Buying or selling a property can seem confusing and even overwhelming at times. In fact, you’re likely to come across a whole host of terminology that you might be unfamiliar with! Understanding the difference between freehold and leasehold property is particularly important when you’re searching for a new home, looking for a commercial property, or preparing to sell. Fortunately, this handy guide will tell you everything you need to know about freehold and leasehold properties – and the pros and cons of each.
Read on to learn more about the difference between freehold and leasehold property in the UK and find out what type of property is right for you.
What is the difference between Freehold and Leasehold in the UK?
For property buyers, it’s easy to make assumptions when you’re looking at potential homes or commercial buildings. However, this can be a costly mistake to make. When it comes to freehold vs leasehold, it’s vital to confirm which type of title a property is being sold with, as the ownership rights you’ll gain will be very different, depending on whether you’re buying a freehold or a leasehold property.
One of the most common questions property buyers ask is, ‘what is the difference between freehold and leasehold properties?’, and we’re always happy to help our clients distinguish between the two.
If you buy a freehold property, you’re purchasing the property and the land it sits on. In contrast, if you buy a leasehold property, you’re purchasing the property and not the land it sits on.
However, the differences between the two don’t stop there. When you buy a freehold house, you will be its owner until you decide to sell it or pass the title on to someone else. If you purchase a house with a leasehold, you will own the property for a specific amount of time. Once the lease runs out, the ownership of the property reverts back to whoever owns the freehold. Find out more about selling a leasehold property in our simple guide.
Why are properties sold without a lease?
At first glance, buying a leasehold property might not seem like an attractive option. After all, you will only own the property for a set amount of time, depending on how long the lease has left to run. However, there can be many advantages to purchasing a leasehold property and many reasons why a building is sold in this way.
If you’re thinking about buying a flat or apartment, for example, you’ll find that these are usually sold with a leasehold, rather than freehold. This is because multiple flats are situated on the same portion of land. Often, a single individual or entity owns the freehold and multiple people own leaseholds on flats or apartments within the complex. In many instances, the freeholder of a block of flats will also be responsible for maintaining communal areas, such as hallways and entrance halls.
Alternatively, a property might be sold with a leasehold simply because the owner of the freehold wants to retain their interest in the land. A short leasehold could be a viable way for a property owner to generate funds from the property, while keeping the freehold title, for example.
The difference between a Leasehold and a Freehold house
It’s more common for houses in the UK to be sold with the respective freehold, but this isn’t always the case. Due to this, it’s important to know the difference between freehold and leasehold house.
A property owner might decide to sell a house with a leasehold because they want to retain an interest in the land or because the house has been split into multiple dwellings. When a house is converted into flats, the flats may be sold with a leasehold, while the freehold remains with the original property owner or developer.
Another reason why an owner might decide to sell a house with a leasehold is if they own the land surrounding the property. If someone owns a home and acres of land surrounding it, they might decide to build a second house on the land and sell it with a leasehold. If sold with a freehold, the buyer would only be purchasing the property and the land immediately beneath it and potentially still need to cross the original owner’s land to access it. By selling it with a leasehold, however, the original owner can retain ownership of all of the land, while the buyer’s access to their property can be protected via the terms of the lease.
As you can see, there are many legitimate reasons why a property might be sold with a leasehold rather than a freehold. Furthermore, there can be many advantages associated with buying a leasehold property too.
Long Leasehold vs Freehold Properties
If you’re thinking about buying a leasehold property, one of the first things you need to check is how long the lease has left to run. This determines how long you will own the property before it reverts back to the freeholder, so it’s a critical issue when you’re purchasing a property.
In many cases, leasehold properties are sold with a 999-year lease. This is arguably the best term for a buyer of a leasehold property, as there is no risk of the ownership of the property returning to the freeholder within their lifetime. In fact, many people believe that a leasehold property with a 999-year term lease is ‘as good’ as a freehold. While it’s important to remember the difference between freehold and leasehold properties, a long-term lease does typically provide more of a return on your investment.
It’s worth noting, however, that some properties are sold which much shorter leases. You’ll find plenty of properties on the market with 99 or 125-year leases, for example. While these may be an ideal option for your needs, it can be difficult to obtain a mortgage for leasehold properties when the remaining term of the lease is relatively low.
Due to this, it’s important to verify how long is left on the lease and whether it will affect your financing options if you’re thinking of buying a leasehold property.
Share of Freehold vs Leasehold properties
Most properties in the UK are sold with either a freehold or a leasehold but there are times when you can purchase a share of the freehold of a property. This most commonly occurs when flats, apartments, or houses converted into individual units are bought or sold. If these types of properties aren’t sold via a leasehold, you may instead be offered the chance to buy a share of the freehold.
This essentially means that you will own part of the freehold and other people (usually other property owners in the same complex) will own the remainder of the freehold. Often, the joint owners of a freehold will set up a management company so that the land and the communal areas of the property can be maintained and managed appropriately.
Although this may sound similar to a leasehold, there is a significant difference between leasehold and share of freehold. With a leasehold property, a third party is responsible for the land and communal areas (subject to contractual terms), and you only own the property until the lease expires. If you own a share of the freehold, however, the ownership of the property is yours until you decide to sell it or pass the title on to someone else, but you are partly liable for the communal areas and the land beneath the property.
Practical Differences Between Freehold and Leasehold Property
For potential property buyers, the practice difference between freehold and leasehold property is, perhaps, the most important factor in their decision-making process. After all, you’ll want to know whether you’ll be disadvantaged if you choose to buy a leasehold vs a freehold or vice versa.
