When buying or selling a property, you may come across the terms leasehold and freehold. If you have no legal experience, these terms can seem confusing, but the basic difference is quite simple.
In short, freehold means you own the property and the land it stands on, while leasehold means you own the right to occupy the property for a certain period of time under a lease.
Understanding the difference is important, particularly if you are buying a leasehold property, as there are additional matters you should consider before committing to the purchase.
What is a freehold property?
If you own a freehold property, you generally own both the building and the land it stands on.
For example, if you buy a typical house on a freehold basis, you own the house and the garden and land within the property's boundaries. Subject to planning rules and other restrictions, you are generally responsible for maintaining the property and deciding how it is used.
Freehold ownership does not normally have an expiry date. Once you have bought the property, you own it unless you later sell it or transfer it to someone else.
What is a leasehold property?
With a leasehold property, you do not own the property outright forever. Instead, you buy a lease, which gives you the right to occupy and use the property for a set period.
Leasehold is particularly common with flats. For example, a flat might be sold with a lease originally granted for 99 or 125 years, although many newer leases are granted for longer periods.
The lease sets out the rights and responsibilities of both the leaseholder and the landlord (sometimes called the freeholder).
These can include who is responsible for repairs, whether you need permission to make alterations, and what payments you must make.
Why does the length of the lease matter?
One of the most important things to check when buying a leasehold property is how many years are left on the lease.
A lease with a long remaining term may not cause significant concern. However, as the remaining term gets shorter, the property can become more difficult to sell or mortgage and may be worth less.
This is because a buyer and their mortgage lender will want to know that there is sufficient time remaining on the lease.
If you are considering buying a leasehold property, your solicitor should check the lease term as part of the legal work and explain any concerns to you.
What other costs might there be?
Leasehold properties can involve additional payments that you would not usually encounter when buying a freehold house.
These may include:
Service charges – contributions towards maintaining and managing communal areas and parts of the building.
Ground rent – an amount payable to the freeholder under the terms of the lease, although the position on ground rent varies depending on when the lease was granted and the terms involved.
Buildings insurance – this may be arranged by the freeholder or a management company, with the cost usually recovered from leaseholders.
Other charges – the lease may allow the landlord or management company to charge for certain services, permissions or administration.
The amount you have to pay, and how often you have to pay it, will depend on the particular property and lease.
What should you check before buying a leasehold property?
Buying a leasehold property is not necessarily something to be worried about. However, it is important to understand exactly what you are buying.
Your solicitor should review the lease and investigate matters such as:
How long is left on the lease?
What are the current service charges?
Are there any planned major works to the building?
Are there any unpaid charges?
What restrictions does the lease contain?
Are there rules about alterations, subletting or keeping pets?
Who is responsible for repairs and maintenance?
Is the building properly insured?
Are there any disputes involving the landlord, management company or other leaseholders?
These checks can help you avoid unexpected costs or restrictions after you have completed your purchase.
So, which is better: leasehold or freehold?
There is no simple answer. It depends on the property and your circumstances.
Freehold ownership is often more straightforward because you own the property and land outright. However, leasehold ownership is very common, particularly for flats, and a well-managed leasehold property with a long lease can be a perfectly good purchase.
The important thing is to understand the terms of the lease before you commit to buying.
Getting advice on a leasehold property
If you are buying or selling a leasehold property, it is important to get advice from a solicitor or conveyancer who can explain the particular terms that apply to your property.
A leasehold property is not necessarily a problem — but it is important to know what you are taking on. Understanding the lease, the costs and your responsibilities before you buy can help prevent unpleasant surprises later.