Freehold VS Leasehold: The Difference Explained

When making your first steps onto the property ladder, two terms you’ll encounter repeatedly are ‘freehold’ and ‘leasehold’. Most (but not all) houses are freehold properties, while most flats are leaseholds – but what do these terms actually mean?

They may sound similar, but these two ways of owning property are quite different. The distinction between these two terms can affect how you make payments, how the land is maintained – and in some cases, even the future value of the property.

Although estate agents can sometimes downplay the importance of the two types of property, the differences could easily become dealbreakers in some situations. It is therefore important to understand both terms and under which circumstances they become primary considerations.  

What is a freehold property?

‘Freehold’ means that you will be buying the property (and the land on which it stands) outright and indefinitely.

The Land Registry will have your name down as the freeholder and the owner of the ‘title absolute’, which is the best kind of title to have as it essentially means that your ownership can’t be challenged under any circumstances.

In a nutshell, the property is 100% yours and you can do whatever you like with it (planning policy permitting). It does, however, mean that any and all maintenance work, building insurance and so on are entirely your own responsibility.

What is a leasehold property?

By contrast, a ‘leasehold’ property is – as the name suggests – simply leased from the freeholder. This is commonly used for blocks of flats, in which an individual may buy the lease for a single flat but not the entire building or the land.

A property lease might last for decades or centuries, with some common lease lengths being 90 years, 120 years or even 999 years. At the end of the lease, however, ownership of the property ultimately reverts back to the freeholder.

Leases on flats can often be extended, and tenants can earn the right to do this once they have owned the property for at least two years (and the original duration of the lease was at least 21 years). When buying a leasehold property, however, it can be very important to know how many years are left on the lease as this may affect your ability to remortgage or sell it.

It’s common for leasehold tenants to be charged a standard ‘ground rent’ on an annual basis and also pay a recurring maintenance fee or service charge. At the same time, the freeholder is usually responsible for any maintenance needed on the exterior of the property or the land itself (with only the interior of the property being the tenant’s responsibility).

In some cases, there may be restrictions on what the tenant is allowed to do at the property (such as keeping pets or subletting). Importantly, if a leasehold tenant should breach the terms of their lease, the lease itself may become forfeit (although in practice this happens quite rarely).

While it is mostly flats that are leasehold properties, recent years have seen an increase in the number of newly built houses that are sold on a leasehold basis.

As a note of caution, properties with extremely long leases (such as 999 years) are sometimes marketed by estate agents as ‘virtual freeholds’ – the implication being that the buyer doesn’t need to worry about the lease length and can think about the purchase the way they would a freehold. However, this may in some cases be a setup for small-print sleight of hand whereby the buyer ends up on the hook for ever-increasing and extortionate annual ground rent charges.

Extending a leasehold

It’s usually possible to seek an extension of another ninety years on top of the remaining term of your flat lease. If you get the extension, you can negotiate new terms and you also won’t be expected to pay extra ground rent (and if your request is denied, you can take the freeholder to court).

You will have to pay a fee (generally in the thousands) to get an extension on your lease, and the amount will typically depend on the length. In many cases this is very much worth doing, as leaseholds effectively lose value as they continue to expire – and a lease with only a few years left on it may become practically unsellable.

In order to extend the lease on your flat, you will also need to pay for a survey to have the property valued so that the right price can be put on the extension. If the extension happens to be worth more than £125,000, you will also need to pay stamp duty.

Buying the freehold

There are a number of reasons why a leaseholder might consider trying to buy the freehold for their property. For the cost of (usually) a ninety-year lease extension, they can gain the right to extend the lease as much as they’d like, essentially for free (with legal fees being the only expense).

Owning the freehold also allows the buyer to have some control over service charges – they aren’t forced to pay the bills for the providers chosen by somebody else – and also complete freedom from ground rent obligations. Additionally it can add value to their home, as freehold properties are generally more desirable to buyers than leaseholds.

However, buying the freehold isn’t cheap and it can be quite a drawn-out process – often taking a year or more. The procedure is also different depending on whether you have a leasehold house or a flat (in which case you would be buying a share of the freehold).

In a building comprised of flats it’s necessary for tenants to team up and buy the freehold between them (and by law, at least half of the building’s leaseholders need to be involved). Thus, each tenant then usually owns a lease of the freehold now owned by the legal entity they formed together.

Overall, the differences between freehold and leasehold properties are quite straightforward. Leasehold properties may seem to be off-putting to some, but they can be a good and sensible option in many circumstances.

With a clear understanding of the pros and cons of each type of property, a prospective first-time buyer can make an informed decision when searching for their dream new home – entering into an arrangement that works well for everybody involved.

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This post was contributed by Girlings Solicitors – expert property solicitors in Ashford, Canterbury and Herne Bay. With nearly 140 years of experience providing personal, business and not-for-profit legal services, Girlings is one of the largest and oldest law firms in Kent.

Written by Julie Hanson

Julie is passionate about property – development, investment and portfolio planning. Along with husband Alec, Julie is actively building a property portfolio while helping others to do the same.

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