Leasehold vs freehold

3rd September 2018

Leasehold vs freehold

What’s the difference between a freehold and leasehold property? These are the two main forms of home ownership you should understand before buying a property…

What is freehold?

Owning a property freehold means you own it outright: both the building and the land it sits on belong to you. You are registered in the Land Registry as the freeholder, and you own the ‘title absolute’. Freehold is the simpler form of home ownership.

KEY FEATURES OF FREEHOLD:

  • No annual ground rent to pay
  • No relying on a separate freeholder to maintain the building
  • Sole responsibility for maintaining the building and managing the land rests with you, the freeholder
  • Freehold is the most normal way of selling houses as they are standalone properties and include the land they sit on
  • Some new-build houses are now being sold leasehold so make sure you check! The government is proposing a ban on this ** For the latest on the government's project to make leasehold property ownership fairer, head to the Law Commission's site here.

What is leasehold?

Leasehold is a more complex form of home ownership and is common for apartments or in developments, where multiple homes form one larger building on a plot of land.

The freeholder (or landlord) owns the land and building. Homebuyers buy a ‘lease’ for a property from the freeholder. The lease can be of any length – 90 or 120 years are common but can be as much as 999 years. Some mortgage lenders can be averse to lending on a property with a shorter lease, so make sure you check with your mortgage advisor if you are unsure how long the lease needs to be for the mortgage you have found.

KEY FEATURES OF LEASEHOLD:

  • A leaseholder buys a lease for a property from the freeholder
  • The contract between the leaseholder and freeholder details the legal responsibilities and rights of each party
  • The freeholder is usually responsible for the upkeep of the common areas of the building, as well as the roof and exterior walls
  • As well as the initial purchase price of the leasehold property, leaseholder will need to pay annual ground rent, annual service charges, maintenance fees and a share of insurance for the buildings
  • Leaseholders cannot usually undertake any major works on the property without the permission of the freeholder
  • Leaseholders may be subject to other restrictions on how they use their property, such as subletting rooms or pet ownership
  • The lease can become forfeit if a leaseholder does not fulfil their side of the contract

What’s in the lease?

The leasehold document contains all the details of the lease, including:

  • The length of the lease Service charges that will be due
  • The amount charged for ground rent
  • The obligations of both the freeholder and leaseholder
  • Rent increases or changes that are permitted, and when these can happen

Length of the lease: This is often an initial period of 99 or 125 years but can be less if the lease has not been renewed recently. This is usually reflected in the sale price of the property.

Ground rent: The amount of rent the leaseholder must pay to the freeholder. This may be charged monthly or annually, and failure to pay may result in court action and possible extra charges that will be detailed in your leasehold document.

Obligations: These are the responsibilities of both the freeholder and the leaseholder with regards to the property and the building/common areas.

Rent increases: Details of any increases in the ground rent the leaseholder can expect, showing how much and how often those increases will happen.

SERVICE CHARGES FOR LEASEHOLD PROPERTIES

Most leaseholders will pay service charges to the freeholder or company responsible for managing the property. This covers all the activities that are needed to maintain the building within which the leaseholder’s property sits. Insurance, maintenance, repairs and management are all paid for out of the service charges.

Properties with features such as leisure facilities, elevators, large communal grounds, will usually incur higher service charges.

WHAT IS GROUND RENT?

Ground rent is a low fee paid to the freeholder as a token ‘rent’ for the ground a property sits on. For older properties this could amount to around £100 paid annually, but for some new-build properties it may be higher, and there may be a clause in the leasehold agreement that states how much the ground rent can increase over time.

It is always worth checking the terms of a leasehold contract to make sure ground rent charges are reasonable in the long term.

WHAT IS A SINKING FUND?

A sinking fund is a fund held in reserve to pay for any major or expensive works that might be required on the building. This is not included in all leasehold agreements but many leaseholders will be required to pay into a sinking fund that will be held in case of major works. The freeholder must consult with leaseholders if any work is to be carried out that will cost each leaseholder money.

CONVEYANCING COSTS: FREEHOLD AND LEASEHOLD

Another factor to take into consideration when buying a leasehold property is that, because of the greater complexity of the leasehold contract, conveyancing fees are likely to be higher than when buying a freehold property.

Solicitors for both buyer and freeholder will generally need to field a larger number of queries over the process of agreeing the terms and conditions of the leasehold agreement. This generates a much higher conveyancing cost for the buyer.

Common issues between freeholders and leaseholders

Friction can arise between leaseholders and freeholders. The following can be a common source of issues if not managed carefully:

  • Maintenance not being completed to residents’ standards is a common cause of complaint against freeholders
  • Untidiness in stairwells, landings and outdoor common areas
  • Leaseholders often feel that the fees charged by the freeholder are excessive
  • Freeholders might complain about leaseholders breaching the terms of their agreement, for example by starting building works without permission

Buying a freehold or leasehold property? We can help you navigate all the options.