Freehold vs Leasehold: What's the Difference?
Written by Martha Lott
12th Mar 2019 (Last updated on 3rd Mar 2020) 8 minute read
Whether your property is Leasehold or Freehold is an important distinction. When you’re purchasing a home, knowing whether you own it in perpetuity or are simply leasing it for a set amount of time is vital.
In this guide Compare My Move explain freehold and leasehold, highlighting the main differences between the two methods of home ownership. There are a huge amount of legal nuances in owning a leasehold property, and this guide will explain all of the different aspects involved.
Using reliable conveyancing solicitors to ensure your lease is watertight with no hidden clauses is vital.
What is Freehold?
Freehold is the absolute ownership of a property and the land it was built on. Although the process of buying a house is never truly simple, the idea of freehold is straightforward: you are the owner of the property and land in perpetuity and are responsible for its maintenance.
What is Leasehold?
Leasehold is when a tenant temporarily owns a property, leasing the home from the landlord or freeholder. Flats are the most common example of a leasehold property, as you can imagine an array of leased flats under the overall freeholder of the building. As a leaseholder you won’t actually own the property outright, but will lease its use for a set amount of time. After the lease ends, the property reverts back to the freeholder.
Leaseholds are usually for an extended period of time, usually over 90 years, and in some cases up to 999 years. Any lease shorter than 90 years will affect the ability to get a mortgage and the value of the selling price.
You’ll likely pay ground rent and service charges to the freeholder during your tenancy. You’ll have to pay these fees on top of mortgage payments, so it’s important that these costs are taken into account in your budget.
It’s important to have a dependable conveyancer if you're contemplating purchasing a leasehold home to ensure you understand every aspect of the lease agreement.
Difference Between Freehold and Leasehold
The main difference is that a freeholder owns the property in perpetuity, whereas a leaseholder owns it for a period of time before ownership reverts back to the freeholder. Freeholders own the property and the land it sits on, and may lease the property for a set period of time to the tenant or leaseholder.
Leaseholders will pay ground rent to the freeholder, and will also pay for ongoing maintenance fees. Freeholders are responsible for the condition and maintenance of the external walls, communal areas and roof.
A leaseholder will generally have to get permission from the freeholder to change or extend the property. The most common property type for a leasehold is a flat, with separate apartments leased from the overall building freeholder.
Disadvantages of Buying Leasehold Property
The main disadvantages of buying a leasehold property stem from the fact that you don’t own the property outright. The freeholder has set the terms of your lease, so you’ll usually be limited in what you can do to the property without their approval. Further problems can arise from hidden clauses and restrictions. This then escalates ground rent, or short leases causing the resale value to drop.
Luckily the major issues are only in the minority of cases. You’re likely to have no issues purchasing a flat on a long lease with nominal ground rent and a fair contract.
Possible disadvantages of buying leasehold property include:
1. A short lease makes it hard to sell
As a rule of thumb, you won’t be able to arrange a mortgage on a property with a lease of less than 70 years, as the property will become untenable to future buyers. Leasehold properties on very short leases will drop in value, and in extreme situations causes the tenant to be stuck unable to sell.
2. Escalating ground rent
Many leaseholds are sold with ‘peppercorn rents’, nominal ground rents which are kept at a low rate. However some leases may have a clause where the ground rent increases, which can be a big issue if the cost increases over the lease. Ground rent that doubles every 10 years for example is not only a huge cost for yourself, but makes it unpalatable to a new buyer. A decent conveyancer is important to ensure you’re informed about ground rent.
3. Rules and restrictions in your lease
Your contract will include rules on noise and other elements to ensure peaceful living in your neighbourhood, but your lease might also include rules which affect your quality of life. For example, a ban on keeping any pets could be an issue depending on your particular circumstances.
