Once you know what's meant by the terms leasehold and freehold, you can get to grips with this aspect of property ownership and work out how you might be affected
When you buy your first property, you'll more than likely encounter the terms 'leasehold' and 'freehold'.
If you don't know what these mean - and there's no reason why you should - it's important to find out as they are completely different ways of owning property.
Here we set out the differences between the two and the implications each has for you as a first-time buyer of a house or a flat.
What is freehold?
If you own the freehold to your home, it means you own the building and the land it stands on outright in perpetuity. It is essentially ‘free from hold’.
This means you’ll be responsible for repairs and maintenance of your home – with no third party having any say in what you do.
Traditionally, most houses were sold as freehold. And, given the choice, freehold is pretty much always the best option.
What is leasehold?
If you own a leasehold property, you don’t own the land the property is built on, or the building itself. Instead you have a lease from the freeholder to use the property for a given number of years. Leases normally start out with a term of either 99 or 999 years.
When there are zero years left on the lease, ownership of the property reverts to the freeholder. This applies regardless of any mortgage on the property – whether it’s outstanding or paid off.
In general, the shorter the remaining lease, the less a property is worth. This means it can be difficult to remortgage or sell your property once your lease has less than 70 years left.
Flats are almost always leasehold, but houses can be leasehold too.
Freeholders and managing agents
If you are a leaseholder, a freeholder (or landlord) will own the land and building. This might be an individual or a company based in the UK or overseas.
For blocks of flats, the freeholder is usually responsible for arranging repairs to the building's structure (such as the roof) and shared parts of the building (such as lifts and communal stairways). However, the freeholder can pass on the cost of the repairs to leaseholders via service charges.
Most freeholders hire a managing agent to do the legwork involved in managing a building. The managing agent will normally be leaseholders’ point of contact, and the relevant contact details should be on service charge bills and ground rent demands.
About the lease
A lease is basically a list of terms both the freeholder and leaseholder must abide by. In short, a leaseholder must stick to the rules and the freeholder must maintain the building.
Key terms in the lease relate to:
You should also pay attention to what you can and can’t do in your property. Some leases ban subletting or owning pets, while others won’t let you install a satellite dish or hang out washing on a balcony.
It’s rare, but if a leaseholder fails to pay ground rent or service charges, or breaks terms in their lease, the property can be forfeited. This means the lease is terminated and ownership reverts to the freeholder.
What is ground rent?
Ground rent is an annual payment from the leaseholder to the freeholder as ‘rent’ for the ground the property sits on. This can be anything from a token amount of £10, up to hundreds of pounds a year.
Some leases allow for the ground rent to be increased at set intervals throughout the lease.
What should I know about service charges?
The lease will also set out what the freeholder must do regarding maintenance and repairs of the building and insuring the building.
Although the freeholder is responsible for arranging for work to be done, terms in the lease allow the cost to be split between the leaseholders. These costs are known as service charges.
‘Major works’ will normally be scheduled every few years – these normally result in an additional major works bill.
A common complaint about leasehold flats is that service charges and major works bills are too high and work isn’t carried out to an adequate standard.
Extending a lease
Most leaseholders extend their lease long before it approaches zero and the freeholder takes possession of the property.
The 1993 Leasehold Reform Act sets out the process for a lease extension. Leases extended under the act will benefit from an additional 90 years on the lease and ground rent will be reduced to zero.
The cost of a lease extension is matter of negotiation between the leaseholder and freeholder and their respective surveyors. The cost will depend on:
How many years there are left on the lease
The property’s value
How much the ground rent is
The freeholder’s attitude to negotiations
Surveying and legal costs (the leaseholder has to pay the freeholder’s costs as well as their own).
What’s share of freehold?
Some flat are sold as ‘share of freehold’. This means the leaseholders collectively own the freehold. A common set-up is for the freehold to be held by a separate limited company; each leaseholder owns a share of that company and elects directors to run the building.
With share of freehold there will still be a lease, but leaseholders have much more control over maintenance and costs.
Leaseholders have a joint right, with other flat owners in the block, to buy the freehold of their building. This is known as ‘freehold enfranchisement’.
Obtaining the ‘right to manage’ (RTM) is another option. This means leaseholders take over the management of the building, giving them more control over costs, but the freeholder still owns the building and land.
Traditionally houses were usually sold as freehold, and flats as leasehold, but the past decade or so has seen some housebuilders sell new build houses as leasehold.
This means the houses come with ground rent and a lease which sets out what owners can and can’t do to their property. Some owners will also have to pay ‘estate maintenance fees’ for the communal areas of a new-build estate.
The issue with leasehold houses
Leasehold houses have hit the headlines due to the way they have been sold, and the associated costs.
Thousands of buyers claim they weren’t told their house was leasehold until late in the sales process and that conveyancing solicitors failed to explain the full implications of leasehold.
Many leases of new-build houses also come with a clause that allows the ground rent to double or rise in line with inflation every 10 years – this can make an initially affordable ground rent unaffordable later on.
Some leases also require the owner to pay the freeholder for consent to make alterations to their home – these fees are unregulated.
Buyers routinely claim that developers’ sales staff told them they could buy their freehold for a couple of thousand pounds in two years’ time. This is via a process called ‘enfranchisement’ – and would mean ground rent is no longer payable.
However, many developers then quietly sold the freeholds to homes to investment companies which subsequently demanded a much higher price for the freehold.
The government has said it will ban new build houses being sold as leasehold, apart from in exceptional circumstances, but the ban has not come into force yet and a date has not been set.
Where can I find help on leasehold questions?
Leaseholders who think they are being overcharged for work, treated unfairly by their freeholder, or charged too much for a lease extension, can take their case to the First Tier Tribunal (Property Chamber) – formerly known as Leasehold Valuation Tribunal.