What Is The Difference Between Freehold And Leasehold?

Homeownership and occupancy in England and Wales belong to two key types of tenure and domains of property law; leasehold and freehold. The main differences are relatively simple but there are many caveats and complications which can get more gritty the deeper you delve into the law surrounding each, particularly when it comes to leasehold.

Like much property law and indeed UK law in general, the complexity of some situations can be tricky to grasp. Here, we’ll explain the key differences between these two types of property ownership and tenure. Also, we’ll investigate more complex circumstances such as buying the freehold of a leasehold property using the process of ‘enfranchisement’.

Freehold

To own a freehold, you own the building itself as well as the land it is built on including any garden or perimeter areas as indicated as part of the freehold. In this case, your name would be entered into the land registry as the “freeholder” and you own the “title absolute”. Freehold is legally defined as ‘permanent and absolute tenure of land or property with freedom to dispose of it at will’.

Freehold is by far the most common tenure of houses in the UK. It means you solely own the property and control its maintenance, service provision and other aspects relating to the upkeep of the home. That means no ground rent and no service charges imposed by any third parties.

You will have to take responsibility for maintenance to the home yourself and become legally responsible for what is called the ‘fabric of the building’ – areas that include exterior walls, the roof and any internal or external communal areas (alongside other owners of those areas) where applicable.

The Types of Freehold Property:

• A freehold house that contains multiple occupancies within it.
• A freehold block of flats which contains leasehold and rented accommodation.
• Freehold garages.
• Commercial freehold, e.g. office blocks.
• Freehold land.
• Residential freehold properties, e.g. homes – the most common type of homeownership.

The Advantages of Freehold Houses

• You own the property outright and do not need to worry about a lease. The title deeds to the house can be absolutely inherited by next of kin or other stipulated receivers upon death.
• You can modify the property provided you obtain planning permission.
• You’re free to keep pets and other domestic animals, etc, if complying with the law and obtaining planning permission and will never be restricted by a landowner, only by the law.
• You’re free to obtain the most competitive rates for services and repairs or maintenance.
• You never need to pay ground rent or service charges except in some niche circumstances involving communal areas.

Leasehold

A leasehold operates on a temporary basis. Freeholders of a property may grant a lease to another person, therefore entering a contract between landlord or landlady and a tenant, or in other words between a lessor and lessee. This involves a series of contractually binding obligations and responsibilities between both parties. This will be set out in a legal document which is usually quite complex depending on the type of property. Most flats purchased (not rented) in England and Wales are occupied on a leasehold basis.

What is in a Lease Document?

• The total length of the lease.
• Detailed itemisation of service changes.
• Restricted covenants (prohibited actions), e.g. no smoking or pets.
• Ground rent charges.
• Obligations between freeholder and leaseholder, e.g. maintenance obligations.
• Details of when and why increases and changes in ground rent and services charges can happen.

Leases for leasehold property ownership are offered on a long-term basis. Leases were typically 99 years long but are now more commonly 125 years at least but 999-year leases are becoming more common for new builds. Houses or flats with 999-year leases are often marketed to buyers as ‘virtually freehold’ but this isn’t true for reasons we’ll be overviewing shortly.

A lease will have a fixed amount of time left on it for which you are entitled to lease the property from the freeholder before you have to leave, but you can renew the lease before then or buy the leasehold from the landowner by converting it into your own freehold using a legal process called enfranchisement.

A leaseholder cannot prevent you from buying the freehold using this method and if they decide to sell the property, they must, by law, ask the leaseholder if they want to buy it first.

Herein lies the key practical difference between freehold and leasehold, you never truly own a leasehold property so long as it is on lease from the freeholder, though enfranchisement allows you to own the freehold yourself.

Leases beyond 80 years are typically called ‘long leases’. Once your lease reaches 80 years, it is no longer considered a ‘long lease’ and thus, the value of your house will begin to depreciate rapidly as your lease runs down – a house or flat that you can only occupy for 10 years will never be worth the same as one you can live in for 999 years.

Mortgage lenders will rarely provide mortgages to houses or flats with leases shorter than 80 years leaving the leaseholder no option but to sell to a cash buyer, extend the lease or buy the freehold.

