Leasehold vs Freehold – what’s the difference?
It may seem like technical legal language, but there are few things more important about your home than whether it is freehold or leasehold. It makes the difference between owning your own home outright, and having a landlord.
Leasehold vs freehold – the different forms of home ownership
There are two fundamentally different forms of legal ownership: freehold and leasehold. Although estate agents tend to gloss over it, it can be the difference between a home that is worth buying and one that isn’t. Many people who don’t take into account the tenure of the property when they buy a home end up regretting it. Getting it wrong can be hugely expensive. For more advice on what your conveyancing solicitor should check if you are buying a leasehold property, see our guide to leasehold conveyancing.
What is freehold?
If you own the freehold, it means that you own the building and the land it stands on outright, in perpetuity. It is your name in the Land Registry as “freeholder”, owning the “title absolute”.
Freehold is pretty much always the preferred option: you can’t really go wrong with it:
- If you own the freehold, you won’t pay annual ground rent.
- You don’t have the issue of a freeholder either failing to maintain the building, or charging huge amounts for it.
- But, you are responsible for maintaining the fabric of the building – roof and outside walls.
A whole house is usually freehold. There is no reason for a standalone house to be leasehold. Although, there is an increasing trend for leasehold houses, particularly with new build homes, so check the tenure of your property before you buy.
What is leasehold?
Leasehold means that you just have a lease from the freeholder (sometimes called the landlord) to use the home for a number of years. The leases are usually long term – often 90 years or 120 years and as high as 999 years – but can be short, such as 40 years.
- A leaseholder has a contract with the freeholder, which sets down the legal rights and responsibilities of either side.
- The freeholder will normally be responsible for maintaining the common parts of the building, such as the entrance hall and staircase, as well as the exterior walls and roof. However, other leaseholders might have claimed their “right to manage”, in which case it is their responsibility.
- As a leaseholder, you will pay maintenance fees, annual service charges and a share of the buildings insurance.
- Annual “ground rent” is normally paid to the freeholder.
- Leaseholders will have to obtain permission for any majors works done to the property.
- There may be other leasehold restrictions, such as not owning pets or subletting.
If leaseholders don’t fulfil the terms of the lease – for example, by not paying the fees – then the lease can become forfeit.
Disputes between leaseholders and freeholders
It is common to have tension between freeholders and leaseholders.
Fees are a major source of contention. One in four (26%) leaseholders feel their freeholder is over charging, but don’t feel able to do much about it. While the ground rent usually costs in the region of £100-250, even on ordinary flats, the annual charges can amount to over £1000 a year.
Leaseholders often complain freeholders don’t maintain the building to a sufficiently high standard, or keep common areas clean and tidy. 23% of leaseholders feel they lack control over what major works are done and (18%) say they have difficulty getting necessary works done (2019 annual Homeowner Survey).
Freeholders complain leaseholders breach the terms of their lease. For example, by making too much noise or not getting permission for building works.
The declining value of leaseholds
When the term of the leasehold drops to zero years, the property reverts to the freeholder. So, if you have a 40 year leasehold, you only have the right to use the property for 40 years before it goes back to the freeholder. A lease with a term of zero years is clearly worthless. All other things being equal, the shorter the lease, the less it is worth. The value of long leases stays fairly stable, but the value of short leases can drop rapidly. For example, a flat with a lease of 60 years is worth more than 10 per cent less than if it had a lease of 99 years. You might think a flat is worth £200,000, but actually it is worth less than £180,000. The difference is the value owned by the freeholder. To understand the costs involved, see what’s involved in getting a lease extension valuation.
Should I avoid buying a property on a short leasehold?
Leases of less than 90 years can be a problem for leaseholders, and should be approached warily. Any lease of less than 80 years can start to significantly affect the value of the house. If you have a short lease, the property can decline in value. Even if property prices in your area are generally rising. This means fewer people will want to buy it when you resell; it also means mortgage companies might be reluctant to lend on it. See getting a mortgage on a leasehold property.
Extending your lease
A series of Government acts have given leaseholders protection against short leases, by giving them the right to extend their lease or the right to buy the property – but this can be very expensive indeed. The law is slightly different depending on whether you have a house or flat:
Extending the lease on a flat:
Normally, you have the right to extend your flat’s lease by 90 years on top of the unexpired term.
- If so, you won’t have to pay any more ground rent and you can negotiate new terms for the lease, like who pays for works on the flat.
- However, you only have the legal right to do this if you have held the lease on the property for 2 years and it was originally leased on a “long lease”, usually more than 21 years.
- You will have to pay a premium for extending the leasehold.
- Many people considering buying a short leasehold property (generally less than 80 years) insist that the leaseholder extends the lease before they buy it.
- After you tell your freeholder you qualify for the right to extend the lease, they can accept, negotiate, or reject your offer. If they reject your offer, you can challenge them in court.
Extending the lease on a house:
You might have the right to extend the lease on your house by 50 years.
- If you have the right to extend your lease, you can also renegotiate the terms of your lease, like who pays for works on the house.
- You must have held the lease on your house for 2 years and it must have originally been leased on a “long lease”, usually more than 21 years.
- Unlike flats, you don’t have to buy a lease extension for a house, but your ground rent is likely to go up.
- You should get a professional to help you extend the lease. For example, if you live in a converted house, the rules for extending a lease on a flat might apply instead.
- After you tell your landlord that you qualify for the right to extend the lease, they can accept, negotiate, or reject your offer. You can challenge them in court if your offer is rejected.
Buying the freehold on a leasehold property
You might also have the right to buy your house or flat outright, so that you own the freehold. This is called ‘enfranchisement’. While there are complicated legal procedures and legal costs involved, this process of enfranchisement can be invaluable. The law depends on whether you have a house or flat. Ensure you get professional advice and assistance. See Should I buy the freehold?
What is commonhold?
Commonhold is a variant of freehold, created by the Leasehold Reform Act of 2002, which overcomes some of the worst aspects of leaseholds.
Commonhold is where a multi-occupancy building is divided into a number of freehold units. Each individual flat owns its own freehold. The common parts (staircases and hallways etc) are owned and managed by a Commonhold Association, a company that is itself owned by the freeholders of the flats.
This means there is no superior freeholder. Rather, the owners of the flats manage the common and external parts of the property jointly. This protects people both from greedy landlords, and from the problems of short leases.
But, as with any form of community ownership, problems and conflicts can arise between members of the Commonhold Association. Moreover, there are only 15-20 commonholds in the UK.