You may have heard the terms ‘leasehold’ and ‘freehold’ when it comes to property but what do they actually mean? In a nutshell, they are the most common types of land tenure and legal ownership available when buying a property.
Here we discuss the differences between leasehold and freehold properties and the potential issues you may face as a homeowner of each property type.
Please note these apply only in the English and Welsh property markets as both Scotland and Northern Ireland have their own policies.
How do I know if my new home is freehold or leasehold?
Your new home builder should tell you if the property you are interested in buying is freehold or leasehold. If this information is not forthcoming, then ensure you ask them this important question. It is legally required that all properties for sale state if the tenure is freehold or leasehold. Whilst leaseholds were once most common in flats, there has been an increasing amount of new build houses with leasehold attached.
Freehold vs leasehold – What is the difference?
What is a freehold property?
Freehold property includes owning both the building and the land it is built on. This also includes the airspace above the property up to 500 feet as indicated by the Civil Aviation Act 1982.
How long is a freehold?
A freehold can last forever. The owner has the permanent, absolute ownership of the property and land unless they decide to sell the freehold.
Advantages of a freehold property
Freehold properties are usually the preferred option when the budget is not a problem. By owning both the building and land outright, you will not have to pay any ground rent on the property. Standalone houses are usually freehold.
Disadvantages of a freehold property
- Freehold is the more expensive option of the two as the price will be increased to reflect the value of both the building and land.
- Owning the freehold means being responsible for all upkeep and repairs of the home and its land, which can be expensive and time-consuming. This includes all the parts of the building, including any outside walls.
What is a leasehold property?
Leasehold properties tend to be more complex than freeholds. A leasehold property comes with a legal agreement (known as a ‘lease’) between the leaseholder and the freeholder for a fixed period of time. The leaseholder is entitled to buy and sell the property during the lease period, but will not own the land it is built on – this is owned by the freeholder. There are an estimated 4.2 million leasehold properties in England.
How long do leaseholds last?
Leaseholds are usually agreed on a longterm basis and can be anything from 40 – 999 years. The standard length is around 125 years. Leaseholders should be aware that any leasehold under 80 years can make getting a mortgage or remortgaging more difficult and may face outright rejection from some mortgage providers.
In some cases, leaseholders have the right to extend their lease or can negotiate a longer lease before entering into an agreement.
What are the rights and responsibilities of a leaseholder?
The leaseholder essentially becomes a ‘tenant’ of the freeholder and the property is returned to the freeholder after the fixed lease agreement period ends.
The leaseholder will have rights and responsibilities that are set out in their lease agreement. These will include all charges payable by the leaseholder (e.g. ground rent and service charges). It will also outline what repairs and maintenance they are responsible for, as well as what they are allowed to do the property in terms of alterations.
Leaseholders have the right to their freeholder’s name and address, as well as clear information regarding charges, insurance and costs. They also have the right to challenge charges in some cases. Source: Gov.co.uk
The advantages of leasehold
- Leasehold properties are usually cheaper than freehold properties.
- Leaseholders usually have fewer responsibilities over the property than the freeholder.
- Freeholders will normally take care of the building’s insurance.
- The owner of the freehold is usually responsible for maintaining the common areas of the building, including the entrance hall and staircase, as well as the exterior walls and roof.
Disadvantages of buying a leasehold property
- The most obvious disadvantage of buying leasehold property is that the property will be returned to the freeholder at the end of the lease agreement – so even if a leaseholder has paid off their mortgage they will not own the property once the lease comes to an end.
- The leaseholder may need certain permissions from the freeholder – including whether they can make physical alterations to the property or own pets. They may also need permission to, make changes in their mortgage or sublet the property.
- As the leaseholder only owns the property, not the land, they will have to pay annual ground rent fees to the freeholder. The freeholder may also charge a service fee for other aspects such as communal area and garden upkeep.
Can a leasehold become a freehold?
Yes. If a freeholder is planning to sell their freehold, they must offer ‘first refusal’ to the current leaseholders and give them the opportunity to purchase the freehold. If you are buying a freehold on a house you will own the freehold outright, however, if you are buying the freehold of a flat, it is slightly more complicated and you will own only a share of the freehold.
The ‘fleecehold’ scandal
In recent years, a scandal has emerged regarding leaseholds properties known as ‘fleecehold’. This scandal has affected new build properties in particular with reports of around 12,000 leaseholders being contracted into paying ground rent charges that double every 10 years and facing charges that make selling or remortgaging their properties difficult to impossible. A lack of rules on what can be charged for ground rent means that costs have been spiralling for some leaseholders – with freeholders cashing in on the lack of restrictions. Reports also emerged of leaseholders paying punitive charges for having pets, making any alterations and even having to ask (and pay) to change their doorbell!
There are steps being taken by both the government and leading property developers to help end the fleecehold scandal. The government launched a 2018 consultation on plans to increase rights for leaseholders – including capping ground rents, making it easier for leaseholders to buy their freehold and preventing housing developers from selling new build property as leasehold.
In early 2019, Communities Secretary, Rt Hon James Brokenshire MP announced that 40 of the UK’s leading property developers had signed a government-backed pledge committing to fairer, less exploitative contracts for leaseholders and freeing existing leaseholders from onerous deals.
Leasehold or freehold – which is better for me?
Freehold properties are usually the best option if you are looking to buy a new home. You will own the property and the ground it sits on, as well as avoiding additional negotiation with a 3rd party (the freeholder), extra charges and the possibility of ever-increasing ground rents.
If you are looking to buy a leasehold property, however, our advice would be to thoroughly look at the contracts, terms and conditions to make sure you are aware of all aspects of the contract and charges to avoid being hit with unexpected expense or limitation later on.