Freehold vs Leasehold: What's the Difference?
There are two main types of property ownership in the UK: freehold and leasehold. 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 is vital in ensuring your lease is watertight with no hidden clauses is vital.
What is Freehold?
Freehold is the absolute ownership of both the property and the land it stands on. Freehold ownership is “in perpetuity” – that means forever. It’s “free from hold” from any third party. 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 and are responsible for its maintenance.
Most houses are freehold, but it’s still wise to double check before buying.
What is Leasehold?
Leasehold gives you the right to use or live in a property for a set period of time.
Flats are normally leasehold. The building itself is owned by a freeholder who grants an individual lease to each flat owner. The freeholder is responsible for maintenance of the communal parts of the building, such as the roof and stairway. As a leaseholder you won’t actually own the property outright, but will lease its use for a set amount of time.
The lease sets out the rights and responsibilities of both the leaseholder (flat owner) and freeholder.
Leases normally start at 99 or 999 years. When there are zero years left on a lease, ownership reverts to the freeholder. However, most flat owners extend their lease before this happens.
If the lease has less than 70 years left to run, you may have trouble getting a mortgage.
Leasehold ownership comes with regular extra costs including ground rent and service charges. It’s important to have a dependable conveyancer if you're contemplating buying a leasehold property 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.
The most common property type for a leasehold is a flat, with separate apartments leased from the overall building freeholder. 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. If you purchase a freehold home, you can change or renovate your property as you please. The biggest concern with renovating a freehold home, is if you'll require planning permission or a party wall agreement for more extensive work.
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.
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
You may have trouble finding a mortgage for a property with a lease of less than 70 years. This will affect your ability to remortgage and also to sell the property (as any buyer will also find it tricky to get a mortgage).
2. Escalating ground rent
Many leaseholds are sold with low ‘peppercorn’ ground rents. However, some leases have a clause where the ground rent increases. Some increases are reasonable but many leases on new build properties have ground rent which doubles every 10 years. This can soon make an initially affordable ground rent unaffordable for the current owner and unattractive to any buyer.
3. Rules and restrictions in your lease
Your lease will include clauses about things you cannot do in your property. While some of these might be reasonable, others will affect your day-to-day activities. For example, some leases prohibit you from having pets or installing a satellite dish. These are called restrictive covenants.
4. Lease extensions are expensive
The Leasehold Reform Housing and Urban Development Act 1993 gives leaseholders the right to extend their lease by 90 years if they meet certain criteria. But lease extensions can be very expensive.
5. Permission costs
If you want to make certain alterations to your property, you will have to get the freeholder’s permission. They will charge a fee for this permission – these fees are often excessive.
6. Conveyancing costs
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. When you buy or sell a leasehold property, you’ll pay your conveyancer an extra fee due to the extra work involved with a leasehold transaction.
7. Major works
Your lease may contain provision for the freeholder to carry out “major works” at periodic intervals. This will mean leaseholders will have to pay a “major works” bill on top of normal service charges and ground rents. Major works bills can be very high and there is often little justification that the work really needs doing. For example, your freeholder may decide to replace the roof when it can easily be repaired for less cost.
What is a Service Charge?
If you own a flat in a block of flats, maintenance and cleaning of the communal areas of the building, and buildings insurance, will be arranged by the freeholder (or their managing agent). The service charge is paid by the leaseholder.
The freeholder will decide what work will be done and by which company. But costs will be split between leaseholders. Service charges are collected in advance of any work or maintenance carried out.
Service charges may be billed monthly, twice a year or annually. Bills can be large and may often seem unfair if you don’t think the work has been done to a reasonable standard. The service charges will be outlined clearly in your lease, so ensure your conveyancer explains these in detail.
A lack of control over high service charges is a common complaint about leasehold property.
Service Charge Disputes
Disputes between leaseholders and freeholders are very common. Most disputes are about high service charges and major works bills and the service received in return.
If you cannot reach agreement with your freeholder about service charge disputes, you can take your case to the First Tier Tribunal (Property Chamber). However, freeholders will hire expensive solicitors to fight their case, so this process can be stressful and expensive.
Ultimately, if you don’t pay service charges owed, the freeholder can repossess your property.
What is Ground Rent?
Ground rent is paid by the leaseholder for “rent” of the land the property is built on.
It’s usually an annual cost and is payable to the landlord or freeholder. Most freeholders hire managing agents to collect this money.
Ground rent can be anything from £5 a year to thousands of pounds. How much it will be, and any mechanisms for increases, will be written in the lease. Keep in mind that this extra cost will be in addition to any mortgage you may be making, so always factor it in.
Your conveyancer should point out any onerous ground rent clauses in your lease.
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
The Leasehold Reform, Housing and Urban Development Act 1993 sets out the statutory process to extend your lease.
In most cases you are legally entitled to extend your lease by 90 years once you have owned the property for two years. Doing so will see your ground rent decrease to zero. But you’ll still have to pay service charges.
How much you will pay for a lease extension depends on:
- Your property’s value
- The property location
- The length of the remaining lease
- How much the ground rent is
When you extend your lease you will need to pay your own surveying and solicitor costs, plus the freeholder’s costs.
Conveyancing for Leasehold Properties
When buying a leasehold property, your conveyancer should point out any terms in the lease that may cause problems in the future, or impact your day-to-day living in the property.
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.