Difference Between Freehold and Leasehold
In the world of property ownership, two terms often cause confusion: freehold and leasehold. These terms differentiate the types of ownership one can hold over a property, each with its unique set of rights and responsibilities.
Understanding the difference between freehold and leasehold is crucial when buying property, as it can significantly affect your ownership rights, restrictions, and costs associated with the property. This blog post aims to demystify these terms and provide a clear understanding of what each term entails.
What is a Freehold Property
In a freehold property, the owner holds outright ownership of the land and the structures built on it. This ownership is indefinite, meaning it remains with the owner until they decide to sell it or transfer ownership rights. There is no time limit on freehold ownership, which does not expire as with leasehold properties.
Ownership of freehold properties includes the land, the building, and other structures, such as garages or sheds. The owner can modify or alter the property, subject to planning permissions and regulations. Any changes or upgrades made to the property can often increase its value, potentially providing a greater return on investment when it comes to selling.
Freehold property ownership implies managing and maintaining the property, including any associated costs. There is no landlord or management company to turn to for property repairs or maintenance. The owner is solely responsible for maintaining the property's structural integrity, keeping its aesthetic appearance, and ensuring it complies with all relevant safety regulations and standards.
Freehold ownership implies that the property is yours: 'lock, stock, and barrel'. It offers the highest degree of ownership one can have, giving you complete control over your property.
Pros and Cons of Freehold Properties
Pros of Freehold Properties:
Complete Autonomy: Freehold property owners have full discretion over their property, including the freedom to make modifications as per their needs and preferences, subject to planning permissions.
No Expiry: Unlike leasehold properties, freehold properties do not have an expiry date, meaning ownership remains indefinitely until the owner chooses to sell.
No Ground Rent: Freehold owners are not required to pay ground rent, as they own the land on which their property is built.
Potential for Increased Value: Any improvements or upgrades made to the property can increase its market value, providing a potentially higher return on investment.
Cons of Freehold Properties:
Full Responsibility: The maintenance and repair of the property are the sole responsibility of the freehold owner, which can be time-consuming and costly.
Potential for Legal Complications: In instances of property disputes or issues around land boundaries, the freehold owner must handle legal aspects independently.
Upfront Costs: Buying a freehold property often requires a substantial upfront financial investment.
Risk of Market Fluctuations: Freehold property owners bear the risk of property market fluctuations, which could affect the property's resale value.
Share of Freehold
You may sometimes come across the term "share of freehold". This usually applies to flats or apartments within a building where multiple owners (the flat owners) jointly own the freehold instead of having a single freehold. This means they collectively own the building and the land it's built on. It's an appealing concept as it provides more control over the management of the building and eradicates the issues typically associated with leasehold properties. However, it does come with its own set of complexities and responsibilities.
What is a Leasehold Property
In contrast to freehold properties, a leasehold property is a type of ownership where the purchaser owns the structure, be it a house, flat, maisonette, or apartment, but not the land on which it is built. The land remains the freeholder's property, also known as the landlord. When you buy a leasehold property, you're essentially purchasing the right to occupy the land and the structure on it for a predetermined period, known as the lease term. This term can range from a few decades to hundreds of years, but it's expected to encounter 99, 125, or 999-year lease terms in the market.
Leasehold ownership is time-limited, meaning it diminishes over time and eventually reverts to the freeholder once the lease expires unless steps are taken to extend it. This is one of the critical differences from freehold ownership, which is indefinite and doesn't expire. As a leaseholder, you enter into a contractual agreement with the landlord, which outlines the terms of your lease, responsibilities, and rights.
The lease agreement also specifies the 'ground rent,' a fee that the leaseholder must pay the landlord annually. This ground rent may be nominal or can amount to a significant sum and can sometimes increase over the lease term, as set out in the lease agreement.
Typically, leasehold properties are apartments or flats within a larger building or development, where the freeholder retains the ownership of the communal spaces and land. The freeholder is usually responsible for maintaining and managing these shared spaces, including hallways, lifts, gardens, car parks, roofs, and the building's exterior.
However, the leaseholder will usually pay a service charge to the freeholder or a management company to cover the cost of these services. This service charge can also include contributions to a reserve or 'sinking' fund, which is set aside for significant repair works or unexpected costs. The specific obligations and responsibilities of the leaseholder and freeholder should be outlined in the lease agreement.
While leasehold properties can be slightly more complex in nature due to the dual ownership of land and structure, they often provide a more affordable entry point into property ownership. They are ubiquitous in densely populated urban areas and apartment-style living arrangements.
Pros of Leasehold Properties:
Affordability: Leasehold properties often have lower purchasing prices than freehold properties, offering a more affordable entry point into property ownership.
Less Responsibility: Maintenance of the building's structure and common areas is usually the freeholder's responsibility, meaning leaseholders are not required to manage or fund large-scale repair works.
Ideal for Urban Living: Leasehold arrangements are standard in flats and apartments, making them suitable for those who wish to live in densely populated urban areas.
Access to Shared Amenities: In many complexes or developments, leasehold properties often have access to shared amenities such as gyms, swimming pools, and gardens.
Cons of Leasehold Properties:
Limited Control: Leaseholders are limited in the changes they can make to the property and may need permission from the freeholder for specific modifications.
Ground Rent and Service Charges: Leaseholders must pay an annual ground rent to the freeholder and are often responsible for service charges, which can increase over time.
