Leasehold vs freehold: What's the difference?
In this article from Carpenter Surveyors, we look at the difference between leasehold and freehold. We also look at how to extend a lease or buy your freehold.
You may be restricted in what you can do to your own home depending on whether you own a freehold or leasehold property.
Throughout this guide, we explain everything you need to know about leasehold and freehold ownership, as well as changes the government is making to leaseholds.
What is leasehold?
Leasehold properties allow you to live in them for a specific period of time (specified in the lease), but the land it sits on does not belong to you. You are known as a ‘leaseholder’ in this arrangement.
Houses are typically sold as freehold properties in England, Northern Ireland and Wales, while flats are mostly leasehold. Only a small number of properties are sold as leaseholds in Scotland.
In leasehold properties, the land is owned by the landlord, known as the freeholder. Their ownership of the property will revert once the lease expires.
Some alterations to a property require permission from the freeholder. In addition, they must pay a yearly rent – known as ‘ground rent’ – and a managing agent fee each year.
What is freehold?
As soon as you purchase a freehold property, you become the sole owner of both the building and the land.
You will not have to pay ground rent, service charges, or permission fees as a freeholder, but you will be responsible for building maintenance.
How does share of freehold work?
A share of freehold can be purchased with some properties, usually flats. Essentially, you own the property leasehold plus a share of the building’s freehold.
The advantage of this type of ownership is greater control over the property and service charges, but the downside is more administration (e.g. getting buildings insurance) for the management of the building.
When buying a flat, how long should the lease be?
You’ll find out what you need to pay for insurance and maintenance in your lease, which is a legal document.
An initial residential lease usually lasts for 125 years, but it is possible to have one for 999 years.
The longer your lease is, the better, since properties with short leases can be hard to sell.
Having fewer than 80 years left on your lease can seriously affect both the value of your property and the cost of extending it. A property with less than 80 years left may also be refused a mortgage by many mortgage lenders.
If you are planning to sell a leasehold property, check how many years are left on the lease.
Should you extend the lease when buying the property?
In order to extend your lease, you need to live in the property for two years, so if you are buying a property with a short remaining lease and want it extended, you have two options.
It is best to ask the seller to extend the lease before you buy the property. The lease can be extended if they’ve owned the property for more than two years – although it may take some time.
As extending a lease when buying a flat is fairly common, a specialist property solicitor can handle much of the process for you.
In the second option, you can purchase the property and ask the freeholder for an extension of the lease even though you do not yet have the legal right to do so. You will need to wait two years if the freeholder says no – this is a riskier option.
In order to take this path, you must have enough time remaining on your lease to meet your mortgage lender’s requirements.