Leasehold vs Freehold: Understanding the Differences

When considering property ownership, it is important to understand the terms "leasehold" and "freehold."

What is Freehold?

Freehold ownership is the most complete form of property ownership. When an individual purchases a freehold property, they are acquiring both the building and the land upon which it stands. This ownership is perpetual.

Freeholders also enjoy a level of control that leaseholders do not. They have the liberty to make alterations to their property, such as building an extension, converting a loft or even demolishing and rebuilding a property, without needing permission from another party, other than the local planning authorities. This freedom to alter the property as one sees fit not only enhances the potential for personalizing the home, but can potentially also increase its market value.

However, freehold ownership is not without its challenges. One of the primary disadvantages is the responsibility that comes with full ownership. Freeholders are solely responsible for the maintenance and repair of both the building and the land that it occupies. This can be challenging, particularly for those who own large properties or those with extensive grounds, where maintenance can be both time consuming and expensive.

What is Leasehold?

In contrast to freehold, leasehold ownership means that, while you own the building or part of a building, such as a flat within a building which contains several leasehold flats, for a specified period, the freehold land upon which it stands is owned in perpetuity by someone else, known as the freeholder or landlord. The ownership of a leasehold property reverts to the freeholder upon the expiry of the lease, unless the lease has been extended by the freeholder in return for a payment by the leaseholder.

Leasehold arrangements are particularly common in flats and apartments, where the land and communal areas are shared among multiple leaseholders. The key characteristic of leasehold ownership is the lease, a legal agreement that sets out the length of the lease, and the rights and responsibilities of both the leaseholder and freeholder. Leases can vary significantly in length, with terms as long as 999 years, though 125 to 150-year lease terms are  usually more common.  

Leasehold considerations

Leasehold ownership typically imposes ongoing financial obligations on the leaseholder. Unlike freeholders, leaseholders are usually required to pay ground rent to the freeholder, which can range from a nominal sum to several hundred pounds per year, depending on the terms of the lease. In addition to ground rent, leaseholders are typically also required to pay service charges, which can be quite substantial, to cover the cost of maintaining and repairing communal areas such as hallways, gardens, external walls and roofs, and providing concierge services and buildings insurance. Service charges are usually subject to annual increases.

The process of extending a lease or purchasing the freehold or a share of the freehold can be complex and expensive. When the remaining length of a lease falls below 80 years, it is generally considered a diminishing asset, and the cost of extending it increases significantly due to the so-called "marriage value", which is broadly the potential increase in the value of the property resulting from the extension of the lease. A short lease can make the property less attractive to potential buyers and lenders. Extending a lease involves surveyor fees, legal fees, negotiation with the freeholder and a premium payment, which can sometimes be very substantial if the remaining lease is short.

Leasehold vs Freehold

The most significant difference lies in the ownership structure: with freehold, the owner owns the property and the land it stands on outright in perpetuity, whereas, with leasehold, the owner only has the right to occupy the property for a the number of years stated in the lease, after which ownership reverts to the freeholder, unless the lease is extended.

This distinction has several practical implications. Freehold properties generally offer more security and control, as there is no risk of the ownership term expiring, and the owner is free to make changes to the property without needing permission from a third party, except for  planning authorities. Leasehold properties, on the other hand, come with ongoing costs, such as ground rent and service charges, and the leaseholder's ability to make alterations to the property is often restricted by the terms of the lease.

Another important difference is how each type of ownership affects property value and marketability. Freehold properties tend to maintain or increase their value, over time, particularly in desirable areas, and are generally easier to sell because buyers do not have to worry about the complexities of extending a lease, if required. Leasehold properties, on the other hand, typically decrease in value as the lease term shortens, especially if it falls below 80 years, and the additional costs associated with leasehold ownership and lease extension can make such properties less attractive to potential buyers.

Recent Developments

In recent years, the government has recognized the challenges and potential pitfalls associated with leasehold ownership, particularly in light of cases where leaseholders have faced significant financial difficulties due to escalating ground rents and service charges. As a result, there have been calls for reform to make the leasehold system fairer.

One of the most significant proposed reforms is the reduction or elimination of ground rents for new leasehold properties. Additionally, the government proposed to make it easier and cheaper for leaseholders to extend their leases or purchase the freehold or a share in it, thereby reducing the risks associated with leasehold ownership.

These proposed reforms have been met with widespread support, particularly among leaseholders who have been affected by unfair practices in the past. However, the reforms have also faced criticism from some freeholders and developers, who argue that the changes could reduce the value of their investments and lead to fewer new homes being built.

Conclusion

While freehold ownership offers greater security and control, it also comes with the sole responsibility for property maintenance. Leasehold ownership, on the other hand, means shared maintenance responsibilities, but involves ongoing financial obligations, less control, and potential complications related to lease expiry and extension. Ultimately, the right choice will depend on your individual circumstances, the type of property you are considering and your longer-term plans.

FAQs:

Q.  What are the main differences between leasehold and freehold properties?

A. The primary difference relates to ownership. With a freehold property, you own both the property and the land that it stands on. By contrast, with a leasehold property, such as a leasehold flat, you own the property only for a defined period, as set out in the lease, but not the land it is built on, which is owned by the freeholder. Leaseholders typically also have to pay ground rent and service charges, and may face restrictions on how they can use the property.

Q.  Can a leasehold property become a freehold?

A. It is possible for a leaseholder to buy the freehold or a share of the freehold of their property, a process known as enfranchisement. This can be done individually or, in the case of flats, collectively with other leaseholders. The process can be complex and expensive, involving surveyor fees, legal fees, and negotiations with and the payment of a premium to the freeholder.

Q.  How does the length of a lease affect the value of a leasehold property?

A. The remaining length of the lease can have an impact on the property's value. Generally, the property’s value decreases as the remaining length of the lease decreases, particularly when it falls below 80 years. From this point onwards, extending the lease also becomes more expensive. Properties with shorter leases can also be more difficult to sell or mortgage.

Q.  What are service charges and who pays them in a leasehold arrangement?

A. Service charges are fees that leaseholders pay to cover the maintenance and repair of communal areas such as hallways, gardens, exterior walls and roofs, and for the provision of common services such as concierge services and buildings insurance.

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Leasehold vs. Freehold - What is the difference? | Money Helper