Leasehold VS Freehold - What's the Difference

by Access Legal

Leasehold VS Freehold - What's the Difference

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We will probably all face the question of whether a property is leasehold or freehold at some point in our lives when looking for a place to rent or a home to buy.

The concepts can often cause confusion. Each has its own advantages and sometimes disadvantages, especially when it comes to selling a property, but in essence the difference between leasehold and freehold is straight forward.

The terms relate to what's called the 'tenure' of a property and involve land laws and land ownership (Scotland has its own version of freehold, called 'feuhold').

There are three type of property tenure in England and Wales:

As well as this guide, you'll find the Leasehold Advisory Service, a non-departmental public body funded by government, to be an excellent source of information on all matters relating to leasehold issues.

Freehold Property

When you purchase a freehold property, you own the home and the land it is built on and you will have the right to live there for as long as you please. Detached and semi-detached houses or bungalows are most often freehold properties. If you own the freehold you can make changes to the property provided that you have the relevant planning permissions although with listed buildings or property in a conservation area you may need special permission to make structural changes.

When your property is freehold, you own it and the land on which it is built outright. When you die, it is part of your estate and can be bequeathed to your heirs. Your can do whatever you want to do with the property (knock down walls, build extensions, paint it pink) and are limited only by planning regulations and other laws. Of course, any necessary repairs to the building and the costs of those repairs are also your responsibility.

Leasehold property

Most flats and maisonettes are usually leasehold, although other types of property such as retirement apartments can be leasehold too. The leaseholder usually owns everything within the walls, including the floorboards and plaster, while the freeholder owns the structure, the land on which the property is built and the common parts (which include communal entrance halls, staircases etc).

Leasehold's main advantage is that it assigns clear responsibilities for upkeep and repairs, protecting individual leaseholders in the event of, say, a leak from a flat above. On the downside, it can be more difficult to obtain a mortgage on a leasehold property, depending on the length of time the lease will have left to run after the end of the mortgage term.

Possession of a leasehold property will be subject to the payment of an annual fee (known as ground rent) specified in a document called the lease. How long that lease runs does vary from 99 - 125 years (in the case of ex local authority housing for example) to as long as 999 years for brand new leases. Most are around the 125 year mark.

The length of a lease, naturally, diminishes over time and the duration of the lease has a direct bearing on a property's value and how easy it will be to sell. Mortgage lenders usually prefer that there are at least 50 years left on a lease at the end of a mortgage term. If you have a lease with 75 years or less left to run, you will have problems selling the property because lenders will be unwilling to lend to prospective buyers.

Leasehold is, in effect, a form of tenancy and ground rent is payable annually to the landlord who could be the freehold owner or their managing agent. Ground rent may only be a nominal sum but usually a 'maintenance or service charge' is also levied to cover things like external redecoration and repairs, gardening and window cleaning.

The service charge will also cover the cost of buildings insurance (although as a leaseholder you will be responsible for your own contents insurance). These service charges can be substantial (several thousand pounds per annum is not unusual for properties such as retirement apartments with on-site managers) and may rise annually without limit, but they are required by law to be 'reasonable'.

The lease

This is a legally binding document detailing the rights and responsibilities of freeholder/landlord and leaseholder and stating the terms and conditions under which the property is occupied and used. Leaseholders are usually entitled to 'quiet enjoyment' of their property but also have responsibilities such as paying the relevant charges on time, keeping the inside of the property in good order, conducting themselves in a neighbourly fashion, and not doing some things (for example, sub-letting or making certain alterations) without the freeholder's permission.

Extending or renewing your lease

One way to avoid problems associated with a lease that has a short term remaining is to extend the term or apply to the landlord/freehold owner for a new one. This process can be long and costly but mechanism to do so is contained in The Leasehold Reform Housing and Urban Development Act 1993. It is strongly recommended that you use the services of a solicitor and a qualified surveyor before you consider taking this action.

Most residential leaseholders with leases granted for more than 21 years at the outset and who have owned the lease for at least two years will have a right under the 1993 Act for the grant of a new lease for a term of 90 years plus the present unexpired term, all at a peppercorn rent (that is, rent free). The formal procedure is started by the service of the Tenant's S41 Notice on the freeholder/landlord by your solicitor and it then follows a prescribed route.

Different rules apply to houses than flats and the Leasehold Advisory Service's lease extension calculator gives you a guide to the costs of extending the lease of a flat (note: it cannot make the calculation for a lease of 60 years or less – for that you would need to talk to a solicitor).

Buying the freehold

In some cases, qualifying resident leaseholders are entitled to what's called 'the right to collective enfranchisement' and can buy the freehold by grouping together to form a management company, joining forces to buy the freehold of their building.

Landlords of residential flats who intend to sell their freehold interest are legally obliged to first offer to sell to qualifying leaseholders. The offer, which will detail the terms on which the landlord is proposing to sell the building, must be made by formal notice in the correct form.

It must also give a period within which the qualifying tenants may accept the offer. If it is not accepted, then the landlord may sell the freehold interest to a third party. In order for the notice to be accepted, more than half of the qualifying tenants must act together to accept the offer and set up a company to buy the freehold interest and effectively take on the landlord's obligations and responsibilities for the building.

Shared ownership of the freehold

It is also possible to arrange shared ownership of the freehold, meaning you would still own the flat on a leasehold basis, but you would also own a share of the freehold title to the whole building. This way, you and your neighbours would jointly be the freeholders as well as leaseholders. The most common method for doing this is to have the freehold owned by a limited company in which each flat owner has a share. When a flat is sold, their share is transferred to the new flat owner and a new share certificate is issued.

The right to manage

Under 'right to manage' legislation, leaseholders may also be entitled to manage the building as if they were the freeholder even if they do not own the freehold. If the freeholder/landlord is falling down on making repairs and generally not looking after the fabric of a building (or even if they are doing an adequate job) leasehold residents and tenants can apply to manage the building themselves.

The Commonhold and Leasehold Reform Act 2002 gives certain long leaseholders of flats a right to force the transfer of the landlord's management functions to a company run by those leaseholders. If others in the block agree, you can do this at any time and you do not need the consent of the landlord to take this action but you would need to meet the 2002 Act's criteria. Following that, the process then involves serving a formal notice in order to transfer the landlord's management functions to the company within a set period.

Our Conveyancing Service

If you have any questions about conveyancing (buying or selling a property whether leashold or freehold) or are thinking about becoming a landlord and renting out property, call our free helpline on 03700 868 686 or contact us through the website. We are more than happy to discuss your needs and offer our specialist help. The helpline is available seven days a week and lines are open Monday to Friday 8 am to 8 pm and Saturday 9 am to 6 pm.

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