If you’re buying or selling a property, you should know the difference between freehold and leasehold property in the UK and the benefits and drawbacks surrounding each of them. In any case, you should make a residential property investment with great care and thoroughly consider the differences between these property types before committing to a purchase. Read on to learn more.
Freehold vs Leasehold in the UK
Knowing the difference between freehold and leasehold property is critical, as the type of property can have enormous implications for responsibilities, ownership rights, and financial planning in the long run.
Leasehold
Leasehold is a term that refers to an arrangement in which an individual is allowed to occupy a property for a specific period but does not actually own it. In these circumstances, you may have to pay service charges and ground rent to the landlord, depending on the rules and regulations in your contract.
It is possible to renew or extend your lease, but you should consider the lease length, eligibility, and statutory rights in this process.
Examples of leasehold properties include public housing, apartments and condominiums, commercial spaces, and ground leases.
Freehold
Freehold is where an individual owns the building and land outright, with no lease agreement or time limits, although there may still be covenants and restrictions affecting the property.
Examples of freehold properties can include semi-detached or detached houses, single-family homes, and land plots, though, historically, there have been leasehold houses.
Freehold and leasehold differences
- Ownership differences
Freehold property owners have total ownership over the building and land in question, with no lease or time limits holding them back. This ownership does not terminate unless the individual sells the property or transfers ownership to another party.
On the other hand, the owner of a leasehold property does not entirely own the property – they simply have a right to occupy and utilise the property for a period outlined in a lease agreement. This can go on for decades. The landlord, otherwise known as the freeholder, has ownership once the lease term terminates (but this can be extended as above).
- Remortgaging differences
Freehold property can be remortgaged, but it can be more difficult to remortgage leasehold properties as the majority of mortgage lenders will want to see a minimum of 70 years remaining on the lease.
- Decision-making differences
Owners of freehold property can typically make the majority of decisions with regards to the property, although they will be subject to certain covenants or restrictions. However, leaseholders are much more restricted in what decisions they can make, and big decisions typically need approval by the landlord to go ahead or may even be dealt with by a property management company.
- Responsibility differences
Owners of freehold property have full responsibility over the property. This can include maintenance and alteration decisions, subject to any relevant restrictions or regulations affecting the property.
Leaseholders may be more restricted regarding property responsibility as they will have to follow the terms of their lease. For example, the owner is responsible for maintaining the property’s garden, whilst leaseholders can leave this job to the landlord.
- Cost differences
Freehold property owners must pay all maintenance costs for the property directly. Depending on the property, a freehold owner may also have to contribute towards other areas of upkeep, such as other parts of the estate or any shared drives.
Leasehold property costs are typically covered by a service charge, which is paid on top of the ground rent. This charge is usually an estimated amount and, when the actual bill is served, may be topped up or an overpayment.
- Resale value differences
Freehold properties typically have higher resale values because there are no lease limitations. This means that leasehold properties generally have lower market values out of the two options, especially as the lease term decreases.
Purchasing the freehold as a leaseholder
A leaseholder is able to buy the property freehold in some situations, although the process can be complex. Therefore, it’s no surprise that this isn’t very common.
The freeholder must be given notice and the chance to respond, ensuring an agreed price and completion time can be established. A tribunal can arrange a price if the parties cannot agree on one. Additionally, the property, lease and tenant must meet specific criteria in order to be eligible for this option. These include (but are not limited to):
- There must be 21 or more years left to run on the lease
- The individual must own the lease for the whole property
Freehold vs leasehold property: pros and cons
To get a better understanding of whether you should opt for freehold or leasehold property, take a look at their collected advantages and disadvantages.
Freehold Property
Pros
- You have complete control and ownership of the property and land
- You have the freedom to sell the property or transfer the title if you do not wish to own it anymore
- You are not required to pay lease payments, such as service charges and ground rent (although newer properties are increasingly responsible for paying estate rent charges or maintenance charges)
- The property value will not be subject to falling because of a decreasing lease term
- There is more security and peace of mind for freeholders since there is no worry of a lease expiring
Cons
- Properties are more expensive to buy upfront
Leasehold Property
Pros
- Properties are cheaper to buy in the short term
- You are not typically responsible for maintaining the building structure (although you may be liable to pay for this upkeep)
- You are not generally responsible for maintaining communal areas, such as garden space (although, again, you may be liable to pay for this upkeep)
Cons
- You face restrictions on how you can use the property, such as smoking indoors, keeping pets, changing the interior design, and making renovations
- You usually require approval from the landlord to make adjustments to the property
- You typically have to pay leasehold costs, such as service charges, ground rent, and administration fees
- The property value may be lower than that of freehold property as the lease term decreases
- It could be trickier to sell the property, especially if the lease is short
Both types of ownership come with benefits and drawbacks, so choosing between the two depends on personal preferences and circumstances.
How Newtons Can Help
Our team of solicitors is well-experienced in guiding clients through residential conveyancing. We know that making a property purchase can be daunting, which is why all our solicitors with conveyancing quality scheme accreditation are here to guide you through the process. We can even offer you handy top legal tips on moving house, which should help clarify this process for you.
Please contact us for more information.