What's the difference between leasehold and freehold properties?

The Government's recent reform of leasehold tenure will make buying or extending lease agreements “easier, faster, fairer and cheaper…"

In the coming months, leaseholders across the UK will be given the right to extend their lease by a maximum term of 990 years at zero ground rent. But, how does leasehold work? And how does it differ from freehold? Below, we discuss the differences between them and the advantages of each.

What does leasehold mean?

If you buy a property leasehold, you simply own the building for a designated period. Once the lease expires, the property belongs to the landowner unless the lease is extended further. In the simplest terms, this means that the amount paid for the property would be lost if the lease were to run out. This rarely happens, however, it’s something you’ll need to be aware of if you enter into this type of arrangement. 

How long does a lease last?

Leases can extend from 99 to 999 years. If you manage to secure a 999 year lease you’re in a very strong position and can use this to your advantage. Leases with a shorter time frame can become problematic. For example, if you have 80 years left it can make the property hard to sell and can be complicated to remortgage as the the cost to extend your lease increases considerably. It's also important to consider the marriage value. This is the difference between the combined value of the current freehold/leasehold interests and the future freehold/leasehold interest. UK law deems that the leaseholder must pay 50% of this to the freeholder.

What else is different about a leasehold property?

Generally, leasehold properties tend to be apartments or flats. A lease owner does not own the land, nor are they responsible for the communal areas for example, the lobby, stairways or halls. Owners in these types of buildings pay 'ground rent' - a regular fee collected by the freeholder. The terms should be set out in a contract during the initial purchase. The contract may also set out other rules or codes of conduct around pets, refuse, utilities and repairs.

What does freehold mean?

In the UK, most houses are freehold. Purchasing a property freehold gives you complete ownership of the property and the land. You may hear this type of arrangement referred to as ‘title absolute’ and sometimes by the curious term ‘fee simple’. As the owner, all costs are your responsibility. This includes any maintenance, repairs and buildings insurance.

What are the advantages of a leasehold property?

If you own a property in a communal building, being leasehold has a number of advantages. Leasehold is often less expensive, and the owner of the freehold is responsible for any building maintenance and looking after the structure e.g the roof. The owner of the freehold is also accountable for the buildings insurance, although the fee is usually charged to the leaseholder at a later date.

What are the disadvantages of a leasehold property? 

The disadvantages include having to pay service charges and/or ground rent, plus you are not able to change the property's external features and you could be subject to rules around pets and subletting. It may also become harder to sell as the number of year's on the lease decrease.

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For advice or further information on freehold and leasehold properties, get in touch today.