Leasehold vs Freehold – What’s the difference?
You are more likely to encounter the terms ‘leasehold’ and ‘freehold’ when you buy your first house or any property. These are the two main types of ownership and before buying a house, you should understand the difference! Here we will look at every way you can legally own your home along with its advantages and disadvantages of freehold buying or taking it on lease. We’ll guide you through some of the more technical elements and try to explain which will suit you best according to your needs.
In the UK, this is two separate forms of homeownership that exist – freehold and leasehold. Each of these is vastly different from each other and it’s important to know what needs to be applied to a property that you’re thinking of buying or renting. Because if you make a misinformed decision, it can result in problems in the future.
What are the different forms of property ownership?
The two types of legal ownership are fundamentally different: freehold and leasehold. While estate agents tend to gloss over this ownership fact and mostly ignore telling the buyer what type of building they sell. This terminology is the difference between a home worth buying and one that isn’t worth buying. Many people who don’t find out or understand this while buying a home end up regretting it – getting it wrong can be mostly hugely expensive.
This very confusing and legal technical term basically means –
Freehold: Someone who owns the freehold of the property owns the property and the land on which it stands.
Leasehold: On the other hand, a leaseholder, do not own the property or land on which the property is built. A leaseholder basically rents property from a freeholder for an assigned number of years, decades, or centuries.
What is freehold?
If you own a property freehold, it means that you own the property itself, plus the land on which it stands, forever. You are named as the freeholder in the land registry, owning the ‘ title absolute.’ This ensures that you will be responsible for repairing and maintaining your home – with no third party having any say in what you are doing. Traditionally, most houses used to be sold as freeholds. Given the choice, freehold is pretty much always the best option to go for while buying any property.
The majority of houses are normally sold freehold. However, there are still a large number of houses that are sold as leaseholds. This issue has recently been well publicised and highlighted in the press and is particularly pronounced with new apartments or new houses, so check before you purchase.
Benefits of having a freehold
- You don’t have to worry about the lease running out, as you own the property.
- You won’t have to pay annual rents, ground rent, services charges or any other landlord charges.
- No third party has a say on any work undertaken in your property.
Disadvantages of having a freehold
- You are responsible for maintaining everything.
What is Leasehold?
If you own a leasehold property, you do not own the land on which the property is constructed, or the building itself. Instead, you have a lease from the freeholder who owns that property for a period of months or years, just to use the property. Leases generally start with either a 99 but can go up to 999 years.
With a leasehold, you own the property for the duration of the lease agreement with the freeholder (specific to the terms and conditions of the leasehold). When the lease ends, the property returns to the freeholder, unless you are able to extend the lease. Most flats are owned by leasehold, so while you own your property in the building, you have no stake in the building in which it is located.
Homebuyers normally buy a ‘lease’ type of agreement from the freeholder for a house or land. The lease can be of any length, it is common for 90 or 120 years but it can be as long as 999 years and short as 40 years.
In general, the shorter the lease remaining, the less valuable a property is. This means that the remortgage or sale of your property can be difficult once your lease end date is less than 70 years. Almost all the flats in the UK are leasehold, but houses can also be leasehold. A leaseholder has a contract with the freehold owner that sets out both sides’ legal rights and responsibilities.
Disadvantage of Leasehold
- Leaseholders are liable to pay maintenance fees, annual service charge and building insurance costs.
- Leaseholders have to pay an annual “ground rent” to the freeholder the amount which is decided in agreement.
- Leaseholders will always have to seek permission for any major works done to or in the property.
- The freeholder can keep restrictions, such as not owning pets or subletting on leaseholders and they have to follow that.
- If the leaseholder does not comply with the requirements of the lease, for example in the case by not paying the fees, the lease could be forfeited.
Advantage of leasehold
- By signing a leasehold agreement, the tenant negates the need to buy the land. By eliminating the costs of land acquisition, you can drastically reduce its overall and upfront cost.
- Normally, the freeholder would be responsible for maintaining the building’s common parts, such as the entrance hall and staircase, as well as the exterior walls and roof. Which helps to reduce the stress of maintaining a building to the leaseholder.
For which should you go for?
In most cases, the Freehold appears to be the safest and preferred option when it comes to buying your own home. However, this can be expensive. You must do your research before purchasing any property and always check the documents. Depending upon your budget, it may be worthwhile going for a leasehold property as this will work out cheaper and you could also buy in a better location for less than a freehold.
No matter whether you choose Freehold or Leasehold property, we will always suggest you take proper professional advice so you won’t end up stuck in a bad property situation.