Leasehold Vs Freehold: What Are The Differences?

> BUYING & SELLING PROPERTY
TIPS AND ADVICE

It makes quite a difference to a property if it is available as ‘freehold’ or ‘leasehold’, but if you’re new to buying property you might not be aware of the issue.

We look at the differences between the legal ownership of freehold and leasehold properties, including the concept of ‘ground rent’ and why you don’t have to pay ground rent on a freehold property. We show why there is a price difference between a freehold and leasehold property, including factors such as how much annual ground rent payable.

Freehold properties

What is a Freehold Property?

When you buy a freehold property you, as the owner, have absolute and perpetual ownership of both the building and the land it stands on. This means that you have complete control over the property and are solely responsible for its maintenance and upkeep. Freehold properties are usually houses, but in some cases, they are also flats.

Owning a property ‘freehold’ is often preferred by those who want full autonomy over their home without the constraints of a regular lease payment to the actual freeholder.

Definition of a freehold property

In England and Wales, a freehold property is defined as a property where the owner holds the title to both the building and the land indefinitely. This type of ownership is also known as “title absolute” or “fee simple.” As a freehold owner, you are responsible for all costs related to the property, including repairs, maintenance, and buildings insurance. This complete ownership provides a sense of security and freedom, allowing you to make changes to your property without needing permission from a landlord or freeholder – though you may need planning permission from your local council.

Buying a freehold property

When you buy a freehold property, you become the legal owner of the building and the land it sits on. This means that all maintenance on your home, including the roof and wall structures, is your sole responsibility. You are free to make any changes you want to the building, since you also own the land. For instance, if you want to extend your freehold property, you can do so as long as the council approves your plans.

Can I buy the freehold?

It may very well be an option for you if you currently own a leasehold property and desire to have freehold ownership over it. In the case of a flat, the owner may share the freehold with the other flat owners. Be ready if you want to start this process because it can be drawn out and costly.

How much does it cost to buy the freehold?

The price of freehold properties is typically higher than a leasehold. Remember that in addition to the purchase price, you will have to pay for Stamp Duty, Valuation fees for your mortgage lender, Land Registry fees and Legal fees – whether or not your property is owned on a freehold or leasehold basis. Additionally, the amount of regular ground rent payable can influence the overall cost of buying a leasehold property.

The purchasing process can become complicated if several tenants are involved. To avoid any unpleasant surprises, it is crucial to seek legal assistance before making a purchase.

Are the conveyancing fees the same for freehold and leasehold?

Conveyancing a leasehold property will typically cost more than a freehold property, as there is more work to do. A conveyancing solicitor will have to liaise with a freeholder, and collect information about service charges and maintenance. Conveyancing for a freehold property tends to be more straightforward.

What are the responsibilities of a freeholder regarding building insurance?

The freeholder is usually responsible for insuring the building against accidental damage, fire, and water damage. They are generally required to ensure that the fabric of the building is adequately covered by insurance.

What is the role of the freeholder when it comes to maintaining the building as a whole?

The freeholder is usually responsible for maintaining the building as a whole. This includes ensuring the upkeep of the structure, repairs, and general maintenance of the building. The cost is passed on to the leaseholders, who each pay a proportion.

Leasehold properties

What are Leasehold Properties?

Leasehold properties, on the other hand, are a different type of property ownership to freehold. You have a contract to use the property for a set period, rather than owning it outright. The ‘leasehold’ arrangement is often likened to renting, but instead of an ongoing monthly contract, a leaseholder makes a one-time payment to live in the property for the duration of the lease. Lengths of lease often range from 90 to 120 years or more, though some properties come onto the market with considerably less time remaining on their lease – it is important to check this. Leasehold properties are often flats, but some houses fall under this type of tenure too.

Leasehold Properties Compared to Freehold

A leasehold property is very different to a freehold property. A leasehold house, for instance, comes with its own set of advantages and disadvantages for potential buyers, including restrictions and recurring costs. It is important that you understand the lease terms and obligations before making your purchase. You “lease” a property rather than officially own it for a set amount of time, often between 90 and 120 years. This is effectively like renting, but with a payment to live in the house for the rest of your life rather than a rolling contract with monthly rent – usually you must pay ground rent once a year.

