Leasehold Vs Freehold: What Are The Differences

What Is A Leasehold?

Leasehold is the ownership of a property. The leaseholder will own the property for a set period of time as set out in the leasehold agreement/contract with the landowner.

When the lease ends, ownership returns to the landowner, unless you can lengthen the contract, known as a lease extension.  Some houses are sold as leaseholds; however, it is more common for flats and apartments to be purchased on a leasehold basis. If it is such a case,  then you own a property, but not the land it sits on.

Buying Purchasing A Leasehold Property

When you buy a leasehold property, you will either take over the lease from the previous leaseholder or the landowner, who is also known as the freeholder. So, before making an offer, you will need to consider:

  • How many years are left on the lease
  • How will you set a budget for the service charges and related costs
  • How might the length of the lease affect obtaining a mortgage and the property resale rates

How Important Is The Length Of A Lease?

You might struggle to get a mortgage if the lease is less than seventy years. Generally, lenders will need it to run for 25-30 years beyond the mortgage end. Meaning, if you want to obtain a 25-year mortgage, the lease requires having at least 50-55 years before it finishes.

As a result, it may be challenging to sell a property if the lease is less than 80 years. Eventually, if you want to sell a leasehold property that you are buying, you must consider how many years will be left on the lease as this may affect your future investments.

Extending The Lease Period

A wide range of Government actions have given leaseholders safeguard against short leases, by giving them the right to extend their lease or the right to buy the property – but this can be costly. The law is slightly different depending on whether you have a house or flat.

Usually, if your lease was for more than 21 years, then you will be a qualifying tenant. The landlord will charge for extending the lease. The cost will depend on the property. If you or the landlord cannot agree on the cost of extending the lease, you might need to hire a solicitor who will work to increase the rate.

Charges For Leasehold Properties

  • If you own a leasehold property, you do not own the land. This means you will not be liable for issues such as maintaining and governing the land and/or building. 
  • The landlord will hire a managing expert to take care of the property for them. However, the leaseholders share the rates of this by paying a service charge to landowner.
  • You might also be asked to pay into a sinking fund, to assist in covering any unpredictable maintenance work.

Leasehold Service Charges

Service charges vary from property to property and are to pay for things such as:

  • Maintaining community parks
  • Electricity bills (if you own a flat or apartment with in a building)
  • Repair and maintenance of exterior walls, elevators etc. (if you own a flat or apartment with in a building)
  • Building insurance
  • Administration charges
  • Ground rent

Ensure you are aware of the costs before putting in an offer on a property as it might affect your affordability. If you possess a leasehold property, you are responsible for the maintenance within the property itself.

If you want to make changes in the property, depending upon the desired changes, you may need to gain permission from your landlord.

What Is A Freehold?

Freehold is the complete ownership of a piece of land, and that which is built upon it so the landlord ‘holds’ it ‘freely’. When purchasing a freehold property, you are fully in charge of the building, what happens to it, how it’s used, and it is your duty for any repairs or maintenance. This is in comparison to leasehold, where you own the property, but the land the property on is being ‘leased’ from the leaseholder.

When buying a freehold property, you are purchasing the entirety of the land, and the property on it.

Benefits Of Having A Freehold

There are several benefits of owning a freehold property.

These include:

  • You don’t have to worry about the lease time running out
  • You don’t pay ground rent
  • You don’t have to pay any service charges or any landlord charges

Owning A Share Of Freehold

You can purchase a freehold from a freeholder/landlord along with other leaseholders; for example, neighbors occupying the flats in the same building you are leasing your property in. You can act on this as long as at least half of the leaseholders agree to purchase a share.

This also means you can prolong the lease period fairly for up to 999 years.

Commonhold Properties

This is a type of freehold ownership. It is designed to assist flat owners to gain full ownership of their property, rather than owning it on a lease.

Every person within a building or flats gathers to form a company known as a Commonhold Association. That company then owns the freehold of the building.