What is the Difference Between Leasehold and Freehold?

Surveyor's photo of Chiswick

There are important differences between freehold and leasehold

Whilst you may fall in love with a particular property and set your heart on buying it, there is one crucial legality that should not be overlooked – the terms on which you will own that property. In England there are two forms of home ownership – freehold and leasehold – and it makes all the difference between owning your home outright and having a landlord.

So what is a freehold?

Owning the freehold of a property means outright ownership of the building – and the land on which it stands – in perpetuity. Generally speaking, most houses (bought in their entirety) are freehold properties, although some leaseholds are available through shared ownership schemes.

As a freeholder you are solely responsible for the upkeep of your property and land. You are, effectively, your own landlord and your name will appear in the land registry records for your property.

And what is a leasehold?

Block of flats

Flats tend to be leasehold properties.

Most flats and maisonettes in England are sold as leasehold properties. This means you have temporary rights to the property for the length of your lease agreement.

The freeholder retains overall ownership of the land and has responsibility for the maintenance and running of the building. This responsibility may be passed on to a managing agent, but whatever the scenario, it means you will need to factor in additional costs, such as ground rent, buildings insurance and service charges.

Service charges vary from one property to another and are intended to cover the costs of utility bills for communal areas, maintenance and repair of exterior walls and roof, maintenance of communal gardens etc. As the leaseholder you have the right to demand evidence of how the service charge is calculated, how monies are spent and receipts for works carried out. The freeholder should also consult you in advance of building works taking place.

Does the length of a leasehold matter?

The short answer is yes! Leases are usually long-term – often 90 or 120 years, but they can be as long as 999 years. If you buy a leasehold property you are buying whatever duration remains of the lease from the previous owner, and it’s important that you know exactly how many years are left for several reasons.

  • If the lease is for anything less than 70 years it may impact on your ability to get a mortgage. Lenders often prefer a lease to run for 25-30 years beyond the duration of a mortgage, so a 25-year mortgage will mean a lease should, at the very minimum, still have 50-55 years to run.
  • Similarly, you should take into account how easy it will be to sell your property if and when you decide to move. As the lease gets shorter and shorter, it will impact on the resale value – even if property prices in your area are on the increase. This is one of the most important differences between leasehold and freehold properties. A freehold property will always maintain its value, while a leasehold is a diminishing asset.

That said, you can always request an extension to the lease, and after two years of owning your home you have the right to extend the lease by 90 years. Naturally, there will be a fee attached and, if you need to employ the services of a solicitor and/or surveyor, there will be additional costs.

Is there anything else to consider?

If you buy a freehold, the property and land is yours and you can do with it as you wish. As a leaseholder, you will still be responsible for repairs and maintenance of your property, but you would have to seek the freeholder’s permission for any significant changes, particularly structural changes. In addition, a leasehold may contain other restrictions, such as not being allowed to sublet the property or not owning pets.

Image credits

Block of flats image copyright Scriniary and licensed for reuse under this Creative Commons Licence.