The difference between leasehold and freehold

What is a leasehold?

Leasehold properties are only owned for the length of the lease (or lease term), which can dramatically vary from as little as 40 years, to multiple hundreds of years in length. This means that when you buy a leasehold property, someone else owns the land that it’s built on, they are known as the freeholder. 

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.

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 leasehold of any property before you buy it. 

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

On the other hand, it’s important not to let a lease run too short, as this will drastically affect the value of your property, and becomes more costly to extend as time passes. This could be very problematic if you decide to sell your home, or even affect your ability to remortgage. 

Should you buy a leasehold property?

This will depend on your circumstances and future plans, however, there can be advantages to buying a leasehold property, which we’ll look at in more detail later in the article. 

Generally speaking if the leasehold is very long, it shouldn’t have a huge impact on your decision, but it’s also worth bearing in mind that with the purchase of a flat or apartment, it’s unlikely that you’ll have a choice, as they are predominantly sold as leasehold properties. 

Property prices can be affected, with similar leasehold properties in a particular location being priced lower than a freehold a few doors away, for example. 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 you won’t usually need to pay for any maintenance or repairs to the property or land, as this would fall under the responsibility of the freeholder. However, the freeholder, or their chosen management company, will charge you fees known as a service charge, to cover these costs. 

Particularly in the case of buildings with multiple leaseholds, such as an apartment block, you may also need to contribute to a sinking fund. This is a similar fee to service charges, but where service charges pay for regular maintenance costs such as groundskeeping or window cleaning, a sinking fund is a pot of money for unexpected expenses, such as repairs following an emergency, like a fire or major weather event. 

Ground rent charges banned

Another fee previously payable by leaseholders was ground rent, however, as of June 2022, freeholders are no longer allowed to charge ground rent on new residential leases. 

Whilst those with existing leases in place may still have ground rent charges to pay, these will no longer be subject to annual increases. 

Can you extend the lease on a property?

If you own a leasehold property, you will typically be able to apply to extend the lease by up to 90 years for a flat and 50 for a house. There are certain criteria that you will need to meet in order to be eligible for the extension, such as:

• You must have owned the property for at least two years

• The leaseholder must reach an agreement with the freeholder

• The leaseholder must pay the relevant costs associated with extending the lease

How much does it cost to extend a lease?

The cost of extending a lease will depend on a number of factors, including the remaining length of the lease, property value and potentially the marriage value. Marriage value is the term used to describe any additional value that a property is expected to gain by extending the length of its leasehold. 

The fees are separated into two categories:

• The premium - which is the price agreed for extending the lease. If the remaining lease is less than 80 years, you will also likely have to pay 50% of the marriage value on top of this

• Fees and taxes - such as the cost of hiring professionals to evaluate the marriage value and the carry out the legal processes involved with extending the lease, as well as any taxes that apply. Whilst Stamp duty can apply, this is only if the leasehold extension costs more than £125,000

The Leasehold Advisory Service’s  have a useful lease extension calculator which can help provide you with an estimated cost of extending your lease. 

When should I extend the leasehold on my property?

Although the government has raised the possibility of easing the rules and costs associated with leasehold extension in the future, at the current time, keeping an eye on the remaining length of your leasehold is incredibly important! 

This is because extending your lease becomes very costly once your remaining lease drops below 80 years. For this reason, properties with a remaining lease of less than 80 years can be very difficult to sell, and have a much lower market value. 

It can also be more difficult to remortgage properties in this category, as lenders tend to shy away from properties with leases below the 80 year threshold. 

Can you change the terms of a lease?

It may be possible to renegotiate the terms of the lease with the freeholder, and this is something that you can discuss prior to the purchase of a leasehold property, if the existing terms are putting you off the purchase. 

Prior to an extension of the lease could be another good time to discuss any modifications to the terms, as some changes may affect the cost of your lease extension. 

What is a freehold?

