Leasehold vs freehold – What is the difference?

The difference between a freehold and leasehold property is a frequently asked question in the property industry. To go over all the details in depth, it is necessary to have the right information at hand.

As well as this, after reading our article you should be better able to identify the pros and cons of purchasing a property through each method and may even decide that a commonhold is better for you.

So, whether you’re a landlord, tenant or just interested in the topic, read on and take notes if necessary as you go as the legislation surrounding the law of property act can get quite complicated.

The difference between freehold and leasehold property in the UK

Below, the key differences between a leasehold and freehold property are listed. For a quicker overview. The below table explains things sufficiently.

The details of the lease

When you sign a Lease, you gain the right to live on the property and use it. When the property is sold, the lease is transferred, and each owner receives a portion of the lease term. 

As a result, with each sale, the amount of time left on the lease decreases. It’s worth noting that some mortgage lenders may refuse to lend on leasehold purchases if the remaining lease term is less than 80 years. 

However, you can extend the term of your lease. If you are thinking about doing this, it is best to seek professional advice on the procedure as things can get fairly complicated and you don’t want a section 146 served to you for a breach of covenant.

Service charges

It is a standard procedure to pay for the building’s maintenance and insurance costs when renting a property under a lease. The amount you pay will vary depending on the services provided. 

Other charges, such as a reserve or sinking fund, may also be collected. Typically, these funds are collected for large projects such as roof repair or lift maintenance. 

Although these are not routine repairs, leaseholders are typically expected to contribute. The reserve, also known as a sinking fund, is established to spread the cost of these major works over a number of years, making it easier for everyone involved.

Ground rent

In addition to other charges, some leases require you to pay ground rent. The amount of ground rent payable on the property is usually specified in the lease, which can sometimes be an amount that is up to the tenant but is most of the time fixed.

When purchasing a leasehold property, it is critical to determine the total amount of all charges, as these will be ongoing annual costs that can vary depending on the property’s upkeep requirements. 

It is critical to gather as much information as possible before making a purchase in order to make an informed decision. Your conveyancing solicitor can provide you with a comprehensive overview of the property and its costs.

The government recently announced new leasehold reforms, which if passed, could significantly extend lease terms for approximately 4.5 million leaseholders without any ground rent. 

Many other changes to leasehold ownership are being considered, and it is hoped that the government will pass legislation on these soon.

The difference in price

When purchasing property in the United Kingdom, whether it is freehold or leasehold can make a significant difference in price. 

In general, a property with a freehold title is more expensive than one with a leasehold title in the same location. However, if the property has a long leasehold, the price difference may not be as significant.

Of course, the price difference between a short leasehold and a freehold property can be significant, as ownership reverts to the freeholder when the lease expires. However, owning a leasehold property can be enjoyable for the duration of the lease.

It should be noted that the price differences between freehold and leasehold properties can be influenced by a variety of factors such as location, property size, and other relevant factors. 

For many people, the opportunity to own a leasehold property in a desirable location is worth the sacrifice of the benefits of a freehold house in a less desirable location.

However, before purchasing a leasehold property, you should carefully review the lease terms to ensure that they meet your requirements. 

While lower property prices may make leasehold properties appear appealing, it is critical to consider the long-term implications of purchasing a leasehold property.

Other differences

When deciding whether to purchase a freehold or leasehold property, it is critical to understand the practical implications of each as there are some significant differences to consider. 

For instance, if you’re thinking about buying a leasehold property, you should read the lease carefully and understand any restrictions on how the property can be used. 

You should also find out how much time is left on the lease and whether you will be required to pay ground rent or a service charge and how long is left before your property could be adversely repossessed if you have squatters.

The leaseholder pays the freeholder ground rent, which is essentially the cost of renting the land on which the property is built. It may be due monthly, quarterly, or annually, depending on the lease terms. Furthermore, some leasehold properties may levy a service charge to cover the upkeep of communal areas.

While these extra costs aren’t always associated with freehold properties, there are still obligations that come with owning a freehold or a share of a freehold. 

As a freeholder, you will be responsible for the upkeep of the property’s communal areas. If you own a portion of the freehold, you will be liable for some of these costs.

Finally, when deciding on the difference between leasehold and freehold property in the UK, it’s critical to weigh all of these factors and determine what works best for you.

What is the reason for properties being sold without a lease?

When considering purchasing a property, you may believe that purchasing a leasehold property is not an appealing option because you will only own the property for a limited time. 

