Leasehold vs. Freehold - What's the difference?

What is a leasehold?

Leasehold means you own a property for a fixed period of time, but not the land it's built on. Someone else owns the land and the property is leased from this freeholder. Leasehold properties are only owned for the length of their specified term, which can vary dramatically from as little as 40 years to hundreds of years.

When the lease term ends, ownership of the land and any properties on it return to the freeholder. Buying a leasehold property can therefore be seen as lifelong rental, as typically the lease term will outlast the people that purchase it.

However, if you’re planning to pass your home onto younger generations, or even sell or remortgage in the future, however, it's important to be fully aware of the length of the lease before you buy it. A short lease can make a poperty less valuable and harder to get a mortgage on.

Whilst there are some leasehold houses, it’s far more commonly seen in flats, as the communal areas often stay under the ownership of the freeholder, even if there are many different flat owners in any given building. 

How long does a lease last?

It’s possible for a new leasehold to be created from anywhere between 99 and 999 years. It’s important not to let a lease run too short, as this will drastically affect the value of your property and pentially even your ability to secure a mortgage.

Many lenders require at least 85 years left on the lease at the time of application. And, in fact, some won't lend on properties at all if the lease is under 70 years.

The lease also become more costly to extend as time passes, which could even affect your ability to remortgage. 

Are there any disadvantages of a 999 year lease?

Typically, the longer the lease, the more valuable the property, as the transfer of ownership issues wouldn’t need to be considered for many generations. 

The possible disadvantage of extending to 999 years is that you need the freeholder's agreement in order to do so. Previously the freeholder could negotiate ground rent in these circumstances. However, landmark legislation has changed this. As of June 2022, freeholders are no longer allowed to charge ground rent on most new residential leases. Since April 2023, this has also applied to retirement properties.

Those with existing leases in place may still have ground rent charges to pay, but upcoming reforms may aim to address this for existing leaseholders as well.

Should you buy a leasehold property?

Generally speaking if the lease is very long, it shouldn’t have a huge impact on your decision. With the purchase of a flat or apartment, it’s unlikely you’ll have a choice, as they are predominantly sold as leasehold properties. 

Property prices can be affected, as similar leasehold properties in a particular location are typically priced lower than an equivalent freehold a few doors away. With a very long lease, however, the price difference is likely to be minimal.

The terms of the lease can also be an important factor to consider, as these may include ongoing monthly fees and restrictions that make ownership of the property less favourable to you.

What are the charges that come with a leasehold property?

When you own a leasehold property, the freeholder is usually responsible for the maintenance and repairs of the building and common areas. However, to cover these costs, the freeholder or their chosen management company, will charge you a service charge.

Particularly in buildings with multiple leaseholds, such as an apartment block, you may also need to contribute to a sinking fund. This is similar to a service charge, but instead of regular maintenance costs such as window cleaning, a sinking fund is used for major, unexpected expenses, such as emergency repais following a fire or weather event.

Can you extend the lease on a property?

Yes, and recent legislation (the Leasehold and Freehold Reform Act 2024) has made this process more favourable for leaseholders. Leaseholders can now apply to extend the lease or buy the freehold immediately once they purchase the property, rather than having to wait until they have owned the property for two years. The new standard extension is now 990 years for both houses and flats, too.

It is important to note that while the Act has become law, it could take much longer for the legislation to be implemented fully.

How much does it cost to extend a lease?

The cost of extending a lease depends on a number of factors, including the remaining length of the lease, property value and potentially the marriage value (though the Leasehold and Freehold Reform Act 2024 looks to abolish this).

Other fees may include:

• The premium - the price agreed for extending the lease.

• Fees and taxes - such as the cost of carrying out the legal processes involved with extending the lease, as well as any taxes that apply.

• Stamp Duty. Stamp Duty will only apply if the leasehold extension costs more than £125,000.

When should I extend the leasehold on my property?

The new Leasehold and Freehold Reform Act 2024 is designed to ease the rules and costs, but for now, keeping a close eye on your lease length is incredibly important. The 80-year mark is critical. Extending your lease becomes significantly more expensive once the remaining term drops below 80 years, and it can make the property very difficult to sell or remortgage. That's because many lenders won't offer a mortgage on properties with a lease of less than 70-80 years remaining.

What is a freehold?

A freehold property is one you own outright (once you’ve repaid the mortgage in full), including the land that it's built on. Some other terms that you may hear used to describe freehold ownership are ‘title absolute’ and ‘fee simple’.

With freehold ownership, you are responsible for all property and ground maintenance, but there will be no service charges to pay.

Most houses in England and Wales are sold as freehold. It is unusual to find freehold flats, but there are exceptions, so always check the ownership status before you purchase.

What is the meaning of flying freehold?

A flying freehold is when a part of a freehold property overhangs or lies beneath another person's freehold property. This could be a bedroom over a shared alleyway or a balcony extending over a neighbour's garden, for example.

Some mortgage lenders shy away from properties that have this element to them, as there can be a number of complexities involved with this type of ownership. 

Can you purchase a freehold as a leaseholder?

It’s possible to purchase the freehold on a leasehold home. Your right to purchase can be enforced through a tribunal if your freeholder is unwilling to sell, but it's often simpler if they agree to the sale. 

For flat owners, purchasing the freehold usually requires a majority of the leaseholders in the building to act together in what is called "collective enfranchisement".

What is a share of freehold property?

It's sometimes possible to purchase a home with a share of the freehold, rather than complete freehold ownership. This is often seen on flats, and means that you're buying a share of the freehold for the building - but that your actual home is still leasehold.

How much does a freehold cost?

It can be expensive and fairly complex to buy a freehold. The cost depends on factors similar to a property valuation, including the remaining lease length (a shorter lease generally makes the freehold cheaper to buy) and the property's value.

Aside from the purchase cost of the freehold, you may also have to pay:

• Valuation fees

• Legal fees for both yourself and the freeholder

• Land Registry fees

• Stamp Duty

What is Commonhold property?

Commonhold properties are communal properties, such as blocks of flats, where the building is split into freehold units. Freehold units are owned by each individual flat owner, and all owners jointly share ownership of the common areas, which is managed and maintained through a commonhold association.

Whilst this is fairly rare in the majority of the UK, flat ownership in Scotland is based on a very similar system. Flat owners in Scotland pay a 'factor', which is the equivalent of a service charge, to maintain common areas.