POSTED 09 March 2016 General

Difference between Leasehold and Freehold Property

freehold vs leasehold

There are two ways of owning a property: freehold and leasehold. These terms may seem like technical legal jargon, but it’s actually very important to know the differences between both.

Getting it wrong can be incredibly expensive, as it can make the difference between a home that’s worth buying and one that isn’t.

So, what are the differences between a leasehold property and a freehold property?

What is a Freehold Property?

If you purchase a freehold property you become a freeholder, meaning you own the property outright. This also includes the land that it sits on, so your name should be in the land registry.

This means that, if you’re a freehold property owner, you’re responsible for maintaining both the property and the land, so you’ll need to budget for these costs. For example, if the roof breaks and water begins to pour in, it’s your job to fix it.

With a freehold property, you own the property outright, so you don’t have to worry about the lease running out. This is the main advantage for freehold properties.

In addition, you won’t have to pay ground rent, service charges or any other land charges because you own the property, the land and “the title absolute”.

So, to summarise:

  • If you’re looking to buy a whole house, it’s likely to be sold as a freehold property.
  • You won’t have to pay an annual ground rent
  • You won't have to pay a service charge 
  • You have the personal responsibility as the freeholder to maintain the fabric of the building
  • You don’t have to worry about someone else failing to maintain the building or charging large amounts for maintenance.

What is a Leasehold Property?

On the other hand, if you’re buying a flat or maisonette, it’s much more likely to be a leasehold property. But, what does leasehold mean?

With a leasehold property, you own the property for the length of your lease agreement with the freeholder. A lease from the freeholder allows you to use the home for a number of years. These are long-term and can be for anything up to 999 years.

A leasehold is generally considered short-term if it’s only for around 40 years. The length of a leasehold can massively affect the property’s value.

When you come to the end of the lease, ownership of the property returns to the freeholder unless you can agree upon an extension. This is the main reason why many people choose freehold properties when making their buying decision.

If you’re buying a leasehold property, you’ll be purchasing the lease from a previous owner. This means that you’ll need to consider a number of factors, including:

  • How many years are left on the leasehold
  • How the leasehold may affect the property value (particularly if the lease begins to run down and you’re struggling to renegotiate)
  • How you’ll budget for additional costs and service charges

freehold vs leasehold 

What is the difference between leasehold and freehold?

  • As a leaseholder, you should have a written contract with the freeholder which details rights and responsibilities
  • You’ll have to pay maintenance fees, annual service charges and a share of the building’s insurance
  • You’ll normally have to pay “ground rent” to the freeholder
  • You may have restrictions. For example, it’s unlikely you’ll be able to own a pet or sub-let the property.
  • You’ll have to get the freeholder’s permission if you intend to make major changes to the property.
  • As the leaseholder, it’s likely you’ll be responsible for the common parts of the building. However, you’ll have to check this in your contract with the freeholder as they may have the “right to manage”.

If you don’t fulfil the terms of the lease, you may be forced to forfeit it.

To conclude, a freehold property and a leasehold property are two very different things and it’s vital that you fully understand what you’re entering into before you buy a property.

Image courtesy of iStock