However, there are a variety of reasons why a building is sold in this manner, and there may be benefits to purchasing a leasehold property.

For example, if you want to buy a flat or apartment, it will most likely be sold with a leasehold rather than a freehold title. 

This is due to the fact that multiple flats are frequently located on the same plot of land, and it is more practical for a single individual or entity to own the freehold while multiple people own leaseholds on the flats or apartments within the building.

The freeholder of a block of flats may be responsible for maintaining communal areas such as hallways and entrance halls in some cases. 

Another reason a property may be sold with a leasehold is if the freehold owner wishes to keep their interest in the land. For instance, a short leasehold could be a way for a property owner to generate funds from the property while still keeping the freehold title.

Is it possible to change the terms of a lease?

Most people do not know that if you own a leasehold property, you can extend or renew the lease. Of course, this is assuming you reach an agreement with the freeholder though as it cannot just be your idea.

Early lease renewal is often a wise move to preserve the property’s value and provide you with peace of mind. You can find more about this here. 

Waiting until it is nearly due to expire may cause problems with the freeholder, who may refuse to extend the lease or, worse, charge a premium for it.

How does lease renewal work?

Renewal of a leasehold property’s lease is an important consideration for property owners. Waiting too long to renew the lease can reduce the property’s value and cause unnecessary stress for the leaseholder. 

As a result, it is advised to begin the renewal process as soon as possible. It should be noted, however, that freeholders may not always agree to extend the lease or may charge a premium to do so. 

To ensure a favourable outcome, it is critical to have a good negotiation strategy and, if necessary, consult a legal expert.

What is the difference between a long Leasehold and a freehold property?

One of the most important factors to consider when purchasing a leasehold property is the remaining lease term. This determines how long you own the property before it reverts to the freeholder, so it’s an important consideration when buying a home.

In general, leasehold properties have 999-year leases, which are thought to be the best lease term for buyers. This means there is no risk of the property reverting to the freeholder during your lifetime, making it nearly as good as owning a freehold property. 

Although understanding the distinction between freehold and leasehold properties is critical, a long-term lease typically provides a good return on investment.

Keep in mind, however, that some properties are sold with much shorter lease terms. You can find properties on the market with 99 or 125-year leases, but getting a mortgage for leasehold properties can be difficult when the remaining lease term is relatively short.

If you’re considering purchasing a leasehold property, it’s critical to confirm the remaining lease term and understand how it will affect your financing options. 

Remember that renewing a lease can be a difficult process, so it’s always a good idea to think about the lease term before making a purchase.

Is there a difference between share of freeholds and leasehold properties

If you’re looking to buy a home in the United Kingdom, you’ll most likely come across two types of ownership, freehold ownership and leasehold ownership. However, what are the direct pros and cons of the two?

Advantages and disadvantages of leasehold properties

Read on below for the pros and cons of owning a leasehold property.

Pros

• Lower initial costs mean leaseholds are usually less expensive
• There is a lower general maintenance cost as the landlord or freeholder is responsible for the maintenance and repair.
• Leasehold properties are often located in more desirable areas

Cons

• You have limited control over the property and there will probably be restriction on how much you can develop and use the property
• There are service charge fees that you may not deem worth it for the service that is provided
• Leasehold property tends to depreciation in value making it more difficult to sell or mortgage the property.

Advantages and disadvantages of freehold properties

Here are some pros and cons of owning a freehold property, the type of property that an owner has full and unconditional ownership of without any time limit on ownership. 

Pros

• Complete ownership is the biggest advantage of freeholds. Use a house in any way you wish and do as many renovations as you desire without consequence
• There are no fees unlike leasehold properties which require you to pay ground rent and other fees such as service charge to the landlord
• There is a greater flexibility to sell or pass on your property as you wish, without any restrictions.

Cons

• Higher initial cost
• As the owner of a freehold property, you are responsible for all maintenance and repair costs, which can be significant.
• There is limited access to services that can make your life easier in a property. Freehold property located in remote areas may have limited public transportation for instance.

To summarise

All in all, the main difference between a leasehold and a freehold is who owns the land. While it may always be looked at as a negative thing if you only own the building and not the land during a leasehold.

There are tenants who prefer this setup because of the added benefit of services and the lower costs of purchase.

However, there is no one size fits all approach to leaseholds and freehold and you have to make the right decision for you by weighing up the pros and cons.