Published 05 Dec 2017
What is the Difference Between Leasehold and Freehold?
There are primarily two types of legal ownership of a property: a leasehold and a freehold. Buying through Shared Ownership will make you an owner-occupier and leaseholder, where you start off by buying a share of your home. Here we discuss the main differences between owning the freehold or having a leasehold for your property.
What is a freehold?
If you are a freeholder you own your property and the land it stands on indefinitely. You don't have to pay annual ground rent and you can sell leases to people who will occupy the property you own. This will make them leaseholders and you their landlord. On the down side, you will be solely responsible for the maintenance of your property.
The freeholder is also entitled to make alterations to the property within legal and planning restrictions.
In the UK, houses are usually sold as a freehold while flats are normally sold as a leasehold.
How does leasehold work?
If you've bought a flat, you most likely bought a leasehold. A leasehold makes you the owner of your property for the duration specified on your lease. Leases in the UK are usually issued for 125 years but if you're buying a property on a resale market your lease might be considerably shorter. If a lease has got less than 80 years left, it is considered 'short' and might affect the value of your property and your ability to sell it. You might also have problems remortgaging a property with a short lease. Thankfully, as a leaseholder you have a legal right to extend your lease.
Common charges for a leasehold property
If you are a leaseholder you may be expected to pay the following charges:
- annual ground rent paid to the freeholder,
- service charges paid to whoever manages your building - they cover the cost of the maintenance of the building and its common areas,
- building insurance - often included in the service charge,
- you might have to contribute to a 'reserve' or 'sinking fund' to help cover any unexpected maintenance or repairs - this also can sometimes be included in the service charge.
As a leaseholder, you are responsible for any repairs that are within your property. Also, leaseholders should be consulted about any charges for running or maintaining the building if they exceed £250 for planned work or £100 per year for work and services lasting more than 12 months. The consultation needs to follow a process that is referred to as 'Section 20' consultation.
Who owns my leasehold?
If you are a leaseholder, you landlord - the freeholder - owns your lease. If you are unsure who the registered freeholder of your property is, you can check that by contacting the Land Registry.
Why are flats sold as leasehold?
Freehold includes the land that the property stands on. If you own one flat in a house that consists of six flats it is impossible for you to also lay claim on the land that the building stands on. This is why apartments are usually sold as a leasehold. It delimits your responsibility to your flat's 'demise' - i.e. everything that your property includes such as balconies, etc. - and leaves the responsibility for the upkeep of the whole building and the land it stands on to the freeholder.
According to the FT, last year, about 95% of new properties sold in London were classified as leasehold, mostly residential apartments. At the same time, leasehold properties made up 43 per cent of all new-build registrations with the Land Registry in England and Wales as a whole in 2015.
Despite their popularity, leasehold properties have been receiving a lot of bad press. It has been pointed out that leasehold is a diminishing asset - with your property losing value as the length of the lease decreases. Also, some of the freeholders have been abusing the charges levied on the leaseholders, especially the ground rent.
Can I buy a freehold if I live in a flat?
If you own a flat in a building - especially if you are a shared owner - there is little you can do about your leasehold. If, however, all of the leaseholders in the building own their flats outright, they can - in theory - get together and purchase the freehold of the whole building. That, however, comes with its own problems:
- it's a costly and drawn-out procedure,
- you end up responsible for the upkeep of the whole property including the land it stands on,
- you will have to set up a freehold management company with all property owners owning a stake,
- there still will be disagreements - if your neighbours consider some of the work you deem essential unnecessary, there may be little you can do to override them.
What is a 'short' lease?
When you purchase a leasehold, you buy the right to own the property for the duration of the lease. The standard length for a new lease in the UK is 125 years, but your lease might be considerably shorter if you've bought a second-hand property. A lease that has less than 80 years on it is considered 'short' and below that number lease extensions become much pricier to buy. In practice, you should consider extending your lease if your lease is close to 90 years. Having a short lease will make it difficult for you to sell or remortgage your home and even if you do manage to sell it you might get a considerably lower sum for it than you would otherwise.
Should I avoid buying a property on a short leasehold?
Given what we've said above about the drawbacks of short leases, you probably should think long and hard before you purchase a property with less than 90 years on the lease. If, however, you do not plan on ever putting the property back on the market - or remortgaging it - short lease might not affect you in any meaningful way.
On the other hand, if you're in a market for a short-lease property you just might grab yourself a bargain. You can then live out the rest of your days in your new property and let your heirs worry about the costly business of extending a very short lease.