Leasehold vs. Freehold - What's the difference?

What is a leasehold?

Leasehold properties are only owned for the length of the lease (or lease term), which can dramatically vary from as little as 40 years, to multiple hundreds of years in length. This means that when you buy a leasehold property, someone else owns the land that it’s built on, they are known as the freeholder. 

When the lease term ends, ownership of the land, and any properties on it return to the freeholder. Buying a leasehold property can therefore be seen as lifelong rental, as typically the lease term will outlast the people that purchase it.

If you’re planning to pass your home onto younger generations, or even sell or remortgage in the future, however, it's important to be fully aware of the length of the leasehold of any property before you buy it. 

Whilst there are some leasehold houses, it’s far more commonly seen in flats, as the communal areas often stay under the ownership of the freeholder, even if there are many different flat owners in any given building. 

How long does a lease last?

It’s possible for a new leasehold to be created from anywhere between 99 and 999 years. It’s important not to let a lease run too short before you sell, as this will drastically affect the value of your property.

The lease also become more costly to extend as time passes - which could even affect your ability to remortgage. 

Are there any disadvantages of a 999 year lease?

Typically, the longer the lease, the more valuable the property, as the transfer of ownership issues wouldn’t need to be considered for many generations. 

The possible disadvantage of extending to 999 years is that you need the freeholder's agreement in order to do so. Previously the freeholder could negotiate ground rent in these circumstances. However, as of June 2022, freeholders are no longer allowed to charge ground rent on new residential leases. Since April 2023, this has also applied to retirement property.

Those with existing leases in place may still have ground rent charges to pay, but these will no longer be subject to annual increases. 

Should you buy a leasehold property?

Generally speaking if the leasehold is very long, it shouldn’t have a huge impact on your decision. With the purchase of a flat or apartment, it’s unlikely you’ll have a choice, as they are predominantly sold as leasehold properties. 

Property prices can be affected, as similar leasehold properties in a particular location are typically priced lower than an equivalent freehold a few doors away. With a very long lease, however, the price difference is likely to be minimal.

The terms of the lease can also be an important factor to consider, as these may include ongoing monthly fees and restrictions that make ownership of the property less favourable to you.

What are the charges that come with a leasehold property?

When you own a leasehold property you won’t usually need to pay for any maintenance or repairs to the property or land, as this would fall under the responsibility of the freeholder. However, the freeholder, or their chosen management company, will charge you fees known as a service charge, to cover these costs. 

Particularly in the case of buildings with multiple leaseholds, such as an apartment block, you may also need to contribute to a sinking fund. This is similar to service charges, but instead of regular maintenance costs such as window cleaning, a sinking fund is used for unexpected expenses, such as repairs following an emergency -like a fire or major weather event. 

Can you extend the lease on a property?

If you own a leasehold property, you'll typically be able to apply to extend the lease by up to 90 years for a flat and 50 for a house. There are certain criteria that you will need to meet in order to be eligible for the extension, such as:

• You must have owned the property for at least two years

• The leaseholder must reach an agreement with the freeholder

• The leaseholder must pay the relevant costs associated with extending the lease

How much does it cost to extend a lease?

The cost of extending a lease depends on a number of factors, including the remaining length of the lease, property value and potentially the marriage value.

Marriage value is the term used to describe any additional value that a property is expected to gain by extending the length of its leasehold. 

The Leasehold Advisory Service’s have a useful leasehold extension calculator which can help provide you with an estimated cost of extending your lease. 

Fees payable may be:

• The premium - the price agreed for extending the lease. If the remaining lease is less than 80 years, you'll also likely have to pay 50% of the marriage value on top of this

• Fees and taxes - such as the cost of hiring professionals to evaluate the marriage value and carry out the legal processes involved with extending the lease, as well as any taxes that apply. Whilst Stamp duty can apply, this is only if the leasehold extension costs more than £125,000

When should I extend the leasehold on my property?

The government has raised the possibility of easing the rules and costs associated with leasehold extension in the future. At the current time, however, keeping an eye on the remaining length of your leasehold is incredibly important as extending your lease becomes very costly once your remaining lease drops below 80 years.

Properties with a remaining lease of less than 80 years can be very difficult to sell, meaning a lower market value is possible and can also be more difficult to remortgage for the same reason

What is a freehold?

A freehold property is owned outright (once you’ve repaid the mortgage in full), including the land that it's built on. Some other terms that you may hear used to describe freehold ownership are ‘title absolute’ and ‘fee simple’.

With this type of property ownership you are responsible for all property and ground maintenance, but there will be no service charges to pay.

It’s unusual to find freehold flats, but the majority of houses tend to be freehold. There are some exceptions to this rule, however, especially with shared ownership houses, so it’s important to ensure you're fully aware of the ownership status of any property before you make a purchase. 

What is the meaning of flying freehold?

A flying freehold is when a section of a freehold property overhangs freehold property or land owned by a different freeholder. This could include a bedroom over an arched entrance or passageway that spans two residences, for example.

Some lenders shy away from properties that have this element to them, as there can be a number of complexities involved with this type of ownership. 

Can you purchase a freehold as a leaseholder?

It’s possible to purchase the freehold on a leasehold home, once you’ve owned it for longer than two years. Your right to purchase can be enforced through a tribunal if your freeholder is unwilling to sell, but it's often simpler if they agree to the sale. 

The Leasehold Reform Act 1967 dictates that you need to fulfil a few criteria in order to purchase a freehold, including:

• You must own the lease for the entire property

• There must be at least 21 years remaining on the lease

• You must have been a leaseholder on the property for at least two years

This means it can be more difficult for flat or apartment owners to purchase a freehold, as there are multiple owners in one building. However, if you can come to an agreement with the other owners, it may be possible to purchase a joint freehold, known as a commonhold.  

What is a share of freehold property?

It's sometimes possible to purchase a home with a share of the freehold, rather than complete freehold ownership. This is often seen on flats, and means that you're buying a share of the freehold for the building - but that your actual home is still leasehold.

How much does a freehold cost?

It can be expensive and fairly complex to buy a freehold, however, a tribunal can enforce the cost suggested by an impartial third party, if an agreed price cannot be reached with the freeholder. Costs vary based on similar factors to those that dictate the property's value. However, the more time remaining on the lease, the more costly it will generally be to purchase the freehold.

Aside from the purchase cost of the freehold, the following fees may also apply at the time of purchase:

• Valuation fees

• Legal fees for both parties (freeholder and leaseholder)

• Land Registry fees

• Stamp duty

What is Commonhold property?

Commonhold properties are communal properties, such as blocks of flats, where the building is split into freehold units. Freehold units are owned by each individual flat owner, and all owners jointly share (usually equal shares) ownership of the common areas, which is managed and maintained through a commonhold association.

Instead of an external freeholder, the commonhold association manages the maintenance of common areas, such as stairwells, roofs, external walls and corridors. 

Whilst this is fairly rare in the majority of the UK, flat ownership in Scotland is based on a very similar system.Scottish law converted all long leases to full ownership in ​​the Long Leases (Scotland) Act 2012.

This means that all flats sold in Scotland are owned on an unlimited freehold basis. Owners pay a factor, which is a service charge to cover the maintenance of the common parts of the building. Common areas are jointly owned and managed by all the flat owners - like in a commonhold ownership. 

The Property Factors (Scotland) Act 2011, means that all factor companies have to sign up to and operate under a code of conduct and a government redress scheme.