From an overview, the language may sound slightly confusing. But when a buyer is considering purchasing a new property, it is crucial to know the difference between freehold properties and leasehold properties. This blog will breakdown the differences to help you understand what type of property is best for you to buy.
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Although estate agents tend to gloss over it, there are different types of legal ownership of a property; these being freehold and leasehold. Both come with differences.
Freehold: A freeholder of a property owns it outright. This includes owning the land it’s built on.
Leasehold: A leasehold means there is already an owner of the property. Going through a leasehold means you would be leasing off the freeholder (also called a landlord).
Many buyers don’t realise the difference between the two. Down the line, not understanding the differences can be regretting and hugely expensive.
Freehold vs Leasehold - What's the difference?
To summarise and make the answer completely clear. Someone who is a freeholder of a property owns it and owns the land that it stands on, if you are a leaseholder, you own the property but you don't own the land it sits on and you essentially rent this land from the freeholder.
If a leaseholder lets the lease expire, then the property will become freehold & be owned by the freeholder of the land.
Being a freeholder means that your name would be on the land registry and as a homeowner, you would own the “title absolute”. Out of the two options, freehold is the much-preferred option. The responsibility is on yourself to look after the property. Unlike leasehold, you don’t have to rely on someone else to maintain the building for you. Also, you will not have to pay an annual fee for ground rent. It is uncommon for whole properties to be leasehold instead of freehold.
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Compared to freehold properties, leasehold can be a rather confusing.
In short, a leaseholder will have a contract with a freeholder which conveys the legal rights and responsibilities for both parties. Leases can be very long, usually they are 90 years. However, some are 120 or even 999 years! A ‘short’ lease is classed as forty years.
Within the contract, it will line out how the freeholder will be responsible for maintaining certain parts of the building interior and exterior. For the leaseholder, sometimes in a contract it may have a clause called ‘the right to manage’. This simply means it will be the leaseholder responsible for the building and land. However, those who do not have a right to manage are able to obtain a permission for any large changes to happen on the property.
Being a leaseholder means that there are certain fees that have to be paid to the freeholder such as maintenance fees and an annual ground rent.
Those leaseholders that don’t fulfil their lease, can become forfeit. For example, if they miss paying certain fees.
Is Freehold better than Leasehold?
Reading through this article you might naturally think that Freehold is better than Leasehold when it comes to purchasing a property, that is mostly true as you don't have to contend with service charges and admin fees that a leaseholder may incur. That being said, because people are more likely to buy freeholds, it often means that their prices are inflated in comparison to Leasehold counterparts, so if you're looking for a lower initial cost to get yourself on a property ladder then a Leasehold might be a good option for you.
Is the process of buying Freehold & Leasehold the same?
In terms of buying a Leasehold the process is very similar to that of a freehold, although there are slight differences when it comes to the conveyancing process. There is extra work required during conveyancing as they have to enquire with the landlord, they also need to find out:
- Charges: They need to figure out what you will be liable to pay the freeholder which includes ground rent and any service charges.
- Major works: Your solicitor needs to find out if there are any planned reservations which could impact on your properties value.
- Service charge account balance: This is just to review what your landlord feels will be spent over the year – it should also log how much has been spent previously and what the balance of the account is.
- Sinking fund: Your solicitor needs to check whether or not your lease comes with a sinking fund, which is a balance used to cover any planned building works.
- Usage: Your solicitor needs to figure out exactly what your boundaries are, can you use the loft, basement, etc.
- Restrictions: They need to find out what restrictions are in place in terms of what you are and aren’t allowed to do in the property, for example can you do considerable renovations?
Is a 999 year lease as good as Freehold?
Not really. A 999 year lease is good, of course, you want to ensure the lease is as long as it possibly can be as short leases can considerably drop the value of the property – however you will still be subject to some potential restrictions, have to pay a service charge & ground rent which freeholders won’t have to pay, so these are all costs that you have to factor in. On the face of it, a leasehold might be cheaper to buy and get yourself on the property market, but adding in all these additional costs it may come much closer to a freehold property than you realise, so no, a 999 year lease is not as good as a freehold, although it could still be beneficial in some circumstances.
Are Leasehold properties harder to sell?
Naturally leaseholds are a little bit harder to sell as they are less desirable, but it depends on your area, for instance if you live in London you often have little option but to buy a leasehold. The main issue that you have with selling a leasehold property is when it runs into a low lease, which is considered anything below 80 years left, this is when it can become expensive and very difficult to extend it. Having a short lease also makes it harder to get a mortgage on a property, which could limit your pool of buyers to auction and cash buyers. The cost of your ground rent may also make your property look unattractive, if of course it’s priced too high.
What are the advantages & disadvantages of buying Leasehold?
Leasehold properties aren’t all doom and gloom, sometimes they have their advantages, as well as disadvantages, of course. We’ve taken a look into some of them and highlighted them for you below:
- It can provide a home for any short term residential needs as getting on the property ladder might be cheaper
- The duration of a lease can go up to 999 years, which is almost as good as a freehold, for cheaper
- You’re still free to make home improvements
- The rent you pay on the land can be reassessed regularly
- Leaseholds may be a little bit harder to get a mortgage on, as some lenders only offer mortgages for freeholds
- You don’t benefit from increases in the land value of the area, in turn, the land owner will benefit and potentially charge you higher rent
- It could be more difficult to sell, especially if the lease is closing in on the 80 year mark
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Should you avoid being part of a leasehold property?
The most problematic leases as usually those that are under ninety years. For this reason, they should be approached warily. Any houses with less than eighty years lease can affect the overall value of the property.
The shorter the lease, the more so it can decline in value even if prices within the local area are riding. Overall, it could make buyers reluctant to purchase your property and some mortgage lenders may not lend money for the property.