Freehold and leasehold are the two main ways of owning property in England and Wales, the property meaning the land and the buildings on that land. But the two forms of ownership are very different, and only apply to certain types of property.
For instance if you’re looking at buying a flat you’ll be asking what is a leasehold? When buying a house, do you need to worry about leasehold? We answer all the burning questions with in-depth expert advice.
What is a leasehold?
‘Leasehold has very different legal status from freehold, in fact only giving you a ‘right to occupy’ a property for a stipulated amount of time (for long leases, usually between 99 and 999 years), rather than own it forever,’ explains property advice expert Saira Parveen, Lawyer at SA Law.
‘The ‘purchase price’ for a new flat is in fact in law a ‘premium’ payable to the landlord for the right to occupy, and on top of this you will still often (but not always – it depends on the terms of the lease) need to pay ground rent (usually once or twice a year), service charges (your share of repairing and maintaining the common parts of the building, eg structural parts of the building, lifts etc and the grounds of the building) and insurance rents.’
What does it mean to buy a leasehold property?
‘Think of buying a leasehold as a more long term rental option and it starts to make more sense,’ explains Founder and CEO of GetAgent.co.uk, Colby Short. ‘You buy, and own the property itself, but you don’t own the land it sits on.’
‘In the case of a leasehold apartment, for example, you also won’t have any ownership over communal areas or the building itself, just your flat or apartment.’
‘Much like a rental lease, there is also a timeframe on the lease of the property you purchase,’ Colby explains. ‘When this term expires, ownership transfers back to the freeholder. It’s also important to note that depending on how long is left on the lease, you may struggle to sell your leasehold home. Anything less than 90 years and you should almost certainly look to extend it or risk losing out on any capital gains.’
‘Leases of residential properties can be roughly divided into: short term residential leases (where you don’t pay a purchase price but pay rent and occupy for a fixed initial term and then on a month by month basis), and long residential leases where the term is often hundreds (or even thousands) of years and the lease can be bought and sold by successive tenants for a purchase price,’ advises Jane Lonergan, Partner and Head of Property at Wilsons Solicitors LLP. ‘In longer leases the rent (called the ground rent) will usually be low.’
What are the disadvantages of buying a leasehold property?
Leasehold homes will come with restrictions, because you don’t own the freehold. ‘This one of the biggest drawbacks of a leasehold home, but they can also come with additional restrictions,’ says Short. ‘These can include things such as needing permission to make any changes to your home, particularly if they are structural.’ For this you’d have to seek permission from the freeholders, and that’s in addition to any council planning permissions etc.
‘You may not be allowed to sub-let your property, use it as a base to run your business or even own a pet. If you’re found to be in breach of these restrictions you could lose your lease so it’s important to know where you stand,’ Short warns.
‘It is also vitally important to know how much ground rent and service charges you can expect to pay. It’s not unusual for homeowners to be hit with hefty services charges that leave them in financial hardship. Ground rents can also increase over time so you really need to be realistic as to what you can afford on an ongoing basis, not just at the point of purchase. ‘
What happens at the end of a leasehold property?
Having a healthy amount of years left on the lease is the only way to ensure you are in a good position, both financially and physically. ‘Failing to extend the lease will see ownership transferred back to the freeholder and in most instances, you will no longer have the right to live at the property,’ cautions COO of Warwick Estates, Bethan Griffiths.
‘The good news is that you can request an extension at any time,’ she adds positively. ‘But after two years of ownership, you have the right to extend the lease by 90 years as long as you are the qualifying tenant. Once you’ve owned the property as the leaseholder for more than two years, you have the right to extend the lease by 90 years (flat) and 50 (house) as long as you are the qualifying tenant.’
To be the qualifying tenant you must have purchased the property with the original lease of at least 21 years, which should be all if not most cases.
Extending a lease is a viable solution, but it does come at a cost. ‘This cost will climb the longer you leave it and the shorter the lease gets,’ Bethan explains.
‘For example, the cost of extending a 90 year lease will sit at around £9,000 for both the extension and fees, but it will add around £13,000 in value,’ she advises. ‘In contrast, extending a 60 year lease will cost you as much as £32,000 and add perhaps the same amount in value. So the key is to stay on top of it and act sooner rather than later.’
