The Difference Between Freehold and Leasehold Properties
There are many different types of properties in the UK with different legal statuses, typically Freehold or Leasehold. The difference between freehold and leasehold properties is the owner of a freehold property owns the building and the land. Whereas the owner of a leasehold property only owns the premises demised by the lease for a set period.
Everything you see, from the one-bedroom flat to the most sumptuous mansion, is most likely either a freehold property or leasehold property. Let’s take a closer look.
A closer look at freehold and leasehold homes
So, what is a freehold property and what is a leasehold?
What is the definition of a leasehold property?
A leasehold property means the property sits on land owned by a separate freeholder. A common example of a leasehold property is a flat within a shared apartment block.
The leasehold homeowner is required to pay ground rent to ensure the property remains theirs. When the lease expires, ownership of the property goes back to the freeholder. When a lease hits 90 years, it’s worth looking to get it renewed.
A Deed of Covenant is a legal document that may be associated with leasehold properties. This document outlines the responsibilities and obligations of the leasehold property owner regarding property management, maintenance, and adherence to certain rules and regulations set by the freeholder or the management company.
A leasehold property can be sold without the freeholder’s permission, but to change the terms and conditions of the lease, or to extend it, requires their agreement, usually at a price. If you own a leasehold property, you can buy the freehold, perhaps with your neighbours.
How long is the lease on a leasehold property?
The length of the lease varies, some common ones include 99, 125, 500 and 999 years.
What is the definition of a freehold property?
Meanwhile, a freehold property is one in which both the property and the land are owned outright, with no time limit.
If you buy a freehold property with a mortgage, the lender keeps this deed until you’ve paid off your loan.
You don’t pay ground rent or service charges, all the responsibility of maintaining the property will be yours.
Is it better to have freehold or leasehold?
Within England, government research shows that approximately 20% of homes are leasehold, while the remainder is freehold.
Two-thirds of leasehold properties are apartments and the rest are houses, while freehold properties are almost always houses.
What is the cost of a leasehold property?
Even though you can pay a lot of money for a leasehold property, there are other ongoing costs, such as maintenance for communal areas, that can vary depending on the terms of the lease.
Ground rent
The most common cost of a leasehold property is the ground rent, which is usually a small amount of money of between £50 and £100 a year paid to the freeholder. Some unscrupulous freeholders write clauses into leases that ramp up the ground rent as time advances, so be aware!
Sinking funds
Freeholders and their managing agents, particularly in a block of flats, will ask their leaseholders to pay into a sinking fund, which is like a savings fund to pay for major items such as a new roof.
Service charges
Leaseholders may also be asked to pay a service charge, for the maintenance of common areas such as corridors or gardens.
Extending a lease
As a lease runs out of time, ideally before it hits 80 years or under left to run, most leaseholders will extend their leases with the cooperation of their freeholder. Although, they need to have owned the leasehold property for at least two years to do so.
The cooperation of the freeholder comes at a price. As a rule of thumb, lease extension costs are approximately 10% of the property’s value. If you leave it until it’s under 60 years left to run, which is called a short lease, then leasehold extension costs can run even higher.
Lease length is also important if you want to remortgage a leasehold property or sell it – both are difficult and expensive if there are fewer than 70 years left to go.
Leaseholders must sometimes also pay their freeholder a portion of the extra value created by extending the lease, which is known as marriage value.
Buying a leasehold property
Some difficulties can arise if the lease has less than 50 years on it, as lenders like there to be at least 50 years remaining (so 75 in total). Extending the lease when it drops below 80 years tends to be significantly more money. Below 60 and it might not be re-mortgageable and difficult to sell.
Under the 1993 Leasehold Reform Act, most leaseholders are legally entitled to a 90-year lease extension at a fair price. But, before buying, you should ensure your property won’t decrease in value. Your solicitor should provide guidance here. Is this somewhere you see yourself living for the long term?
Your rights as a leaseholder
While there are charges and costs involved with being a leaseholder, but you also have rights, including:
- Knowing the name and address of the freeholder
- Getting information about service charges, insurance and running costs
- Being consulted about maintenance work
What does commonhold mean?
This is a relatively new type of ownership introduced during the early noughties that enables leaseholders to own a ‘share of the freehold’ within a building.
This is usually achieved by (a required) majority of leaseholders banding together and buying the freehold. This kind of ownership enables leaseholders to control and manage the building they live in and the costs of running it.
But, commonhold apartments aren’t found for sale that often.
Leasehold houses [new builds]
Over the years, many new build houses have been sold as leasehold properties rather than freehold ones.
Often the people buying the houses didn’t realise this because they didn’t know to ask the right questions, only to find out afterwards they didn’t own their homes in the way they had expected.
They have also faced unfair additional ground rent and service charges, and the changes they could make to their homes have been either restricted or expensive to get permission for.
Some new-build developers exploited ground rent to make money – known as the leasehold scandal. After building and selling leasehold properties, they have in the past inserted clauses into the leases that enabled the ground rent to be increased every year far beyond the usual annual £50-£100.
This has left some leaseholders with bills of several thousand pounds a year.
Regional differences between freehold and leasehold
Most of these rules and laws governing freehold, leasehold and commonhold properties detailed here apply to England and Wales.
But, in Northern Ireland and Scotland, some of them are different. For example, in Scotland apartment blocks are run by the leaseholders in a way that’s much closer to the English and Welsh common holder system described above.
So, it may be worth consulting a local property expert if you’re buying a home in Scotland or Northern Ireland.
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Last Updated: November 1st, 2024
