What is the Difference Between a Leasehold Property and Freehold Property?
Whilst flats are becoming less popular in the UK many homeowners own a leasehold as opposed to a freehold property. These terms might seem arbitrary, but they have a huge impact on the rights of the property owner and the long term value of the property. In this guide we lay out the differences between a leasehold and a freehold property and help you answer questions like: what is a leasehold? Why do leaseholds exist? How can I extend my leasehold? And Is it possible to buy the freehold to my flat? For more information, read on or use the menu below to navigate more quickly…
- What is a leasehold?
- Why do leaseholds exist?
- What are the rights of the leasehold owner?
- What are the responsibilities of the freeholder?
- How long do leaseholds last?
- Can I extend my leasehold?
- Is the freeholder responsible for building repairs and maintenance?
- What is ground rent and service charge?
- Should I get a leasehold?
What is a leasehold?
There are many long-winded answers to this question. The long and short of it is, a leasehold does not give you permanent ownership of the land that is granted in the title. A leaseholder owns the ‘right’ to the property for the duration of the leasehold, but the land that the building stands on is owned by the freeholder. Once the leasehold comes to an end the property reverts back to the freeholder. This explains why properties with a short time period left on the leasehold are undesirable on the open market.
To be completely clear: a freeholder owns the land that the property is built on as well as the property itself; a leaseholder owns the property but not the land, and only owns the property for a set period of time. A leaseholder essentially rents the land from the freeholder.
Why do leaseholds exist?
Leaseholds exist to formalise an arrangement between many residents on a shared piece of land. For example, imagine a block of flats that shares a corridor and a lift. In the event that each person owning a flat in the building owns their flat in perpetuity, where is the incentive to keep the common areas in good repair?
Typically a management company becomes a freeholder and takes on ownership of maintaining these features of the property. Within this agreement, leaseholders have rights as the ‘owners’ of the property.
Leasehold rights explained
Typically the ‘freehold’ is managed by a company on behalf of the many leaseholders within a property. Leaseholders have a number of rights that are enshrined in UK law, specifically they are entitled to:
- Consultation about business work that incurs significant cost
- Consultation over work that lasts for a substantial period (more than 12 months)
- Notification of work that incurs cost that is greater than £100 per year
- Examination of the costs incurred by the freeholder of the property
What are the main freeholder responsibilities?
Freeholders are usually responsible for the maintenance and repair of the building. Including but not limited to:
- Repairs to building structure
- Repairs to communal areas within the building
- Building insurance to protect against adverse events
How long is a leasehold?
The length of leasehold on a property varies. Typically leaseholds last between 99 and 125 years but can last up to 999 years. But what happens when a leasehold expires? In reality it rarely does, leaseholds are extended, but the process of extending a leasehold can be expensive. According to Zoopla a lease less than 80 years can adversely affect the market value of a property. It would require the owner to work with the freeholder to extend the leasehold. If a leasehold is less than 70 years then affect on the value of the property can be significant.
How much will it cost to extend my lease?
The extension of a leasehold is a statutory right of the leaseholder if you have held the property for two years or more. However, extending the leasehold on a property incurs legal fees and likely a premium to the freeholder of the property that you’re negotiating on.
Usually it’s best to extend a leasehold as soon as possible because, as mentioned previously, the shorter the term of the lease the less negotiating power you have vs the freeholder. If you want to extend your leasehold you’ll also need to obtain an independent property valuation and instruct a conveyancing solicitor to check Land Registry records.
Extending the time period of a leasehold property costs a lot of money (typically around 5% of the property value per 100 years). The shorter the time period left on the lease, the more expensive it is to extend. If the leasehold on a property is short, it can be hard to find a buyer.
Is the freeholder responsible for building repairs and maintenance?
Usually yes. A freeholder will take on the cost and responsibility of maintaining the communal areas and structure of the building, as well as the building insurance and coordination of third parties. However, the freeholder will typically charge a management fee along with ground rent. Let’s discuss this in some more detail…
What is ground rent and service charge?
These are two different fees that are charged to the leaseholder by the freeholder of the land. Service charges are typically fees that cover the leaseholder’s contribution to the running costs of the building (e.g. gardening, cleaning, maintenance etc. ). Ground rent is essentially money that leaseholders pay the freeholder to occupy the land that a property is built upon. Legally a freeholder can ask for ground rent as far back as six years, they can also ask for ground rent in one sum rather than installments – in reality this rarely happens, but it’s important to be aware of. Critically, ground rent can often increase to the dismay of residents, and a relatively recent phenomenon known as ‘doubling ground rent’ causes ground rent to double at intervals of 10 or 20 years. When this becomes the case, the property (or leasehold) becomes very difficult to sell.
Should I buy a leasehold property?
Ultimately this is your decision and depends on the type of property you’re purchasing, the area in which you’re buying, and the reason for your purchase. Leaseholds are undoubtedly more complex than freeholds to manage however they’re a common feature of the UK property market. You should make sure you’re fully aware of the implications of your decision before you buy a leasehold property.
If you’re interested in buying a leasehold property and don’t have the cash available, or you want to sell your leasehold property quickly: SmoothSale can help with our cash property buying service. We can offer you cash for your property in as little as 7 days, or work to a timescale that suits your onward plans. Get in touch with us today or get a free cash offer now.