Is it worth buying a freehold interest in my house?
‘Flats are typically only ever leasehold – although this may change in the future with the government looking to reinvigorate common hold ownership – but that’s another story,’ says lawyer Saira Parveen. ‘Because a building will be occupied by a number of tenants and it will be the landlord who owns the freehold in the entirety of the building, ie all the flats together and the common parts.’
‘Some houses can also be leasehold and there is legislation that allows tenants to upgrade their leasehold interest to a freehold interest by exercising their right to require the landlord to sell them the freehold interest on payment of the required premium prescribed by the Leasehold Reform Act 1967. This can be beneficial for a homeowner as a freehold interest may raise the value of the property, make it more sellable (most people expect houses to be freehold) and the owner will no longer need to pay a rent to the landlord nor have any other obligations to a third party landlord.’
‘The current process to upgrade a leasehold interest in a house to a freehold interest is complex and can be expensive,’ Saira warns. ‘There have been some horror stories about leasehold houses where the rents due under those leases have been generally considered unfair to tenants. Experts expect the government to step in and change the law around this area making the process of converting to freehold much cheaper and easier, as well as banning the sale of new leasehold houses in the first place.’
‘It might be worth waiting to see what changes come in over the next few years rather than looking to acquire the freehold of your leasehold house now if you already own one. Unless you have a pressing need to convert from leasehold status.’
What are the advantages of buying a leasehold property?
‘Despite the complications of leasehold homes, they can make a great option for the right kind of buyer,’ says Bethan. ‘And they often favour those buying in major urban areas who may be career focussed and only intending to live in the property for a shorter period of time.’
‘Leasehold homes are more affordable, around a third cheaper depending on where you’re looking to buy,’ she adds.’Leasehold homes are a less hands-on purchase as the freeholder is responsible for maintaining the property and/or wider building. They also have the responsibility of arranging building insurance. So all in all, there’s a lot less to worry about.’
Why are some leases 999 years?
The length of a leasehold will typically be 125 years but you can find 999 years on a lease. This is often in place to make a property more marketable say the experts.
‘In this case, acquiring a 999 year lease allows an owner to have a title that is ‘as good as freehold’ (due to length of time)’ advises Colby. And is therefore much more attractive to buyers vs a shorter lease (e.g. 85 years). It provides longer-term security, while still retaining the existing freehold/leasehold structure.’
Leasehold properties are ideal for first time buyers from the affordability perspective. Most of these leasehold homes will be flats, where a lease is in place because the property has been developed and divided into several dwellings – so no one person owns the freehold or the land the property resides on.
You can obtain a share of freehold, but that will also come at a cost and complications depending on the current set up in place.
‘A quick, inexpensive check at the Land Registry will tell you if a property is freehold or leasehold’ advises Lawyer Saira Parveen. ‘If the property is not registered at the Land Registry (most are) then you can review the deeds and find out.’
Can you renovate a leasehold property?
Yes and no. If you own a leasehold property, you will usually be free to do more minor works, including painting, decorating, kitchen and bathroom refits. However, for more major alterations such as installing windows or making other structural changes you will need to check your lease to see if you are allowed.
‘Carrying out home renovations on leasehold property is more complex. Essentially you don’t own the property you’re renovating,’ explains CEO and Co-Founder of MoveStreets, Adam Kamani. ‘As a result, you will need permission from your freeholder before carrying out renovations. Especially major changes.’
‘Check your lease to see if you are allowed to make any alterations. Some leases can stipulate you only need permission for major works involving plumbing or electrics. While others may require permission for any works. Consult your freeholder. Often the freeholder (or landlord) will want to know that any renovations you intend to make will improve the property and harm its value.’
Adam goes on to warn, ‘If you don’t get consent from your freeholder before undertaking any works they could make you revert the property back to how it originally was, and you will be liable for all costs.’
‘Be aware that property alterations without consent of the freeholder may also affect your ability to sell your property in the future. A potential purchaser will usually ask for details and copies of any consents and permissions. Furthermore, any unauthorised alterations or renovations may contravene the terms of your mortgage.’