Buying a property which comes with a short lease means you will have to likely extend the lease as soon as possible or buy the freehold unless you are specifically looking for a short lease property to sell to cash buyers.

Average Costs Of Extending Leases for Flats worth £200,000

Typical costs of extending leases based on data from the Leasehold Advisory Service Data service. Based on £200,000 flats (valued on 999-year leases) with £200 annual ground rent.

Note: Leasehold is not the same as renting. Renting a property involves a rental agreement that operates on a monthly basis. The landlord or landlady and tenants have the ability to change the terms of the rent and can evict you with 28 days written notice if you’ve been staying there for less than 6 months or 84 days otherwise, you are also able to leave the rental agreement yourself by giving 1 months notice.

Advantages of Leasehold

• You avoid dealing with the upkeep of some parts of the building, the ‘fabric of the building’, e.g. external walls and roofs.
• Problems with neighbours, e.g. from noise, can be dealt with via the landlord or landlady providing the problematic residents also occupy a lease or rental property part of the same freehold.
• Home insurance is usually taken care of by the freeholder.
• You have fewer responsibilities over organising repairs and maintenance, especially when it comes to communal areas.
• You’re still entitled to what’s called ‘quiet enjoyment’ – the ability to use your leasehold property with liberality within reason and legality.

Leasehold vs Freehold

The Lease Extension Process and the 80-year Rule

The concept of lease duration can be confusing, especially given that leases have a total length of anything from 99 or 125 to 999 years.

Flats in old period blocks, e.g. Victorian flats, may have some of the shortest leases when you move in whereas brand new flats will likely not have problematically short leases, usually 999 years. Remember, once a lease approaches 80 years then mortgage lenders are unlikely to lend to any prospective buyers so you’ll be likely confined to cash buyers but in addition to this, if you do let your lease hit 80 years and below then you’re in for a nasty shock when it comes to extending your lease or buying the freehold.
 

The 80 Year Rule

When leases fall below the 80-year mark, the freeholder becomes entitled to a payout resulting from the value increase granted by a lease extension. Without this legal mechanic, leaseholders could wait until the last minute to renew their lease to then significantly boost the value of their property and sell it immediately without crediting the freeholder any of the value from extending the lease.

This 80-year rule means:

• Positives for freeholders who will then be paid out some of the value of the property by the leaseholders when they want to extend a lease or convert to freehold.
• Negatives for the leaseholders who will have to pay a lot more to extend their lease or buy the freehold.

The ‘Marriage Value’

The concept of marriage value is a bit tricky to grasp. Because a leasehold expires after X number of years, its value is pretty dynamic. As we described, a leasehold with 999 remaining years on it is worth more than a leasehold of 99 years and a leasehold of just 9 years would be worth a fraction even of that.

By spending say £20,000 to extend a lease from 9 years to 99 years, or by buying the freehold when that lease has almost expired, the leaseholder is boosting the value by a figure much higher than what they’re laying out for the lease extension (or freehold purchase) and thus, the freeholder is entitled to a payout of some of this marriage value – the value created by the property and lease married together.

Marriage value is named that way because a leasehold is comprised of 2 elements; the building itself – the bricks and mortar – and length of the lease.

Holding a longer lease means the leaseholder can further benefit from increases in the property’s market value, longer leases means greater potential for greater future value.

To accommodate these variables, under the Leasehold Reform, Housing and Urban Development Act 1993, the freeholder can ask for as much of 50 per cent of the marriage value when the lease falls below 80 years. This value is determined by leaseholder valuers.

Ground Rent and Service Charges, A Leasehold Buyer’s Conundrum

Leaseholds are usually associated with flats, namely because blocks of flats are much harder buildings to manage than traditional houses. Flats require specialist maintenance and need to be more intensely regulated as the buildings are more complex and usually house many more people than traditional houses.

This makes leasehold and renting the logical choices for occupying flats as the ‘fabric of the building’ and communal areas are the responsibility of the freeholder who can, therefore, coordinate the upkeep of everything together. The alternative would be those living in the flats having to work together to maintain the building. This is possible and we’ll discuss how this occurs shortly, but, by and large, leasehold is the best fit for long-term flat occupancy.

Leasehold Houses

Leasehold houses, on the other hand, were very uncommon even a decade ago but lately, it’s not unusual to find leasehold property particularly on new development sites.

