When you begin searching for a new home, you are likely to notice that properties are marked as either freehold or leasehold. Whether you choose a leasehold or freehold property can have long-term implications and it’s important to understand the differences between them.
Let’s find out more…
What does freehold mean?
When you buy a freehold property, you own the building and the land it sits on for an unlimited amount of time. Everything to do with the property, from garden maintenance to roof repairs, is up to you.
Although a lot of responsibility, owning a freehold property means you are free to make any changes you like e.g. extending or rebuilding (subject to planning permission).
What is a leasehold property?
Leaseholds are more common for flats but some houses are sold as leasehold, too. If you buy a leasehold property you are really leasing ownership from the freeholder for a defined period. This is often a long time: 40-999 years, but you’ll certainly want to check the remaining lease term on any property you’d like to buy.
Your contract with the freeholder will set out any limitations and what your responsibilities are e.g. ground rent and service charges. You’ll also need to get permission from the freeholder if you want to make significant changes to the property.
If the lease expires while you’re still living at the property, ownership of your home goes straight back (‘reverts’) to the freeholder, unless you agree to extend the lease.
Freehold vs leasehold
There are significant differences when it comes to freehold vs leasehold property and it’s important to understand what kind of contract you’re signing when you buy:
|You own the property||Yes||Yes – for a fixed amount of time|
|You are solely responsible for looking after the whole property||Yes||Not necessarily – check the terms of the lease|
|You must arrange all your own insurance||Yes||Not necessarily – the freeholder may cover building insurance – check the terms of the lease|
|You can freely make any changes you like to the property (subject to local permissions)||Yes||Not necessarily – you may need to get permission from the freeholder|
|You can live at the property as long as you like||Yes||Not necessarily – although most lease terms are very long, if the lease expires then ownership reverts to the freeholder|
|You can sell the property whenever you like||Yes||Yes|
Advantages and disadvantages of freehold
- You own the property outright for an unlimited amount of time
- You can make any changes you like (subject to local planning permission etc.)
- You will not have to pay any additional fees e.g. ground rent and service charges
- Freehold properties are usually more expensive
Advantages and disadvantages of leasehold
- Leasehold properties are usually cheaper
- The freeholder arranges the building insurance
- The freeholder is often responsible for maintenance of communal areas
- The freeholder looks after the structure and maintenance of the building
- Conveyancing fees are likely to be higher
- It’s likely you’ll have additional fees e.g. ground rent and service charges
- You will have to get the freeholder’s permission is you want to make changes to the property
- There may be additional rules e.g. no pets, no subletting, no from-home businesses
- As the lease term decreases, it will be more difficult to sell the property on. Short term leases may not be mortgageable. This can negate the benefits of increasing property prices.
- Extending a lease could cost a significant amount of money
Can I extend the term of a leasehold property?
The length of a lease is very important. As the lease term decreases, as does the value of the property.
It is sometimes possible to extend the lease term. If you want to extend the term then you should talk to the freeholder. Specialist valuation advice will be needed in lease extension negotiations.
Your rights as a leaseholder
Owning a leasehold is much like renting a property: a lease is basically a long tenancy. Make sure you carefully check the contract so that you understand what falls under your responsibility and what the freeholder must do.
However, you have the right to:
- know the freeholder’s name and address
- information about service charges or insurance
- be consulted about certain maintenance and running costs
- challenge some charges under certain circumstances
Can you convert a leasehold property to freehold?
If you buy a leasehold property, it’s possible you’ll decide you’d like to convert it to freehold. This is possible, but it’s not so much a process of converting the contract as purchasing the freehold from the owner. This is called enfranchisement and the price you’ll pay depends on the value of the property.
Things are a little more complicated with individual flats because they are almost always leasehold: a freeholder owns the block and the land. It is possible to buy a share of the freehold but you will then own a share of the block rather than your specific flat. That is, of course, unless you buy commonhold ownership, or freehold ownership of the entire block.
The price of purchasing the freehold of a leasehold property can be very high so it’s sometimes worth weighing up the benefits over asking to extend the term of your lease instead. Whatever you decide, it’s important to get professional advice and help with contracts.
The future for leasehold properties and recent changes
There has been an issue in recent years with developers selling new builds as leaseholds rather than freeholds. Recent reforms aim to tackle this problem to make buying a freehold or extending a lease easier, faster, fairer and cheaper.
Over the next few years, the government will put legislation in place to:
- Reform how the cost of enfranchisement and lease extension is calculated
- Introduce a different valuation method for low-value properties
- Ensure leasehold owners of flats have the right to extend their lease, in line with leasehold house owners
- Cap the treatment of ground rents at 0.1% of the freehold value
- Keep the existing discounts for the improvements leaseholders make
- Abolish marriage value: the difference in a leasehold property value before and after a lease extension, which the leaseholder currently has to pay to the freeholder
What are commonhold properties?
Finally, it’s worth noting that there is another type of property ownership as an alternative to leasehold, although it is more unusual, and that is commonhold.
Commonhold is freehold ownership of a flat or other independent building that shares communal areas or services. The real benefit is that you gain property ownership indefinitely, rather than for a fixed period as you would with leasehold.
You and the other owners have a say in how the building is managed and this includes the associated responsibilities and costs.
Find out more
Whatever type of property you are interested in buying, it’s important to gain the advice of a trusted professional. At Trinity Rose we have years of experience helping clients with their freehold, leasehold and commonhold purchases, and leasehold enfranchisement. Our survey and valuation services can help you make important decisions and determine how much you ultimately pay for the home of your dreams.
If you have any questions or would like to arrange a meeting, please get in touch. A member of our friendly team will be happy to help.