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

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

It’s unusual to find freehold flats, but the majority of houses tend to be freehold. There are some exceptions to this rule, however, especially with shared ownership houses, so it’s important to ensure you are fully aware of the ownership status of any property before you make a purchase. 

Can you purchase a freehold as a leaseholder?

It’s possible to purchase the freehold on a leasehold home, once you’ve owned it for longer than two years. Your right to purchase can be enforced through a tribunal if your freeholder is unwilling to sell, but it is often simpler if they agree to the sale. 

This can be more difficult for flat owners, as there are multiple owners in one building, meaning you cannot become the overall freeholder. However, it’s not impossible, as if you can come to an agreement with the other owners, it may be possible to purchase a joint freehold, known as a commonhold.  

The Leasehold Reform Act 1967 dictates that you will need to fulfil a few criteria in order to purchase a freehold, including:

• You must own the lease for the entire property

• There must be at least 21 years remaining on the lease

• You must have been a leaseholder on the property for at least two years

How much does a freehold cost?

It can be expensive and fairly complex to buy a freehold, however, a tribunal can enforce the cost suggested by an impartial third party if an agreed price cannot be reached with the freeholder. Costs vary based on similar factors as the house price, however, the more time remaining on the lease, the more costly it will generally be to purchase the freehold.

Aside from the purchase cost of the freehold, the following fees may also apply at the time of purchase:

• Valuation fees

• Legal fees for both parties (freeholder and leaseholder)

• 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 and a commonhold association, which owns and manages the maintenance of common areas, such as stairwells, roofs, external walls and corridors. 

Freehold units are owned by each individual flat owner, and all owners jointly share (usually equal shares) ownership of the common areas throughout the commonhold property. 

Whilst this is fairly rare in the majority of the UK, making it difficult to find lenders willing to support this form of purchase, all flat ownership in Scotland is based on a very similar system.

Scottish law converted all long leases to full ownership in ​​the Long Leases (Scotland) Act 2012. This means that all flats sold in Scotland are owned on an unlimited freehold basis. Owners pay a factor, which is a service charge to cover the maintenance of the common parts of the building, which are jointly owned and managed by all the flat owners - like in a commonhold ownership. 

The Property Factors (Scotland) Act 2011, means that all factor companies have to sign up to and operate under a code of conduct and a government redress scheme. 

Pros and Cons of freehold and leasehold

There are both advantages and disadvantages to both leasehold and freehold ownership, but it will depend on your circumstances, which one is best suited to you. Freehold generally comes out on top as having the most benefits, however: 

Disadvantages of buying a leasehold property

• Service charges are payable to the freeholder, and can increase over time

• You need permission from the freeholder to make any changes to the property

• Restrictions included in the terms of a lease could be restrictive to your lifestyle and may include, but are not limited to: No pets allowed, no smoking, no subletting, no business activities allowed in the property, no extensions

• The property value can be affected, especially if the remaining lease is short

• Conveyancing fees are usually higher when buying leasehold

• It can be very costly to extend or buy the freehold 

Advantages of buying a leasehold property

• Leasehold properties are usually cheaper to buy 

• Maintenance costs should be covered by your service charge, meaning that you won’t need to fork out large amounts for repairs

• You may not need to pay for buildings insurance cover

• For flat owners it may be possible to unite with the other flat owners in the building to form a commonhold ownership, which would allow them to extend their lease to 999 years

Disadvantages of buying a freehold property

• They are typically more costly to purchase

• You are completely responsible for the maintenance of the property and grounds

• You will be responsible for paying for both contents and buildings insurance

Advantages of buying a freehold property

• Complete ownership - this means there will be no restrictions on what you can do with your property, whether that’s extending it, subletting it or owning 12 dogs!

• There are no equivalent service fees to pay when compared with leasehold ownership

• You won’t need to consider extending the lease and the house dropping in value as the length remaining reduces, as this will not apply to a freehold property