Decreasing Asset: The value of leasehold properties tends to decrease as the lease gets shorter, and extending the lease can be expensive.
Potential for Disputes: There can be disputes with the freeholder over service charges, maintenance issues, and lease terms.
Difficulty in Selling: Properties with a short lease can be challenging to sell, as many mortgage lenders have minimum lease term requirements.
How Long Should a lease be when buying a property
When considering the purchase of a leasehold property, it's essential to pay attention to the length of the lease, as this can significantly impact the property's value and salability. As a general rule of thumb, a lease term of 80 years or more is considered satisfactory. This is because once a lease drops below 80 years, it can become increasingly expensive to extend and may start to affect the property's value.
Furthermore, properties with leases shorter than 70 years can be challenging to mortgage. Many lenders require a minimum lease term for a mortgage to be granted, often at least 70 years at the start of the mortgage. Therefore, if you're considering buying a leasehold property, it's advisable to look for one with a lease term of at least 80-90 years remaining. This will give you peace of mind that your investment is secure, and you will not face difficulties when you decide to sell or remortgage in the future.
Should You Extend A Lease
Yes, extending a lease is often prudent for a leasehold property owner. When the lease term starts to dwindle, particularly below the 80-year mark, the property can depreciate in value and become difficult to sell or mortgage. Extending the lease can preserve and potentially enhance the property's value. Additionally, under the Leasehold Reform, Housing and Urban Development Act 1993, leaseholders have a legal right to extend their lease by 90 years and reduce the ground rent to zero, notwithstanding the landlord's consent. However, it's important to note that extending a lease can involve significant costs and legal processes, so it's recommended to seek professional advice to understand the implications and benefits thoroughly.
What Service Charges Are Involved With Leasehold
Service charges in a leasehold property are fees that leaseholders pay to cover their share of the cost of maintaining and running the building. These charges typically include the cost of services like cleaning and lighting in communal areas, general maintenance and repairs, building insurance, management fees, and contributions to a reserve or 'sinking' fund for more significant works or unexpected costs. The amount can vary significantly from one property to another and from year to year, depending on what work is needed. Before purchasing a leasehold property, potential leaseholders must understand these charges, as they can significantly impact the overall cost of owning the property. Specific details about the service charges, including how they are calculated and what they cover, should be outlined in the lease agreement.
Can Leasehold Rights Be Transferred
Yes, leasehold rights can be transferred or assigned to a new owner when the leasehold property is sold. This transfer of ownership is typically managed through a legal process with the assistance of solicitors. The new leaseholder takes over the responsibilities and obligations outlined in the lease agreement for the remainder of the lease term. It's important to note that the freeholder's consent may sometimes be required, depending on the lease terms. However, under the Landlord and Tenant Act 1988, freeholders must provide a valid reason if they wish to refuse consent. Therefore, while transferring leasehold rights can involve a complex legal process, it is certainly possible and shared in the sale of leasehold properties.
Can You Sell a Leasehold Property
A leasehold property can be sold. However, the remaining lease term is a crucial factor that can significantly impact the sale. Properties with a lease term of over 80 years are typically more attractive to buyers and mortgage lenders. On the other hand, properties with shorter lease terms (below 70 years) may be challenging to sell since many lenders have minimum lease term requirements for granting mortgages. It's important to note that any service charges, ground rent, and restrictions in the lease will also be transferred to the buyer. Therefore, sellers should be forthcoming about these costs to potential buyers. It's also worth considering that selling a leasehold property might take longer than a freehold property due to the additional legal considerations involved.
What Are the Key Differences Between Leasehold & Freehold Properties
When buying a property, understanding the difference between leasehold and freehold is essential. Here's a simple comparison of these two types of property ownership:
Ownership: With a freehold property, you indefinitely own the building and the land it stands on. In contrast, a leasehold means you have the right to occupy a property for the length of the lease agreement with the freeholder. When the lease ends, the property reverts back to the freeholder unless the lease is extended.
Control: Freeholders have more control over their property as they are not subject to ground rent, service charges, or any stipulations and restrictions that a freeholder may place on a leasehold property.
Costs: Leaseholders must pay ground rent to the freeholder and are often responsible for service charges, which can increase over time. Freeholders do not have these extra costs.
Maintenance & Repairs: Freeholders are fully responsible for all maintenance and repairs to their property. Meanwhile, leaseholders often pay service charges to cover the cost of maintenance and repairs to the building's communal areas.
Selling & Mortgaging: Leasehold properties can be more complex to sell or mortgage, especially if the lease term is less than 80 years. Freehold properties do not have these issues.
Knowing these differences can enable you to make an informed decision when buying a property and help you understand the rights and obligations associated with each type of ownership.
Freehold vs Leasehold - Which Is Best?
Determining whether freehold or leasehold is best largely depends on your circumstances and requirements. If you seek total control over your property without worrying about additional costs like ground rent or service charges, a freehold property might be the better choice for you. However, freehold properties usually come with a higher purchase price. On the other hand, leasehold properties can be more affordable, but you'll have to contend with annual charges and the remaining lease term. Knowing this, it becomes pertinent to consider your financial standing, long-term plans, and personal preferences before deciding. It's always advisable to seek professional advice to understand the implications fully. Feel free to speak with our knowledgeable estate agents for more advice.