Leasehold houses may yield some benefits for buyers who are looking for a hassle-free hands-off approach to living in an area for shorter periods of time and they’re also offered to buyers for cheaper prices than freehold because you’re only buying a lease.

Like a flat, from moving in your lease begins to run down and when that lease begins to reach the 80 – 90-year point, the buyer would normally have to extend a lease to avoid either.

1. Lenders won’t let you remortgage as your property value is dropping sharply.
2. Lenders won’t lend to prospective buyers, again because the house’s value is dropping.

The key difficulty with leasehold houses is spiralling ground rent. Ground rent starts off at a fairly nominal value, e.g. £50 but it can increase alarmingly. Buyers have been sold brand new leasehold property with 999-year leases that were marked up as ‘basically freehold’ but with spiralling ground rent, these types of leases make the property extremely hard to sell and extortionate to maintain, trapping buyers.

The Home Office has given an example where the freeholder is forecast to charge ground rents in excess of £10,000 a year by 2060, it’s made headlines across the news, e.g. in The Guardian which highlights the difficulties of selling leaseholds with spiralling ground rent and so, as of July 2019, the government declared ground rents for these types of newbuild property will be enforced at zero, though the law is not retrospective and thus, those locked into ‘bad’ leases are still set to suffer. This has not become law yet.

Power to the Homeowner: Buying the Freehold of a Leasehold

Leaseholders are entitled to buy the freehold of their property, whether it’s a flat or a house. The Leasehold Reform Act 1967 set the groundwork for this legal procedure but it was boosted by the Commonhold and Leasehold Reform Act 2002 which made it easier for leaseholders to buy the freehold and essentially give the original freeholder the boot. For flats, this requires the cooperation of other leaseholders but for houses, you are free to buy the freehold at any time.

There are certain qualifying criteria to buy the freehold of a leasehold flat, generally, there must be at least two flats in the building, the leases must be over 21 years and at least 50% of the leaseholders need to agree and take part though at least two-thirds of the flats must be on lease to qualifying tenants.

This liberates the leaseholder from the freeholder meaning no more ground rent and total control over service charges, repair and maintenance.

• You’ll escape many restricted covenants, e.g. you’ll be able to keep a pet.
• Your lease is extended for free, usually to 999 years as the land is still owned by the freeholder.
• You can choose what repairs you undertake and when.
• You can let the flat or rooms within it out to others.

This isn’t without its challenges, though. Firstly, it’s costly to buy the freehold and secondly, you do become responsible for repairs and will need to coordinate these with others partaking in freeholding.

There are two routes to freeholding a leasehold:

Informal: It’s always best to approach the freeholder first and try and reach an agreement via negotiation. This could be quick or it could take a lengthy period of time depending on conditions and the willingness of the freeholder.

Formal: Legislation states a procedure for going to a Tribunal if your freeholder doesn’t cooperate or you can’t find them / don’t know who they are. This takes longer and incurs additional legal fees.

Average Costs Of Freeholding for Flats worth £200,000

Typical simplified costs of buying the freeholds of leasehold flats based on data from the Leasehold Advisory Service Data service. Based on £200,000 flats (valued on 999-year leases) with £200 annual ground rent.

Summary

Both houses and flats can be freehold or leasehold but flats are the most common property in the UK to be subject to leasehold tenure and legalities for enfranchisement (buying the freehold).

Leasehold houses are under tight surveillance from regulators and the government to prevent some of the extortionate spiralling ground rent and service fees that become prevalent in the early 2000s and now, the government plans to enforce newbuilds as freehold only, but buyers still need to be aware of leasehold houses offered on new developments with 999-year leases marketed as ‘virtually freehold’ – there is simply no such thing.

Whilst the law has empowered those living within leaseholds to essentially ‘take the power back’, coordinating this effort can be tricky and executing it at a time that suits everyone is no simple task.

Economically, it is well worth the investment to buy the freehold of a leasehold but there are the unlucky ones who then have to fork out more than they expected on repairs and maintenance. Aside from always scrutinising the small print of anything property related to the nth degree, always do your own research on solicitors and other professionals when considering freeholding a leasehold.

Frequently Asked Questions (FAQs)