What’s the Difference between Leasehold and Freehold?
Buying a house is a massive financial commitment. But do you fully understand the terms under which you own your house?
If you have a freehold, you own your property outright for an indefinite period of time (term). By contrast, a leasehold means that you own the property for a specific term of years only. At the end of the term, the property reverts to the freeholder. This can sometimes be an expensive distinction - and one that’s well worth understanding before you commit to buying a house.
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With a freehold property, obviously you don’t have to worry about your lease running out. If you buy a leasehold property, remember you’re taking over the lease from the previous owner, so you need to know how many years are left to run from the original term.
If there is a relatively short space of time left on the lease, you might struggle to get a mortgage, and the value of the property might also be affected when it comes to selling the house.
It’s possible to obtain a lease extension, either by agreement with the landlord or by a statutory process. However, the premium that you would need to pay to increase the term of the lease also increases greatly once the lease has less than 80 years to run.
Maintenance Repair and Alterations
Although some houses are leasehold, the most common leasehold properties are flats or maisonettes. There is a good reason for this, as the lease obliges the landlord to take responsibility for the maintenance, repair and insurance of the common parts and the main structure of the building.
This is extremely important, because it would be a huge risk to rely on each individual owner carrying adequate insurance or maintaining only their part of the building. The lease also obliges the owners of individual properties to comply with certain rules for the general good, and to contribute to the costs of the maintenance repair and insurance.
If you own a freehold property, maintaining and insuring the building is your responsibility. You are also more likely to have the freedom to make changes to the property without asking for permission, as freeholders are also often free of other restrictions often experienced by leaseholders, such as a ban on subletting or owning a pet.
It should be noted, however, that freehold properties may still be subject to restrictive covenants so you may still be required to obtain consent to make additions or alterations to the property, and there may be restrictions on the use of the property. Common examples might be that you must only use the property as a residence and not carry out any trade or business, or that you cannot park caravans or commercial vehicles, or allow your hedge to grow too high.
Service Charges and Ground Rents
Under a lease you usually have to pay a ground rent every year. This is usually a nominal amount, ranging from a peppercorn rent (i.e. nothing), to perhaps £500 per year. Some ground rents have recently proved controversial as they can increase significantly depending on the terms of the lease. Indeed, we’ve seen cases where a lease contained a ground rent clause that doubled every ten years, see The Doubling Ground Rent Scandal.
Leaseholders in the UK usually have to pay their landlord annual service charges, to cover the cost of insuring, maintaining and repairing the land and building. It’s important to be aware that service charges will vary and there may also be additional costs for major works, such as external redecoration, new windows or a new roof.
Where a freeholder usually has the freedom to carry out such works at a time of their choice, leaseholders will be obliged to contribute upon receipt of the appropriate notices from the landlord. With leasehold property, it’s therefore wise to check whether any major works are planned before you proceed with a purchase.
Leasehold Service Charges
Leasehold service charges often come with additional fees, such as the costs of managing agents or accountant’s fees, and you have less control over the amounts spent on maintenance or upkeep of common parts of the building or grounds.
However, service charges must be reasonable, and they can be challenged by leaseholders if they feel that they’re too high. If any dispute between the leaseholders and landlord can’t be resolved, then it’s possible to apply to the First Tier Tribunal to challenge the costs.
Leaseholders can also apply for the ‘Right to Manage’ a leasehold property and take over the management themselves.
Usually with a freehold property, you wouldn’t have to pay rents or annual service charges. However, there are instances where this does occur, such as where, for example, there is a private road or common areas on a housing estate which need to be maintained, such as play areas or parking areas. In this instance, a management company might be set up to carry out this maintenance and they will collect the charges from the freeholders.
So before committing to any purchase, it’s crucial that you fully understand the terms under which you’re buying. It could make a huge difference to you in the long run.
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