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 house or flat you are buying or selling is a freehold or leasehold.
This is because, depending on which category the building falls into, the conveyancing process will either be straightforward or much more complicated!
Put simply, the difference between freehold and leasehold properties is ownership and control.
When you buy a freehold property: you own the building and the land it stands on until you decide to sell it. You are responsible for maintaining your property and land, but you don’t have to pay any fees or get permission from anyone else to make changes to your home. Most houses in the UK are sold as freehold properties.
When you buy a leasehold property: you own the building for a set number of years, but not the land it stands on. The land is owned by the freeholder, who can charge you ground rent, service charges and other fees.
You also must get permission from the freeholder to make certain alterations to your property.
When the lease expires, the ownership of the property returns to the freeholder, unless you can extend the lease or buy the freehold. Most flats and maisonettes in England, Northern Ireland and Wales are sold as leasehold properties.
So, 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:
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 building 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 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 building and the land upon which it sits.
All of the properties we’ve bought to live in ourselves have been freehold. That’s largely because we’ve never had a flat as a home and most (but not all) houses are freehold.
Freehold certainly makes things less complicated and we’ve always preferred freehold properties over leasehold ones.
Definition Of A Leasehold Property
The dictionary definition of a leasehold property is:
In short, that means that the freeholder of the building and land is granting you the rights to use the building for however many years are left on the lease, which is often 99 years and up to 999 years. This makes it a kind of hybrid between renting 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.
Many of the flats we have encountered during our investment journey have been leasehold. It’s often our first question to the selling agent – is it a freehold property?
If it is, we always ask next how long is left on the lease. The answer to this can be the difference between whether we’ll buy the property as an investment, or if we’ll walk away.
Which Is Better? Freehold Or Leasehold?
For most people (including us!), owning the freehold 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. 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 it being rented out. You’ll need to check the leasehold agreement carefully.
- Permissions – You have to get permission from the freeholder or the managing agent to make any alterations or improvements to your property, which may incur additional costs or be refused.
- Fees – The freeholder is likely to charge leaseholders ground rent and may also ask for maintenance and insurance costs to be contributed to. These fees may increase over time.
- 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, there is potential for disagreements to become legal disputes.
- Initial Costs – Because the conveyancing process on a leasehold is more complex, you’ll pay more in solicitor fees when buying or selling a leasehold home.
Also, you need to be aware that you may face difficulties in selling or remortgaging your property if your lease is too short (less than 80 years), as lenders and buyers may consider it risky.
There is also less security and stability as a homeowner, as your lease will eventually expire and you may lose your property if you don’t renew it or buy the freehold.
Benefits of Buying a Leasehold Property
When understanding the difference between freehold and leasehold properties, it’s not all bad news and leasehold property is still a popular investment, especially in those areas where freehold homes may be in short supply. The benefits include:
- Cheaper – You may pay less upfront to buy a leasehold property than a freehold one, as leaseholds tend to be cheaper.
- Services – You may benefit from some services and amenities provided by the freeholder or the managing agent, such as maintenance of common areas, gardens, lifts and security systems.
- Lease extension – You may be able to extend your lease or buy your share of the freehold with other leaseholders, which can increase the value of your property and give you more control over it.
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, leaseholds are not entirely bad.
In fact, in some major cities where prices mean flats are your only option, you may not have much of a choice.
For the most part, owning a leasehold isn’t a bad thing, as long as you do your homework before buying 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 home 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 into a freehold. 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 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, that may help you negotiate a lower price when buying a home.
Benefits Of Buying A Freehold Property
We have looked in detail at the pros and cons of buying a leasehold property, and here’s a list of reasons of the benefits of buying a freehold property:
- You don’t have to pay any ground rent, service charges or other fees to a landlord or a managing agent.
- You don’t have to worry about the lease running out or renewing it, as you own the property outright.
- You don’t have to get permission from anyone to make changes to your property, unless they affect your neighbours or the environment.
- You have more security and stability as a homeowner, as you can’t be evicted by a landlord.
Drawbacks Of Buying A Freehold Property
The drawbacks when buying a freehold property include:
- You may have to pay more upfront to buy a freehold property than a leasehold one, as freeholds tend to be more expensive.
- You must bear all the costs of maintaining and repairing your property and the land, which can be significant over time.
- You may have to deal with any disputes or issues with your neighbours or the local authorities yourself, without the help of a landlord or a managing agent.
Difference Between Freehold And Leasehold Properties
Whether you buy a freehold or a leasehold property depends on your personal preferences, budget and circumstances. However, there are some things you should always check before making an offer:
- The length of the lease: If you are buying a leasehold property, find out how many years are left on the lease and how much it will cost to extend it or buy the freehold. A short lease can affect the value and saleability of your property.
- The ground rent: Find out how much ground rent you have to pay every year and whether it is fixed or variable. Some leases have clauses that allow the ground rent to increase significantly over time, which can make your property unaffordable or unsellable.
- The service charges: Find out how much service charges you have to pay every year and what they cover. Service charges are usually based on the actual or estimated costs of maintaining and managing the building and the common areas. They can vary depending on the size, location and condition of the property and the services provided.
- The lease terms: Find out what restrictions and obligations are imposed by the lease agreement and whether they suit your lifestyle and plans. For example, some leases may prohibit you from keeping pets, subletting your property, running a business from home or making any structural changes to your property.
- The freeholder and the managing agent: Find out who the freeholder and the managing agent are and how they communicate with the leaseholders. You should also check their reputation and track record of dealing with any issues or complaints. A good freeholder and a managing agent can make your life easier, while a bad one can cause you a lot of stress and hassle.
Buying a property is a big decision that requires careful research and professional advice. You should always consult a solicitor, a surveyor and a mortgage adviser before committing to any purchase. They can help you understand the legal, financial and practical implications of buying a freehold or a leasehold property and guide you through the process.