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Leasehold vs Freehold Properties: What’s the Difference?

Jan 12, 2021 by Irini Sala

When it comes to purchasing a home, there are two primary forms of property ownership in England and Wales: leaseholds and freeholds. But how are the two different, and what do they mean for you and your property purchase?

What is a leasehold property?

Leaseholders do not own the land on which the property is built. Instead, they rent the property from the freeholder (usually the developer) for the length of the lease. Owning a leasehold does not mean you own a property, but rather that you own the lease of that property. You can still sell the property, but legally you are a tenant of the freeholder of the period of the lease.Flats are most commonly sold as leasehold properties, with some flats sold as ‘share of freehold’, where the owner shares the freehold with other people living in the same building.

Leasehold service charges

For those buyers less interested in houses and instead looking to purchase a flat, which are often cheaper, leasehold properties are probably the only option. As you don’t own the land, you are not responsible for maintaining it. Instead, you will be required to pay a fee to cover this, which is known as a service charge. Each property is different, but service charges typically apply to communal areas like gardens, entrance halls and staircases. Sometimes, they might apply to exterior walls and the roof.

In addition to service charges, leaseholders pay maintenance fees, their portion of buildings insurance, and ground rent. They also have to receive permission to carry out any major works, and are potentially subject to additional restrictions such as not having pets in the home, subletting the property to another person and, in some cases, not hanging clothes out on the balcony.

How do leaseholds affect the value of a property?

Leasehold property values are determined by the length of the lease. Most leases used to be set at a length of 99 years, but with the arrival of modern flats in the last few decades, it is not unusual to see leases for 125 years or even as high as 999 years. Former council flats also typically have leases of 125 years. Any leases shorter than 85 years are considered risky purchases and are therefore treated by lenders with less enthusiasm. This is due to the diminishing value of the lease. As the lease gets shorter, the value of the flat reduces and selling it is likely to be less profitable.

When buying a leasehold property, the minimum lease length you should consider buying is 70 years. This is because lenders typically need the lease to extend for another 25-30 years after your mortgage. If you’re looking to get a 25-year mortgage on an 80-year leasehold property, the lease will have 55 years before it ends. Selling a leasehold property is therefore quite difficult if the lease is for less than 80 years.

If you do find yourself with only shorter lease options, know that you are able to ask your landlord for a lease extension, which can go up to 90 years once you’ve owned your leasehold property for two years. To qualify, your original lease must have been for at least 21 years. Your freeholder will charge you for extending the lease, the cost of which depends on your property, and must be agreed upon by both leaseholder and freeholder. If an agreement cannot be reached, the leaseholder may appeal to the Leasehold Valuation tribunal but be aware of potential legal costs such as hiring a solicitor or surveyor.

What is a freehold property?

A freehold usually applies to a house, rather than a flat or maisonette, and represents outright ownership of your property and the land where it sits. There is no length for a freehold, and it’s viable for the entire time that you own the property. When you sell the home, the freehold moves onto the new buyer. Freehold owners even have the rights to up to 500 feet of airspace above your property.

The benefits of freeholds

For buyers interested in purchasing only a house, a freehold is usually the best – and most common – option. There are no additional charges, nor is there a need to deal with freeholders or landlords. Aside from freeholders having complete ownership of their property and its land, freehold properties are also valued differently to leasehold properties. Their value reacts to the property market. A freehold property’s value will remain unchanged as long as the property market is even. Increases in property value would occur when house prices rise. Buying and selling can therefore often be organised around the market’s behaviour, to an extent.

However, remember that as a freeholder, you are solely responsible for the maintenance of both your property and your land.

What is a commonhold property?

Commonhold properties are similar to long-term leaseholds, in that property owners are individually responsible for their flats, but have the option to form a commonhold association which would own the building, the land it sits on, and any common areas. These collective owners would also then be responsible for managing and maintaining the property. Commonholds also differ from typical leaseholds in that there is no time limit for how long the leaseholder owns the property.

Commonholds sound like a great option for buyers but conflicts can often arise in commonhold associations, and are therefore quite rare and there have only been about 15-20 commonholds completed in the UK.

It’s important to know exactly what kind of property you are interested in buying, and what form of ownership your purchase comes with. Especially in situations where freehold and leasehold properties are located close enough to one another to share common areas like gardens, it’s always good to know who bears responsibility for those areas.

Resources for house buyers
Jan 12, 2021 by Irini Sala

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