Leasehold vs freehold: What’s the difference?
Wondering what the difference is between a leasehold and a freehold? This guide will break down the ways you can own a property: freehold, leasehold or with a share of the freehold. It also examines the different costs and responsibilities with each, and how they impact how much a property will cost to buy, sell, and maintain.
- What is a freehold?
- Owning a share of freehold
- Commonhold properties
- What is a leasehold
- Charges for leasehold properties
- Management disputes
What is a freehold?
The freeholder of a property owns it outright, including the land it’s built on.
If you buy a freehold, you are responsible for maintaining your property and land, so you’ll need to budget for these costs.
Generally, most houses are freehold properties although some might be leasehold – usually through shared ownership schemes.
Benefits of having a freehold
You don’t have to:
- Worry about the lease running out, as you own the property outright.
- Deal with the freeholder (often known as the landlord).
- Pay ground rent, services charges and any other landlord charges.
Owning a share of freehold
You can buy a share of the freehold with the other leaseholders (for example, other people living in a block of flats) as long as at least half of them agree to buy a share.
Doing this gives you more control over your home and the costs you pay out. It also means you can extend your lease fairly easily for up to 999 years.
- Together you will have to serve a Section 13 Notice on the freeholder of the property.
- It may be expensive to buy the freehold and you and the other leaseholders will then need to set up a company to manage the building, or find a managing agent to do it for you.
Commonhold is a type of freehold ownership.
The system was designed to help flat owners get full ownership of their property, instead of having it on a lease.
Everyone within a building or block of flats comes together to form a company, known as a Commonhold Association. That company then owns the freehold of the building.
What is a leasehold?
With a leasehold, you own the property and its land for the length of your lease agreement with the freeholder. When the lease ends, ownership returns to the freeholder unless you are able to extend the lease.
Most flats and maisonettes are owned leasehold, apart from in Scotland where there are very few leasehold properties.
Buying a leasehold
When you buy a leasehold property, you’ll take over the lease from the previous owner, so before making an offer you’ll need to consider:
- How many years are left on the lease.
- How the length of the lease may affect getting a mortgage and the property resale value.
- How you’ll budget for service charges and related costs.
How important is the length of a lease?
If the lease is for less than 70 years, you may struggle to get a mortgage. Lenders will normally need it to run for 25-30 years beyond the end of your mortgage.
This means if you want to get a 25-year mortgage the lease needs to have at least 50-55 years before it ends.
As a result, it can also be difficult to sell a property if the lease is for less than 80 years. If you eventually want to sell a leasehold property you’re buying think about how many years will be left on the lease by that time.
Extending the lease
You can ask the landlord to extend the lease at any time. And once you’ve owned your home for two years, you have the right to extend your lease by 90 years, provided you are a qualifying tenant.
As a general rule you will qualify if your original lease was for more than 21 years. The freeholder will charge for extending the lease. The cost will vary based on the property.
If you and the freeholder can’t agree on the cost of extending the lease, you can appeal to the Leasehold Valuation Tribunal. You may need to hire a solicitor and surveyor, which will increase the cost.
Charges for leasehold properties
Use the Budget planner to check that you’ll be able to afford service charges on top of your mortgage payments.
If you own a leasehold property, you don’t own the land.
This means you won’t be responsible for maintaining and running the building. The landlord will do this or appoint a managing agent to do so for them.
However, the leaseholders share the costs of this by paying a service charge to the landlord. You may also be asked to pay into a sinking fund, to help cover any unexpected maintenance work needed in the future.
Leasehold service charges
Service charges vary from property to property and are to pay for things like maintaining communal gardens, electricity bills for communal areas, repair and maintenance of exterior walls, roofs and lifts.
Make sure you’re aware of the service charges before you put in an offer on a property as it may impact whether you can afford to live there.
If you own a leasehold property, the repairs and maintenance on your property are your responsibility. But you’ll usually need to get the landlord’s permission to make any significant changes.
Other charges may include:
- Ground rent
- Buildings insurance (arranged by the landlord)
- Administration charges
Factoring charges in Scotland
In Scotland, services charges are known as ‘factoring charges’. These usually apply to flats with common parts or to properties in residential areas which have communal gardens or grounds.
Your rights as a leaseholder
As a leaseholder you have rights that prevent the landlord from taking advantage of you financially.
For example, you can ask to see:
- A summary of what the service charges are being spent on.
- How they have been calculated.
- Any supporting paperwork, such as receipts for work carried out.
The landlord must also consult you:
- About any building work that will cost more than £250.
- Before doing any work lasting more than a year.
- Before doing any work that will cost you more than £100 a year.
What to do if you’re unhappy with the property management
If you’re unhappy with charges or the way the property is managed, you have two options:
1. The Right to Manage lets leaseholders take over certain management tasks from the landlord without having to prove bad management. You’ll need to qualify, and set up a management company with the other leaseholders.
2. Apply to appoint a new manager, but you must prove bad management (unfair costs, breach of agreements).