A freehold property is one where there is complete legal ownership of a piece of land as well as the building on it. As a freeholder, you are completely responsible for the building and the land as well as its maintenance.
In contrast, leasehold properties refer to properties where certain aspects of the property itself, as well as the land upon which it is built, is owned by a third party, such as a property management company, yet leased over an agreed period of time.
Typical examples of leasehold properties include those that own units or apartments in a block of flats, whereas a homeowner that owns a freehold will own both their property as well as the land it is on.
There may be some complications and finer details to consider in cases of leasehold rather than freehold properties. For example, unlike freehold properties, where the homeowner has ultimate control of the property, a leaseholder may not always be able to undertake refurbishments on their property as and when they want and need as they may need to consult with the freeholder first. Read on to find out everything you need to know about freehold and leasehold properties!
What Are Freehold Properties?
If you own a freehold of a property, it means that you own the building, and the land it is built on, outright. This means that your name will be on the Land Registry listed as the “freeholder”.
When purchasing a house, you will usually be purchasing it as a freehold property owner. However, there is a growing trend for leasehold houses, especially with new build homes or shared-ownership schemes. If you purchase a freehold property, you will be responsible for maintaining the property and the land it is on.
What Are the Different Forms of Home Ownership?
Freehold and leasehold are the two different forms of legal home ownership. The difference between freehold and leasehold is that with freehold, you become the owner of the building and the land.
Meanwhile, with leasehold ownership, you simply own a lease from the freeholder (or landlord) meaning that you are entitled to use the home for a number of years. With long term leases (sometimes spanning 90, 120 or even 999 years), this is theoretically the same as being the owner of a property; however, leases can also be short-term such as 40 years.
How Does a Leasehold Property Differ From a Freehold Property?
With leasehold properties, you have a lease from the freeholder for a certain number of years. This is a contract between the leaseholder and freeholder which will need to be met by both parties.
Freeholders usually commit to maintain the common parts of the property; although in some cases, leaseholders can claim a “right to manage” meaning that they will be responsible for those obligations. Leaseholders typically pay maintenance fees, contribute to the building insurance, and pay annual service charges.
As a leaseholder, you will also need to seek permission for any major changes or work that you want to do to the property. It also means that you may be subject to certain restrictions such as no pets or subletting.
How Important Is the Length of a Property Lease?
The length of the lease is one of the most important factors when buying a leasehold property, in particular the length of the remaining term of the lease must always be considered.
For instance, property value will be affected by the diminishing term of the lease – this means that as time goes by, it becomes more and more difficult to sell a property. Experts recommend that the lease should have a minimum of 80 years left in order to be able to secure a mortgage. This applies whether you need a quick valuation or even an instant online house valuation to check how much your property is worth.
There is also the possibility of extending the lease. At any time, you can ask the freeholder to extend the lease and, once you have owned your home for two years, you are legally entitled to extend your lease by 90 years. The freeholder can charge a fee for this service and the cost will vary depending on the property.
What Are the Benefits of Being a Freeholder?
Freehold is generally the preferred option and there are many benefits. Because you own the property outright, you do not need to worry about the lease running out and you can if you so wish and mortgage permitting, sell your house fast in a way you may not be able to in cases of leasehold properties. Additionally, you are not subject to a landlord or freeholder meaning that you do not need to ask permission about certain things such as owning a pet or doing work on the property. Finally, you do not have to pay certain fees such as annual ground rent, service charges or other landlord charges.
Generally, the advantages to freehold properties are:
- Flexibility: Renovate, decorate and do what you like (within reason) to the property at your own discretion.
- Affordability: Freehold properties don’t require leases, so, may be more affordable to own in the long-run.
- Hassle-Free: Unlike leasehold properties which require hassling landlords and other owners, you will own the property and land outright until you sell it.
- Rentability: Renting freehold properties is a lot easier, and means you can earn money quicker!
Are There Any Disadvantages to Freehold Properties?
There are, nevertheless, disadvantages to freeholds. Generally, freeholds tend to be more expensive as not only do you own the property, but also the land that it is built on.
In addition, it is very rare to find flats for freehold purchases; freehold properties usually refer to houses. Therefore, if you prefer to live in a flat or benefit from the perks of living in a communal living complex, it is unlikely that you will find a freehold property to meet your needs.
Another important consideration is that should a freehold property in the UK go through the probate process or should it be subject to Inheritance Tax, it may be dealt with differently to a leasehold property, often in favour of freeholders rather than leaseholders.
What Does It Mean to ‘Buy the Freehold?’
As a leaseholder of a flat, you have a joint right, along with other flat-owners in the block, to buy the freehold of the building. This would mean that the leaseholder would become their own freeholder. This is not something that can be done alone; the neighbours of the building would need to come together in order to buy the freehold of the building from the landlord or freeholder.
This process would enable the leaseholders to become joint freeholders of the building. They would still separately have a long lease; however, they would have control over that lease and they would not be subject to the old freeholder.
Joint freehold enables the neighbours to set their own ground rent and decide on their own building insurance policy. As owners of the freehold, they can also extend their lease term for up to 990 years.
Are You Eligible to Buy a Freehold?
If you are a leaseholder who wants to join together with other leaseholders from the building in order to buy the freehold, they are usually certain criteria you will need to meet:
- The building needs to have at least two flats
- At least two-thirds of the flats must be owned by leaseholders who own long leases (minimum of 21 years)
- A maximum of 25% of the freehold building can be used for non-residential reasons (e.g. offices or shops)
- Not all leaseholders of the building will need to be involved in buying the freehold but at least half of all the flats in the building need to be owned by leaseholders who want to purchase a share of the freehold. For buildings with only two flats, both leaseholders should want to buy the freehold
It can be expensive to buy the freehold and may involve you and the other leaseholders setting up a company in order to manage the building or contracting a managing agent.