When looking at a property to buy, one of the most important things to understand is whether it is freehold or leasehold. This can impact what you can do with the property, as well as how much it may cost you on an ongoing basis.
Simply put, the main distinction between freehold and leasehold properties is that buying a freehold property gives you ownership over the property and the land it is on, whereas, with a leasehold, you own the property but not the land. A leasehold will give you ownership of the property for a fixed term (which is usually up to 999 years), while a freehold means the property is yours until you sell it or pass away.
While most houses in England and Wales are freehold, almost all flats are leasehold. However, it’s not always that clear cut, so it is important to make sure you know what you are buying before making an offer; the estate agent should be able to confirm whether the property is freehold or leasehold. Your solicitor will also check during the conveyancing process. If it is a leasehold, they will also make sure it is clear what your rights and obligations are, including any service charges or other regular payments you will be required to pay.
To learn more about freehold and leasehold properties, including the key differences, pros, and cons of each, take a look at the following article…
What is a freehold property?
Purchasing a freehold property is recognised as having complete ownership over a property and the land it is on. Also known as ‘fee simple’, owning a freehold means that you will have complete responsibility for the property. This includes any building repairs that need to be done, insurance, and upkeep.
If you and your neighbours share a communal space, such as a garden or drive, you may also be required to contribute towards maintenance and repair costs.
Whether or not you can buy a freehold may change depending on the type of property. For example, houses are generally all freehold, but when it comes to a flat, the freehold is usually retained by the landlord, subject to the leases.
The landlord in these circumstances may sometimes be a company in which the tenants each have a share. This may be referred to as ‘share of freehold’ but it is more accurately described as owning a share in the company which owns the freehold. A limited company is often a more suitable vehicle for owning the freehold to a block of flats because transferring a share in the company to new owners is more straightforward than transferring the freehold title each time a flat changes hands.
Additionally, the maximum number of people who can be recorded as legally owning a property at the Land Registry (whether freehold or leasehold) is four.
The pros and cons of owning a freehold property
To determine whether or not a freehold property is the right choice for you, it’s important to know both the good and bad aspects involved.
Pros of owning a freehold property:
- Having complete ownership of your property and the land where it sits
- You do not have to pay ground rent or a service charge
- There will be no fluctuation in property value due to the terms of the lease running out
- You can decide to sell or transfer the property at any time
- Control over the entire property (subject to any covenants)
- Easier to mortgage – lenders have quite stringent lending criteria when it comes to leasehold property
Cons of owning a freehold property:
- Freehold property is often more expensive than leasehold property
- You are responsible and liable for every single aspect of your property
- Some freehold property may be subject to a ‘rent charge’ which may oblige the owner to contribute to certain costs
What is a leasehold property?
Unlike freehold properties, purchasing a leasehold only gives you ownership of the property for a fixed amount of time, referred to as the term. The term will be contained within a written document known as a lease.
When the term runs out, ownership of the property is returned to the freeholder as they own the land. Because of this, the longer you own the property, the more its value drops as it gets closer to the expiry date. If the term remaining on the lease is too short, it may no longer be possible to get a mortgage on the property, making it very hard to sell.
If you would like to maintain ownership of a property or sell it to a new owner, you will need to extend the lease. This increases the overall property value and gives you rights over the property for a much longer period of time; however, it is quite an expensive process under current law. Most residential leases over the last century have been granted for either 99 or 125 years, but terms of 999 years are becoming more common, particularly as it is now illegal to grant a new lease subject to a ground rent.
The pros and cons of owning a leasehold property
There are many different things you must consider if you are thinking about buying a leasehold property.
Pros of owning a leasehold property:
- Can be a less expensive way to gain ownership of a property
- You are not responsible for maintenance or repairs of communal areas and/or the structure of the building (although you will need to contribute towards the costs via the service charge)
Cons of owning a leasehold property:
- If you want to make changes to the property, you may need to get permission from the freeholder depending on the terms of your lease
- The lease may restrict the way you use the property. For example, it may prohibit underletting or holiday lets or you may not be allowed to keep pets or smoke in the property
- As the remaining term of the lease gets smaller, the value of the property will decrease
- You may need to pay annual ground rent and a monthly service charge (which can be quite substantial)
- Generally, your liability for contributing towards the cost of repair and maintenance under the terms of the lease is limitless, although there are certain statutory protections which mean charges must be reasonable
Key differences between leasehold and freehold properties
When it comes to freehold and leasehold properties, there are many key differences that make them appealing for different buyers. To identify the best type of property ownership for you, it’s important to recognise what makes both unique and consider what you are looking for.
For example, if you want full ownership of the property and the land it sits on, you should choose a freehold property. However, if you are happy with a leasehold, it can be a cheaper way to get onto the property ladder. Some modern blocks of leasehold flats also come with communal facilities such as a gym or swimming pool, which may be appealing.
Ownership rights
As we have established, one of the key differences between freehold and leasehold properties is their ownership rights. If you own a freehold property, you have rights over every aspect of the property and the land it sits on and are liable for the maintenance/upkeep of the property.
Owning a leasehold, however, means you only own the property which is actually comprised in the lease (sometimes called the demise) although the lease will usually have the benefit of rights over common parts or other land retained by the freeholder.
Restrictions
If you own a freehold property, you will generally have more freedom to make alterations/changes or let part or all of it. This is subject to any planning/building regulation approval which may be required. In some cases, the property may also be subject to restrictive covenants, in which case you should obtain the advice of a solicitor before taking any action which may fall foul of the covenants.
In addition to planning/building control and any restrictive covenants which may apply, leasehold property may also be subject to restrictions contained within the lease which can be extensive. These will often regulate use, alterations and whether or not you can sub-let the property comprised in the lease.
Ground rent
One key difference between leasehold and freehold properties is the liability for payment of a ground rent.
Ground rent is a charge payable by the leaseholder to the freeholder and is essentially a fee for using the land the property is built on. This payment generally occurs annually and is exclusively paid by the leaseholder. The ground rent can be nominal (such as a peppercorn or £1.00) or more substantial.
As of 30 June 2022, it is no longer possible to impose a ground rent in a new lease. If you have a lease granted after that date (including a lease extension) subject to a ground rent, this will be unenforceable, and you should seek advice from a solicitor if your landlord tries to claim it from you.
Service charges
Another charge that a leaseholder will be required to pay is service charge. The service charge is the leaseholder’s contribution towards the overall cost of maintaining and repairing the building and common parts together with any communal facilities/services supplied by the landlord. The cost of professionals employed by the landlord (such as agents and accountants) in connection with managing the building is usually recoverable under the service charge as well.
Service charge is only recoverable insofar as it is permitted by the terms of the lease. If the lease does not provide for recovery of certain costs, then you may have a right to challenge those charges by applying to the First Tier Property Tribunal.
Is it better to buy a leasehold or freehold property?
There are many benefits to owning both leasehold and freehold properties. Freehold is considered the best way to own a property as there are fewer limitations and no time limit on their ownership. However, a leasehold can be a quicker way to get onto the property ladder and comes with less responsibility.
To make the choice that is best suited to your needs, consider the pros and cons of each option carefully and speak to a professional for guidance before you make any big decisions.
Get in touch with our freehold and leasehold solicitors in Bournemouth
For expert help with any freehold or leasehold property, our Residential Property team has the expertise you need. Please contact our Bournemouth office on 01202 292 424 or fill in our online enquiry form for a quick response.