As a leaseholder, you have a contract with the freeholder of a property that outlines your obligations as a leaseholder, as well as their responsibility as freeholder. You will usually need to contribute financially by paying annual expenses as well as maintenance and service fees, and ‘ground rent’.

You must get the freeholder’s permission before making any significant improvements to your leasehold property. Once the lease expires, full ownership is given back to the freeholder.

Leaseholds are generally reserved for flats, but this hasn’t always been the case. In the UK, several older homes are still under leaseholds, and many new build houses were marketed this way until fairly recently, meaning ‘owners’ still have to pay ground rent. All new build houses are now freehold since the Leasehold Reform Act 2022 – read more about it here https://cunningtons.co.uk/leasehold-reform/.

Can leaseholders make changes to the building or communal features?

Leaseholders typically do not have the authority to make changes to the building or its communal features without the permission of the freeholder or their management agency. Any modifications or alterations would need to be approved by one of them, and potentially the local council depending on the extent of the work.

Can a lease be extended?

As a leaseholder, you can ask your freeholder to extend your lease at any time. If you meet the requirements, you can add 50 years to a leasehold property or up to 90 years to a flat lease.

Two key factors determine how much it will cost to lengthen the term of a lease:
• The premium: This is the pre-determined cost of extending the lease.
• Fees & Taxes: This covers the cost of contracting specialists, as well as any applicable taxes.

What responsibilities does a leaseholder have when it comes to building insurance?

Leaseholders are obliged to contribute a percentage of cost of the building insurance. They are usually responsible for paying a portion of the insurance premium as part of their lease agreement.

Who is responsible for running and maintaining communal features in a leasehold property?

The freeholder or an appointed property management agency is usually responsible for running and maintaining any communal features in a leasehold property.

Should I purchase a leasehold property?

Acquiring a leasehold or freehold property depends mostly on what is available and how much you can afford.

If you’re planning on purchasing a leasehold property, it’s crucial to be aware of any extra costs, like paying the ground rent and service charges. They will be written into the contract.

There could also be a clause in your lease which allows the freeholder to increase these fees annually, which could make it exceptionally expensive to live in that property later down the line. And if you can’t pay the ground rent, there is a possibility that your house will be repossessed, much like it would with mortgage payment problems.

You should check the lease’s remaining term; if it is shorter than 70 years, it may have a substantial impact on the property’s value. It might be challenging to obtain a mortgage for a property with a lease term of fewer than 80 years, and just because you can get a mortgage now, there may be problems when you need to sell or remortgage.

And, of course, you must identify the freeholder of any leasehold property you are considering buying.

Pros and Cons of Freehold and Leasehold Properties

Pros of a freehold property are that you have full ownership over the home and the land it sits on, as long as you continue with/pay off your mortgage payments. There are no extra or hidden charges with this type of property either. However do be aware that many developers of new freehold properties now put in place a scheme of maintenance of common areas of the new estate for which, as a homeowner, you are asked to contribute even though the property is freehold.

You have much more freedom with any changes you may want to make to the property, since you don’t need permission from a landlord. You just need to seek planning permission from the council if you want to make major changes.

Some disadvantages of freehold properties are that they tend to be more expensive in the first place, as you are buying the land as well as the home. The types of properties that you can purchase as freehold are limited mainly to houses, so if you are looking for a freehold flat, they are hard to come by. If you need to repair or otherwise maintain anything in your home, it is your responsibility.

The advantages of owning a leasehold property include that they are more affordable than freehold to buy in the first place, you have less responsibility when it comes to building maintenance, and also since a lot of leasehold properties are flats, they often come with communal areas that you can use, and whose upkeep will be part of your maintenance fees.

The caveat with the cheaper price is that there are many more restrictions with this type of property. Limited ownership means that you don’t have exclusive rights over where you live, and will need to jump through quite a few hoops to get anything about your home changed.

More often than not, the freeholder will have stipulations put into the contract before you sign it, such as no music after a certain time, no pets, no business operations out of the property etc.

This can be a major off-putting factor to prospective buyers, and you can often feel as if you are renting your own home.

Freehold or leasehold properties – we can help you buy

Whatever lease type you are buying, whether it’s a freehold or leasehold property, you need to make sure your conveyancing solicitor is on board throughout. Find out more about our specialist property solicitors in Braintree, Brighton,  Chelmsford, Croydon, Hornchurch, Solihull, and Wickford.