Freehold vs Leasehold – what is the difference?

This is a question our conveyancing solicitors get asked on a daily basis. The blog post below breaks down the difference between the two forms of property ownership, the benefit of each form, as well as various other factors.

What is a freehold?

A freehold is when you own the building and the land that it stands on, although, there are restrictions on the depth of the land beneath the property and the extent of the sky above. The property is normally registered in your name at the land registry as the owner of the freeholder title in perpetuity. As a buyer, freehold is the optimal title.

Benefits of buying a freehold property

  • Unlimited period of ownership  

  • Not subject to annual ground rent fees

  •  You don’t have a freeholder failing to maintain the building, or charging you large amounts for it

  • You have sole responsibility for and control over the maintenance of the building, including the upkeep of the exterior

Whole houses are normally sold freehold, however, there is an increasing trend for leasehold  sales of houses (particularly with new build houses) so it is important that you check before you buy.

 What is a leasehold?

A leasehold property is the purchase of the property for a fixed term, but not the land that it is built on. You have an agreement with the freeholder which sets out the terms of your ownership, known as a lease.  Leases are usually long term and can range from 40 – 999 years.

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. Other leaseholders, however, might have claimed their “right to manage”, in which case it is their responsibility.

In most cases, leaseholders pay an annual “ground-rent” to the freeholder.

Benefits of leasehold

  •  Leases regulate responsibilities of the freeholder (landlord) and the leaseholder (tenant). The also regulate obligations between leaseholders in the same building

  • The responsibility and cost of repairs and maintenance is shared between leaseholders

  • There is still the possibility of buying the property outright, through enfranchisement, or share of the freehold.

Problems with leasehold

  • If leaseholders don’t fulfil the terms of the lease – for example, by not paying rent or service charges fees – then the lease can be terminated by the freeholder. (known as “forfeiture”)  

  • Leaseholders will have to obtain permission for any major work or alterations

  • Leaseholders will have to contribute to maintenance costs through a service charge and their share of the building’s insurance. In addition, most leases require the payment of ground rent which in some cases can be substantial.

  • Restrictions, such as not owning pets or subletting.

Disputes between leaseholders and freeholders

It is not uncommon for tensions to arise between freeholders and leaseholders.

In our experience, they often arise due to:

  • Service charge issues.

  • Building maintenance.

  • Breach of the lease terms           

The declining value of leaseholds

The value of a short-term lease will generally decline in value because once the lease comes to an end the leasehold title is extinguished and you no longer have the right to use the property.  Leases of less than 90 years can start to be problematic for leaseholders and should be approached with caution. If you have a short lease, the property can decline in value even if property prices in your area are rising. This means that fewer people will want to buy it when you resell; it also means that mortgage companies might be reluctant to lend on it. It can however be possible to agree an extension of a lease, but the landlord will normally expect a payment for agreeing to this.

Buying the freehold on a leasehold property

You may have the right to buy your house or flat outright this is called ‘enfranchisement’. While there are detailed  legal procedures and legal costs involved with the process of enfranchisement, it can be a very beneficial step for the leaseholder Ensure you get professional advice and assistance from one of our experienced property solicitors.

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 several freehold units, so 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, but rather the owners of the flats manage the common and external parts of the property together. This prevents problems of short leases and unethical landlords.

Property Solicitors

Located in London, our property lawyers provide advice in relation to a wide range of commercial and residential property transactions and represent clients involved in property disputes. Our conveyancing services include, but are not limited to:

  • Purchase lease and sale of commercial premises such as offices, shops, restaurants, manufacturing and warehousing units.

  • Related funding and mortgage arrangements.

  • Property management and leasehold enfranchisement.

  • Development agreements and related planning requirements for the purchase, sale and granting options over development land and agricultural holdings.

  • Lease extensions, variations and options.

  • Resolution of property disputes.

 

For more information on leasehold and freehold contact our experienced conveyancing team. Louise O'Farrell, Mahak Mohsin & Peter Phillips will help guide you in making the best financial decision.