estate, as well as building insurance.
Most freehold properties are also houses instead of flats, which could limit your choice if you want to buy a flat. This also means that you probably won’t be able to find a space for communal living, as most freehold properties are on their own land and don’t tend to have space that is shared.
FAQs
Can I buy the freehold of a leasehold property?
As a leaseholder, you can apply to buy the freehold, which means that you will own the land on which your property is built. You can ask the landlord of your property to sell the freehold at any time. However, there are different steps that need to be taken depending if you live in a flat or a house.
Leaseholders who own flats can band together to buy the freehold of the property they live in. Leaseholders who own houses also have a legal right to submit a formal application to buy the freehold if they meet certain criteria. This can be done via a formal procedure, which has strict timescales that are set out by law. The formal route offers you more protection if you and the freeholder cannot agree on the terms of the sale or the price.
However, leaseholders can also approach the freeholder informally and ask if they would consider selling. The freeholder is under no obligation to respond, but if they agree, the freeholder and leaseholder will have to negotiate and come to an agreement about the sale.
The informal process of buying a freehold can save time and money, but you may have to go down the formal route if the initial informal negotiations fail.
Summary
A leasehold is when you own the property but not the land that it is on. The land is instead owned by the freeholder, and your ownership of the property is limited to a certain number of years. In comparison, buying a freehold means that you own both the property and the land. You don’t have to consult anyone when it comes to alterations or domestic issues (such as keeping pets), although you will have to gain planning permission to extend or do major work on the property.
There are many advantages and disadvantages to being either a leaseholder or a freeholder. For one, freeholders have complete ownership of the property and the land that it is on, but equally, you are fully responsible for its maintenance and insurance as a freeholder. On the other hand, you will have an expiration date on your ownership of the property as a leaseholder, but you don’t have to pay for repairs or maintenance of the building.
