14 May The difference between freehold and leasehold property
Whether you’re a first-time buyer, or have owned a few different properties in your lifetime, most of us have heard the terms ‘freehold’ and ‘leasehold’. Certainly, anyone who keeps up with the news has probably seen the run of horror stories about leasehold properties, and the often-complex set of obligations that they can place on owners.
But these news stories rarely give a full picture of leasehold property ownership, and often make little mention of how it compares to owning a freehold property.
Freehold vs leasehold
So what exactly are freeholds and leaseholds?
Essentially, the terms ‘freehold’ and ‘leasehold’ refer to the legal relationship that the owner of a property has to the land that their property resides on.
With freehold properties (usually houses), the property and the land it sits on are bought and sold together, and are owned in perpetuity – the property owner owns both the property and the land.
With leasehold properties however (often flats/apartments), only the property is bought and sold, and ownership of the land beneath the property – or the building it’s in – remains the separate property of a freeholder (sometimes referred to as the landlord).
Because leaseholders don’t own the land beneath their property/building, their relationship with the freeholder is hugely important, and includes all sorts of additional responsibilities that freehold property owners don’t usually encounter.
Unlike freehold properties, where one person owns the property and the land, leasehold properties have a property owner (the leaseholder) and a landowner (the freeholder/landlord), making for a more complex ownership.
To make this relationship clear, all leasehold properties will have a document called a ‘lease’, which outlines the terms and conditions of owning the property, as well as any responsibilities on the leaseholder’s part. It also outlines what the leaseholder can expect from the freeholder who owns the land, and whether they have any obligations towards the leaseholders.
It’s important to remember that because leaseholders do not own the land that their property sits on, the separate freeholder/landlord retains a legal interest in the property to some extent. Because a leasehold property is essentially built on someone else’s land, ownership of a leasehold property has a set time limit, which is also defined in the lease. This time limit can range anywhere from 40 to 999 years in length, after which ownership of the property reverts to the freeholder if it expires (although leaseholders can pay to have the lease term extended).
This obviously contrasts with a freehold property, where the owner buys the land and the property, and owns them both for as long as they wish.
One of the big differences between a freehold property and a leasehold, is the existence of service charges.
As most people would expect, when you buy a freehold property – a house, for example – you would be responsible for any repairs that need doing, for the gardening, and for generally keeping the place maintained to the level you’re happy with.
With leaseholds, things are slightly different. Leasehold owners are still responsible for repairs, maintenance and cleaning inside their own property, but because leasehold properties are usually apartments in large, shared buildings, there are usually common areas (lifts, for example) that are shared between multiple owners. These also need to be maintained, as well as any communal grounds outside.
It’s here that the freeholder steps in – because these shared areas (lifts, hallways, stairwells, gardens) are used by the owners of multiple leasehold properties in the same building, they aren’t the responsibility of any single leaseholder.
Instead, all leaseholders in the building will pay an amount every year to the freeholder or their appointed agent, who will then use this to fund repairs, maintenance, and any other works needed for the upkeep of the shared areas/facilities.
This service charge varies greatly depending on the nature and size of the shared areas, but the exact details of what must be paid by leaseholders and the services they can expect in return, will be detailed in their lease.
Although often freehold, service charges can also apply to houses on newbuild developments, where there are large communal green spaces. In these instances, homeowners still own their properties (and the land they sit on) on a freehold basis, but their property deeds and transfer documents will have additional clauses outlining the service charge contribution expected from them.
In addition to paying service charges, leasehold properties will also usually need to pay a yearly amount known as ‘ground rent’ to the freeholder that owns the land. As the name suggests, this is quite literally a rent that the leasehold owner pays to the freeholder for using the freeholder’s land for their property.
As with service charges, this can vary widely. Many leasehold properties pay only a ‘peppercorn’ rent (which is very small, and largely symbolic), but it can be more significant. As with service charges, full details about the size and frequency of any ground rent can be found in the lease for the property.
As you have probably worked out, because freehold property owners own both their property and the land underneath, no ground rent applies to them (if it did, they would only be paying themselves).
Which properties are usually freehold/leasehold?
As you probably guessed by now, there is generally a clear divide between freehold and leasehold properties: apartments and flats are overwhelmingly leasehold ownership, whereas houses (whether terraced, detached, or semi-detached) tend to be owned on a freehold basis.
It’s important to note however, that this divide doesn’t always hold true – some apartments may be freehold, with each apartment jointly owning a stake in the land beneath the apartment building. On the flipside, some houses on newbuild estates have, in recent years, been sold on a leasehold basis (although this is something that the government is currently reviewing action around).
Which is better – leasehold or freehold?
Unfortunately, there’s no single answer as to whether freehold or leasehold is ‘better’ – it really depends on your needs. Are you going to be living in the property? Letting it to a tenant?
Freehold properties give you greater control over your property, and mean that you can own it indefinitely. You are also less likely to pay service charges, and won’t pay ground rent.
Freehold properties also tend to be more expensive however, and can be much harder to come across if you are looking for city living, where apartments and flats are a more effective use of space.
Decide what your priorities are, and what you need out of your property, and that will give you a good framework for making a decision.