Difference between Freehold and Leasehold Property

Both leasehold and freehold are ways you can own a property and it is important to know the difference because it affects your ownership and the future sale of your home.

Leasehold and freehold are principally different forms of legal ownership. If you own the freehold, it means you own both the building and the land it is built upon. Leasehold means you merely have a lease from the freeholder (owner of the building) to use the home for a specified number of years. We discuss the advantages and disadvantages of both leasehold and freehold in more detail below.

What are the main differences in a freehold over a leasehold?

The property will be registered in your name at the Land Registry, which means you own the “absolute title” as the freeholder. If you buy a freehold property, you  own and are responsible for the maintenance of your own property and the land upon which it is built.

Houses are generally sold as freehold, although there is a trend developing for new builds on housing estates to be sold as leasehold. Therefore, it important to find out whether this applies to any new property you are considering buying, and if so, understand the legal implications of such ownership.

The benefits of buying a freehold property are:

• You do not have to worry about the lease running out or having to extend it, as you own the property outright
• You will not have to deal with the freeholder/landlord
• You do not have to pay ground rent, service charges or any other leasehold charges

What are the main differences in a leasehold over a freehold?

Leases are generally long term, often over 90 or around 120 years, and sometimes as long as 999 years. However, if the lease has been run down and not extended, they can be as short as 40 years or less. In the case of a short lease, you may find it difficult to secure a mortgage without first extending it. This is because once a lease ticks down to zero, the property reverts to the freeholder, which renders it worthless to a lender.

The leaseholder has a contract with the building and landowner, known as the freeholder (or landlord), which sets out the legal rights and responsibilities of both parties. The freeholder is typically responsible for maintaining the common areas of the building, such as the entrance, staircase and lifts, as well as the building itself and the grounds surrounding it. Some buildings have leaseholders who have claimed their “right to manage”, and if so, maintenance is their responsibility as a collective.

Leaseholders will pay maintenance fees, annual service charges and a share of the building’s insurance. They will also have to pay an annual ground rent to the freeholder. Fees are a common source of contention, with one in four leaseholders believing their landlord is overcharging, but not being able to do much about it. Ground rents tend to come in at around £100-£250 per year, and even on apartments with basic facilities, annual charges can easily reach more than £1,000 per year.

Leaseholders also often complain their landlord does not maintain or repair the building to a sufficiently high standard or keep common areas in good shape. One in four leaseholders complain of a lack of control surrounding what works are undertaken, and nearly one in five have had problems getting essential work done.

If leaseholders plan to undertake major works on their property, they will have to get permission from the freeholder or their managing agents. And may face other restrictions such as not subletting or owning pets. Freeholders often have the complaint that leaseholders breach the terms of their lease by being too noisy or failing to obtain permission for building works.

If leaseholders fail to honour the terms of the lease, for example, by not paying their fees, then the lease can become forfeit, which means the property reverts to the freeholder.

Leases less than 90 years

Anything of 90 years or fewer can become problematic for leaseholders. So if you are looking at properties that fit into this category, you should approach them with care, because it can significantly affect the value of the property. If you have a short lease, a property can decline in value even if property prices in the area are rising. This will probably lead to fewer people wanting to buy it when you put it in the market to sell. As stated above, mortgage providers are going to be extremely reluctant to lend on shorter leases.

Extending a lease

Government legislation has recently given leaseholders protection against short leases. This gives them the right to extend their lease or buy the property. However, this can be particularly expensive. The law is different depending on whether it is an apartment or house.

Apartment/flat

• There is a general right to extend a lease by 90 years on top of the unexpired term. You will not have to pay ground rent and can negotiate new terms. Although you can only do this if you have held the lease for 2 years or more, and it was originally leased on a “long lease” (over 21 years).
• You will have to pay a premium for extending the lease on the property.
• People considering buying a property with a short lease (80 years or fewer), can insist the leaseholder extends the lease before they will commit to buying it.

After informing a landlord they qualify for the right to extend the lease, the freeholder can either accept or reject the offer or negotiate new terms. If they reject the offer, it can be challenged in court.

House

• You may have the right to extend the lease by 50 years and can negotiate the terms of the lease. Although you only have the right to do so if you have held the lease for 2 years or longer and it was originally leased on a long lease, generally over 21 years.
• You do not have to buy a lease extension, but ground rent on a house is likely to increase.
• As with an apartment, the landlord can accept your offer, reject it or negotiate new terms. Any rejection can be challenged in court.

You should get specialist professional help when extending a lease. If you live in a converted house, for example, the rules for extending a lease on an apartment may apply instead.

Buying the freehold of a leasehold property

You may want to exercise the right to buy your apartment or house outright, so that you own the freehold. This is known as “enfranchisement.” The law surrounding this depends on whether you have a house or an apartment.

You could also buy the freehold with the other leaseholders living in a block of flats, for example. This can be achieved if at least half the leaseholders agree to buy a share. To buy the freehold, every leaseholder will need to serve a Section 13 Notice on the freeholder.

Commonhold property

Commonhold can be a substitute for long-term leasehold. Leasehold owners can form a commonhold association, which owns the building, land, and common areas and is responsible for the maintenance, management, servicing and repair of the estate. As with leasehold, each individual leaseholder is responsible for their own property, but unlike leaseholds, there is no time placed on how long you can own the property. Anyone owning a freehold in the building or estate is entitled to take part in the running of the commonhold association.

Online Conveyancing Solicitors understand how much their new home means to our customers. Buying, selling or remortgaging a new home is one of the biggest investments you’ll ever make and the process can be extremely stressful and time consuming. We know that when it comes to conveyancing you want to work with a professional and experienced company who will always act in your best interest, provide real value for money and make the process as easy and straightforward as possible.