Leasehold vs. Freehold

Leasehold vs Freehold

What is Freehold? What is Leasehold? And What’s The Difference?

Freehold and leasehold are the two types of home ownership in the UK and determine who owns and is responsible for a property. Whether you buy a freehold or leasehold property will determine the extent of your ownership and also your rights to develop and also inherit the property. Navigating the property market can be confusing, especially for a first-time buyer. If you’re looking to buy a property in England, knowing the difference between freehold and leasehold properties is important. This guide will answer all of your questions about the two types of property available for purchase in the UK and help you to decide which one is for you.

Contents:

  • What is the Difference Between Freehold and Leasehold?
  • What is a Freehold Property?
  • The Benefits of Buying Freehold Property
  • What Does Share of Freehold Mean?
  • What is a Leasehold Property?
  • The Benefits of Buying a Leasehold Property
  • Selling a Leasehold Property
  • What is a Commonhold Property
  • What is the Leasehold Scandal?
  • What is Ground Rent?
  • Advice for Buying a Leasehold Property?

What is the Difference Between Freehold and Leasehold?

In basic terms, if someone owns a freehold property, they own both the property and the land the property was built on. A leasehold property owner, on the other hand, does not own the land, just the property.

What is a Freehold Property?

When you buy a freehold property, you are buying both the property and the land it was built on. Freehold properties are usually houses rather than flats. This makes freehold properties often more expensive than leasehold properties. However, when buying a freehold property, you are not risking being faced with annual ground rent or service charges for your property.

As you are the only owner to your freehold property, applying does not require the approval of the state, which means less paperwork is required, making it an easier process. 

A freehold property is yours until you want to sell it, which means your property is also inheritable. As a freeholder, the property is entirely yours, meaning you can use or develop the land as you like, as long as you comply with local regulations. A freehold home buyer is responsible for all maintenance of their property which includes repairing any damages.

The Benefits of Buying Freehold Property

Pros of Being a Freeholder:

  • The property is inheritable
  • Does not require consent of the state (less paperwork)
  • Full control over the property

Cons of Being a Freeholder

  • Can initially be more expensive than a leasehold
  • You are responsible for all maintenance
  • Conveyancing fees are likely to be higher

What Does Share of Freehold Mean?

When you buy a share of the freehold of a property means that you will share the freehold with other owners. There are different ways this can be done. 

One way is that the freehold ownership is shared between all the flat owners of a building. This can be done with up to four flat owners and the freehold will be held in their personal names. Another way that a share of freehold can be set up is that a company owns the freehold and each of the tenants in the building own a share. Share of freehold ownership is usually set up to divide the responsibility of upkeeping any common areas and also the service charge payments. 

The benefits of having shared ownership is that you have greater control over a shared property, which can keep you protected in the event that you have an unfair landlord. It should ensure that a shared building is kept to a higher standard as the responsibility of upkeep isn’t left to one person or organisation. 

The other main benefit of having a share of freehold on a property is that it is your legal right to apply for a lease extension at no extra cost, which can save you huge amounts of money.

What is a Leasehold Property?

The majority of flats are sold as leasehold properties, and the freehold owner is usually the building firm. The lease on a leasehold property will eventually run out and when the lease expires, you will no longer own anything. A leasehold flat or house may seem cheaper than a freehold property, however as a freeholder, you may be faced with service charges, ground rent, a percentage of the buildings insurance as well as admin fees on top of the initial cost of the property. When buying a leasehold property, it’s important to check the paperwork to ensure that the ground rents cannot be increased or sold to a third party.

As a leaseholder, you might be limited as to the number of changes you can make to the property. Whilst you may be allowed to redecorate, there may be restrictions on making larger structural changes or keeping pets. The freeholder of your building will also be responsible for any maintenance of the property as a whole, which includes repairing any damages.

If you are sharing a building with other tenants, a block of flats, for example, you may benefit from communal spaces such as gardens, a reception area or gym. These are some of the things that any maintenance fees you have to pay will cover. The freeholder will normally be responsible for maintaining the communal areas of the building such as the entrance hall, exterior walls, roof and public gardens. However, leaseholders have the right to claim for the Right to Manage, which makes this maintenance their own responsibility.

In some circumstances, when the lease expires, you will have the right to extend the lease. However, this isn’t guaranteed. This is also something you would need to check before making a leasehold purchase. 

When purchasing a leasehold property, it is important to thoroughly check the paperwork of your lease agreement to ensure you know your rights. It’s also worth enquiring how much extra it would cost to buy the freehold. If the extra amount is within your budget, it’s worth considering whether this would be a better and more secure option.

The Benefits of Buying a Leasehold Property

Pros:

  • The initial cost is often cheaper than a freehold
  • You may have access to a communal area of the building such as a gym, reception or gardens
  • The freeholder is responsible for maintenance of the property as a whole

Cons:

  • Can be faced with additional charges on the property (ground rent, service charges, etc)
  • May be unable to perform major work or redecoration on your property
  • The lease on your property can expire
  • Selling a leasehold property can be difficult

Selling a Leasehold Property

Selling a leasehold property can be complicated because it’s value will change depending on the length of the lease. Whilst properties typically increase in value over time, a leasehold will decline in value as the lease declines. The lower the lease becomes, the more the value of the property will drop. For this reason, potential buyers should be careful when looking at properties with a short lease (a lease length of fewer than 80-90 years). To increase the resale value of your property, you could apply to extend the lease however this can cost you some of the value of your property (as much as 20%).

What is a Commonhold Property?

Commonhold is a type of leasehold property created by the Leasehold Reform Act of 2002 in an attempt to overcome some of the downsides to becoming a leaseholder. Commonhold is where a shared building such as a block of flats divided into a number of freehold units, so each individual flat owns its own freehold and the communal areas are owned and managed by a Commonhold Association. Commonhold properties are relatively uncommon in the UK; only around 15 to 20 have been setup.

What is the Leasehold Scandal?

The leasehold scandal occurred during 2017 in the UK and involved new build houses. Many new build owners discovered that they had bought leasehold houses instead of freehold properties, when the freehold on these properties was sold to a third party who increased the ground rents, causing many tenants to be facing extortionate fees on their homes, which left many homeowners unable to sell or remortgage their properties. This is why checking the paperwork of a property to see who owns your freehold when purchasing is so important, as they can always sell it on and leave you faced with extra charges.

What is Ground Rent?

Ground rent is a payment a leasehold owner makes to the freeholder. The ground rent payment will be specified in the lease. These specifications will include the amount of the ground rent and when it’s due to be paid. Ground rent can be fixed or escalating. Fixed ground rents will remain the same throughout the lease, whilst escalating ground rent will increase over the course of the lease. You only have to pay ground rent if the freeholder has formally requested it.

Advice for Buying a Leasehold Property?

Before purchasing a lease on a property, read the paperwork of your leasehold agreement thoroughly to know your rights and make yourself aware of any extra charges. Remember to check whether you will be able to renew your lease after the number of years . Also, make sure that you have the contact details of everyone including the managing agent or management company of your freeholder in case you ever need to make a complaint after moving into a leasehold property.