4. Additional leasehold costs
You’ll need to get the freeholder’s approval to extend your property or amend your lease in any way. Dealing with certain freeholders may incur many extra costs, even for just processing a request. For example covering the legal fees of your freeholder’s solicitor to approve an extension to your property. It’s also worth noting that the cost of conveyancing for a leasehold property will be higher than average because the leasehold itself has a range of complexities.
What is a Service Charge?
The service charge is paid by the leaseholder to the landlord or freeholder to cover the maintenance, cleaning and repairs of the building and communal areas. As a leaseholder, you’re generally not responsible for the maintenance of the building. But you’ll still have to pay your fair share of the costs involved.
Think about it in terms of a modern block of flats: the service charge covers cleaning of the communal area, the wages of the front desk workers, and any larger maintenance work.
The services and cost will be outlined in your lease, but may include:
- Maintenance, cleaning and repairs
- Concierge services
- Management fees
- Building insurance
Service charges are collected in advance of any work or maintenance carried out, so the cost may change from year-to-year depending on the property. The service charges will be outlined clearly in your lease, so ensure your conveyancer explains these in detail.
What is Ground Rent?
Ground rent is paid by the leaseholder for the land the property is built on. It’s usually an annual cost and is payable to the landlord or freeholder. Keep in mind this extra cost will be in addition to any mortgage you may be making, so always factor it in.
The cost of the ground rent varies, with some freeholders charging a few hundred pounds a year, and other charging lower than £50. ‘Peppercorn’ ground rents could be as a low as £5 a year.
Your ground rent will usually be a fixed amount for your entire lease, but in some cases there might be a clause in the lease which allows for an increase. A common example of this is increasing in line with the Retail Price Index.
Uncommon examples include clauses which lead to a large escalation in ground rent after a set amount of time. Stories of ground rent doubling every 10 years demonstrate how it’s of vital importance to understand your ground rent fees completely.
You conveyancer should ensure any issues are explained. Remember that the property could become unsalable if it has a huge ground rent increase.
Leaseholder Rights and Responsibilities
Although the freeholder is responsible for the building as a whole, you’ll have responsibilities outlined in your lease to ensure your property is kept in good condition. Your responsibilities and rights include:
1. Paying the service charge
If you pay service charges, you have a right for a summary about how the charges are spent and any receipts. You can also request details on the insurance policy you’re paying towards through the service charges.
2. Right to Manage
If you have issues involving the management of the property such as unexplained service charges, you can use a tribunal to appoint a new manager. There are also avenues for the leaseholders of a flat to take over the management of the building through Right to Manage. Once this is done it can be easier to extend the leasehold.
3. Right of first refusal
If your landlord wants to sell the freehold to your home you’ll get the right to first refusal as the leaseholder. This means you’ll be offered the chance to purchase the freehold if the landlord is selling it.
Extending Your Leasehold
If your lease has less than 90 years until it ends, your property will likely start to lose value. If your lease drops too low, it’s may become unsalable as mortgage lenders won’t take the risk on short leaseholds. In these situations it’ll be worth extending your lease, as the cost of the extension will add value to the property if you look to sell.
If you’re eligible you can extend your leasehold by 90 years at any time. To be eligible you need to have owned the lease for at least 2 years and it must be a long lease. Extending your leasehold can cost a large amount in legal fees, with costs skyrocketing if you want to extend a short lease. There’s little point in extending a very long lease by 90 years, as it wouldn’t add value. You’ll need a solicitor to extend your lease, and will also need to fund a valuation.
Remember that in the eyes of the law you’ll continue to be a tenant after your lease runs out, on the same terms unless the landlord changes it.
Conveyancing for Leasehold Properties
There are a huge amount of legal nuances involved in purchasing a leasehold property, to ensure of no issues further down the road. You need an independent, reliable conveyancer to ensure clarity on points such as ground rent, service fees and lease length.
You can use Compare My Move to connect with up to 5 regulated conveyancers and property solicitors in your area. Fill in a quick form, and get matched with experienced conveyancers to take you through the leasehold process with ease.