When you’re buying your next property, there’s a dizzying array of terms and intricacies to learn, and it can seem overwhelming at times.
The difference between freehold and leasehold, however, is one of the most important ones, as it can affect the long-term prospects of your property. Follow this handy guide to freeholds and leaseholds, and discover which one is best for you.
What is a freehold?
The most straightforward of the two types, if you’re new to buying and developing property freeholds are probably what you think of when it comes to buying land. Simply put, you are the owner of the land and any existing property on top of it in its entirety.
When you’re the freeholder of a property, you are the one who ultimately owns it, and you have free reign to expand or develop the property as you see fit (once you obtain permission from your Local Planning Authority, of course). Of course, with having ultimate ownership, you also have ultimate responsibility, and any issues, breakages, or damages that occur on the property are your sole responsibility.
Freeholds are the most common type of agreement when it comes to houses, with only approximately 7% of homes being leasehold. However, when it comes to flats and apartments, that number shoots up to 94%. This brings us to what a leasehold is…
What is a leasehold
In effect, you can think of leaseholds as long-term rental agreements. With leaseholds, you enter into a long, fixed-term contract with the landlord of the property (who will also be the freeholder of the property). Upon the expiration of the contract, ownership reverts back to the original holder of the land.
The lease terms tend to be quite long, typically 99 to 125 years, and some are even leased up to a 999-year term, and the time left of the lease has a significant impact on buying or selling the property.
The closer the lease is to its expiration, the less valuable the property becomes, as a leasehold with only a few years left is seen as a risky venture. 80 years is seen as a common threshold for when a property under a leasehold becomes problematic to sell. Fortunately, there are ways to mitigate this.
All leaseholds are open to being extended if you have owned the property for 2+ years, and the lease has less than 80 years left. With a flat or apartment, it is possible to extend the lease by up to 90 years, or by up to 50 years for a house. However, there is a cost associated with renewing the lease: in some cases up to 25% of the value of the property (known as the ‘marriage fee’). Extending the lease raises the value of the property, but in turn the freeholder expects a portion of that increased value. Additionally, there is also the option of buying the lease outright, turning you into the freeholder of the property.
Leaseholds are most common when it comes to flats within a larger building: The occupants of the flats own leaseholds for the individual units, while communal areas (stairs, corridors etc) and the structure itself remain the property of the freeholder.
When buying a leasehold, you may need to be aware of the terms of the contract. As with any other form of rental agreement, the freeholder may impose certain restrictions and requirements upon the buyer as part of the terms of the lease. You may have restrictions on the running of commercial enterprises from within the leasehold, and for residential leaseholds, restrictions on the ownership of pets or restrictions on modifications to the property.
One other thing you might have heard of when it comes to leaseholds is ‘ground rent’, an annual cost paid to the freeholder. However, on the 30th June 2022 the Leasehold Reform (Ground Rent) Act 2022 came into effect, banning annual costs on most properties [4]. With very few exceptions, such as certain community-led housing projects, or businesses with adjunct dwellings which contribute to the business operations, leasehold buyers will no longer need to worry about ground rental.
The pros and cons
Pros: Freehold
- Total ownership until you sell or transfer the property
- Guaranteed no ground rent
- No decrease in property value due to a lease
Pros: Leasehold
- Usually cheaper
- Freeholder responsible for maintenance of the building
Cons: Freehold
- More expensive to purchase
- Liable for all aspects related to maintenance and damages
Cons: Leasehold
- Effectively renting
- Possible ground rent charges
- You need permission from the freeholder to make any changes to your property
- Terms of the lease may adversely affect property prices if trying to sell
- The lease contract may be restrictive
Overall, if your budget is your primary concern, and you’re willing to be flexible on the terms you’re given, then a leasehold may be a suitable option for you. Otherwise, a freehold may be the better choice.
This article is purely speculative and should not be mistaken for financial advice. Readers should consult a professional independently before making any financial decisions.