Freehold vs leasehold: what’s the difference?

Freehold and leasehold are the two main types of property ownership in the UK. Here we explain how these types of ownership differ and the considerations to note when buying a leasehold property.

Freehold

Freehold ownership means having absolute ownership of the property and the land it stands on in perpetuity (without time limit). Absolute ownership means that you are free to use the land as you please (subject to local laws and regulations) until you choose to sell it.

Leasehold

Leasehold ownership means owning a property but not the land on which it stands for a fixed number of years. This type of ownership is common in relation to flats/apartments. Ownership is subject to a lease being granted by the freeholder to use the property for a certain number of years subject to certain conditions set out in the lease.

When purchasing a leasehold property, it’s important to consider the following:

Depreciating value

Once the term of the lease comes to an end, ownership of the property reverts to the freeholder. As a result, as the remaining lease term decreases, so does its value. Once a lease has less than 80 years remaining it can be more difficult to sell the property without first extending the lease term.

Subject to a number of conditions and the payment of a premium to the landlord, it is possible to extend a lease term. This premium payable will be significantly higher once the lease term drops below 80 years so it’s important to act before this point.

Costs

A leasehold owner will be required to pay certain charges associated with the property. These include:

• Annual ground rent – the rent payable may increase over the term of the lease. It is important to establish how much ground rent will be payable both at the offset and in the future as this may effect marketability.
• Service charges – to include a contribution towards the freeholder’s maintenance fees and charges for services serving the building, particularly the communal areas. This is also likely to include a contribution to the insurance of the building.

Restrictions

Ownership of a leasehold property is subject to the terms of the lease. As a result, it is crucial that a potential buyer understands the terms that he/she is agreeing to abide by.

Common terms include:

• The requirement to obtain the freeholder’s consent before carrying out any alterations or major works – the cost of obtaining such consent is often payable by the leaseholder.
• Restrictions on the ownership of pets.
• Restrictions on letting the property – this is particularly important to those intending to let their property short term. It has become clear of late that many leaseholders have unknowingly breached the terms of their lease by letting their property through AirBnB.

It is important to remember that a significant breach of the terms of the lease can result in the freeholder ending the lease, a process known as forfeiture.

If you would like advice relating to a leasehold property or are interested in extending an existing lease, please contact a member of our Leasehold Enfranchisement team who will be happy to assist.