Now that you know the difference between freehold and leasehold in terms of legalities and ownership rights, it’s important to assess the practical impact the varying types of property ownership can have.
If you’re thinking of purchasing a leasehold property, it’s vital to check the terms of the lease before you decide if the property is right for you. As well as determining how long the lease has left to run, check whether there are any restrictions on how the property is used. Some leases may prevent owners from having pets, for example, or you may need to obtain permission from the freeholder before making any changes to your property.
In addition to this, some leasehold properties also come with the obligation to pay a specific amount of ground rent. This is a payment from the leaseholder to the freeholder that essentially covers the cost of ‘renting’ the land upon which the property is built. In some cases, ground rent may be due monthly, although quarterly and annual payments are not uncommon.
Another important difference between freehold and leasehold property in UK is the possible imposition of a service charge. If you own a leasehold property, you might be required to pay a service charge towards the upkeep and maintenance of communal areas, such as gardens or hallways. As a freeholder, you won’t be required to pay a service charge, but you will be liable for the costs of maintaining these areas of the property. Similarly, if you own a share of the freehold, you will be partly liable for these expenses.
Freehold vs Leasehold price difference
As you might expect, there can be a significant difference in price when it comes to the value of leasehold or freehold property. The same property, in the same location, is likely to be more expensive if it is sold with a freehold title than if it is sold with a leasehold. However, a long leasehold may mean that there isn’t as much of a difference in the price as you might think.
When you’re looking at freehold vs leasehold UK, the variations in price will obviously be affected by the location, size of the property, and other relevant factors. For many people, the opportunity to purchase a leasehold property in a sought-after location outweighs the benefits of buying a freehold house in an alternative area.
The price difference between a long leasehold vs freehold may not be substantial but the price difference between a short leasehold vs freehold property can be extremely significant. Of course, this reflects that you will only own the property for a limited amount of time. If you buy a leasehold property with only 25 years remaining on the lease, for example, however much you pay for it will effectively be lost once the lease expires and the ownership of the property reverts to the freeholder. In the meantime, however, you will have the enjoyment of living in the property.
While the reduced property prices often associated with leasehold properties can make them an attractive choice, you should consider whether the terms of the lease are favourable to your needs before you decide whether the property is right for you.
Can you change the terms of a lease?
You can propose changing the terms of a lease, but the freeholder will need to agree to your request before the lease can be formally updated. However, you don’t need to purchase a property before discussing this with the freeholder. If you’re eager to purchase a leasehold property but the terms of the lease are holding you back, suggesting alternative terms could work in your favour.
Can a lease be renewed?
The owner of a leasehold can extend or renew a lease, providing they reach an agreement with the freeholder. In practice, it’s often best to renew a lease as soon as you can, rather than waiting until it only has a few years left to run. This helps to maintain the value of the property and gives the leaseholder peace of mind. However, it is possible that the freeholder will not want to extend the lease or will charge a premium to do so.
Can a Leaseholder buy the Freehold?
Yes. A leaseholder has the right to purchase the freehold of the property in certain circumstances. Under the Leasehold Reform Act 1967, there are various criteria that must be met if you want to enforce your right to purchase the freehold. For example, you need to own the lease for the entire property and not just part of it. Additionally, there must be at least 21 years left to run on the lease. You must have also held the lease for at least two years if you want to insist the freeholder sells you the freehold.
However, the process of buying the freehold can be complicated for the leaseholder. You must give the freeholder notice and the opportunity to reply, at which point a price may be agreed and the sale completed. If a price cannot be agreed upon, the matter can be taken to a tribunal, where the price can be set by an independent third-party.
Having the right to purchase the freehold can be advantageous for leaseholders but it’s less common in practice than you might think. This is because most leasehold properties are flats, with multiple different leaseholders, and you must hold the lease for the entire property if you want to enforce your right to purchase the freehold.
Freehold Properties: Pros and Cons
To get a better idea of whether a freehold property is most suited to your needs, take a look at some of the pros and cons associated with this type of ownership:
- Ownership of the property and the land it sits on
- Complete control of the property
- You own the property until you decide to sell it or transfer the title
- Not liable to pay ground rent or service charges
- Property value will not diminish due to a lease running out
- Freehold properties are typically more expensive to buy
- You are liable for all aspects of the property, including maintenance
Leasehold Properties: Pros and Cons
If you’re considering purchasing a leasehold property, take a look at the pros and cons that this type of property ownership can bring:
- Leasehold properties are often cheaper to purchase
- Leaseholder is not usually responsible for maintaining communal areas
- Leaseholder is not usually responsible for maintaining the structure of the building
- There may be restrictions on how you can use the property (e.g., keeping pets, smoking indoors, etc.)
- You may need to obtain permission before making changes to the property
- The value of the property is likely to decrease as the lease gets shorter
- You may be liable to pay ground rent, service charges, and/or admin fees
- It may be more difficult to sell the property in the future, particularly if there is not long remaining on the lease
With pros and cons for both leasehold vs freehold properties, it’s easy to see why there is so much confusion surrounding these types of ownership. While many people assume that purchasing a freehold is ‘better’, there can be notable benefits associated with leaseholds. To find the best solution for you, it’s important to assess your personal and financial circumstances and scrutinise lease terms in detail before deciding if a leasehold property meets your needs.
Remember – every lease is unique, so one leasehold property won’t have the same terms as another. To avoid disappointment and unexpected costs, be sure to check the lease terms in detail before you make an offer on a leasehold property.