If you’ve ever looked at buying a property, you’ve probably come across the term ‘freehold or leasehold’. But, what is the difference between freehold and leasehold properties?
It’s a fair question and a very important one too. One of the first questions a conveyancer will ask you is whether the property you are buying or selling is a freehold or leasehold.
This is because, depending on which category the property falls into, the conveyancing process will either be straightforward or much more complicated!
So, without further ado, let’s take a look at what you need to know about the difference between freehold and leasehold properties…
Definition Of A Freehold Property
The dictionary definition of a freehold property is simply:
An estate in land, inherited or held for life.
That essentially means that if you purchase a freehold property, you buy the entire rights to the physical property and the land upon which it sits up until the point at which you sell or pass it on to someone else. You are always in control.
The advantages of freehold property are that you won’t have to pay any ground rent to anyone since you own the land and you’re not relying on someone else to maintain the land or fabric of the building.
The downside is that you alone are responsible for the upkeep of the property and the land upon which it sits.
Definition Of A Leasehold Property
The dictionary definition of a leasehold property is simply:
In short, that means that the freeholder of the property and land is granting you the rights to use the property for however many years are left on the lease, which is often 100 years or more. This makes it a kind of hybrid between renting a property and owning it.
You’ll usually be responsible for the maintenance and improvement of the property itself, but the surrounding communal areas (in the case of flats) are usually the freeholder’s responsibility.
In most cases, you’ll need to pay an annual rent to the freeholder and will need their permission before undertaking any major works on the property.
Which Is Better? Freehold Or Leasehold?
For most people, owning the freehold of a property is the preferred option. It is much less restrictive, has no rental fees to pay, and makes the purchase process much simpler. Most houses are freehold.
However, most flats are leasehold. This is because someone needs to be responsible for the upkeep of the communal areas and fabric of the building since the structure of the building is shared with other flats.
This means you may find it difficult to find a flat or apartment that isn’t under a leasehold.
Main Problems With Leasehold Properties
Whenever you are are not entirely in control of something, there is always the risk of problems occurring, and that’s certainly true of leasehold properties. Some of the main issues you may face include:
- Short Leases – If there will be less than 40 years left on the lease when your mortgage comes to maturity, you may struggle to find a lender who will lend you the money to purchase the property. That means you may need to pay to extend the lease.
- Restrictions – Some freeholders will add extra restrictions on their leasehold agreements such as not allowing pets in the building or preventing properties being rented out. You’ll need to check the leasehold agreement carefully.
- Fees – The freeholder is likely to charge leaseholders ground rent and may also ask for maintenance and insurance costs to be contributed to.
- Maintenance – If the freeholder doesn’t adequately maintain the building or communal areas, it can lead to problems inside the part of the property the leaseholder is responsible for.
- Disputes – Whenever someone else is involved in the ownership of a property, there is potential for disagreements to become legal disputes.
- Initial Costs – Because the conveyancing process on a leasehold property is more complex, you’ll pay more in solicitor fees when buying or selling a leasehold property.
Should You Avoid Buying Leasehold Properties?
After reading the above, you may be having second thoughts about ever buying a leasehold property.
However, although the difference between freehold and leasehold properties is significant, leasehold properties are not entirely bad.
In fact, in some major cities where property prices mean flats are your only option, you may not have much of a choice.
For the most part, owning a leasehold property isn’t a bad thing, as long as you do your homework before buying the property to understand exactly what the terms of the lease are and how long is left.
Your Rights To Extend The Time Remaining On A Leasehold Agreement
If you’ve found your dream property but the lease is running out of time, all is not lost.
The Government have moved to help protect leaseholder property owners from short leases by giving them rights that enable them to buy or extend their lease.
If you have owned a leasehold flat for more than 2 years and bought it on a long leasehold (usually more than 21 years), you have the right to extend your lease by a further 90 years and negotiate new terms at the same time.
You will, however, have to pay to extend the lease and the cost will become more expensive as the amount of time left on the lease reduces . It is, therefore, best to extend the lease as early as possible.
If you have owned a leasehold house for more than 2 years and bought it on a long leasehold (usually more than 21 years), you have the right to extend your lease by a further 50 years and negotiate new terms at the same time.
Unlike flats, you won’t have to pay to extend the lease on a house, but you will probably find that the ground rent will go up when you re-negotiate the terms with the freeholder.
Should you need additional advice, there is a Government funded Leasehold Advisory Body you can consult with.
Turning A Leasehold Property Into A Freehold Property
If you really don’t like the idea of owning a leasehold property, it’s possible that you may be able to buy the freehold and turn a leasehold property into a freehold property. This is called ‘enfranchisement’.
It can be a very costly and drawn-out affair but in certain cases, it does make sense to buy the freehold of a property when the opportunity is there.
Owning the freehold does make things much simpler for you as the property owner and can also add value to the property.
There is a great guide from Money Saving Expert that covers the key things you need to know about buying a freehold.
So that sums up the key differences between freehold and leasehold properties that you need to be aware of.
Don’t forget that if a property you are interested is a leasehold property, that may help you negotiate a lower price when buying a home.