What's the difference between leasehold and freehold?

May 13, 2021

What’s the difference between leasehold and freehold?

 

There are two ways you can own a property in England or Wales: freehold or leasehold.  In this article we explain about each of these property types and the differences between them.

Freehold

If you own the freehold of a property, you own the building and the land that comes with it.  You are responsible for the maintenance and repair of the building and can largely do as you please with the property, subject to regulations.

Leasehold

In contrast, if you own the leasehold, you own the right to use the property for the length of the lease. You don’t own the building or the land, which is owned by the freeholder.

The building will be divided into communal areas, that are used by all leaseholders in the building, and private areas.

The freeholder is responsible for maintaining all communal areas. They are also responsible for maintaining the physical building e.g. replacing the roof. As a leaseholder you are responsible for decorating your private area and maintaining your central heating.

Time limits

A leasehold has an expiry date associated with it.  When the lease expires, you hand the property back to the freeholder.

The length of time left on your lease can affect how much your property it worth. Lenders are unlikely to offer a mortgage against a property with a short lease.

A short lease can also make selling your property a challenge later on, as the buyer won’t be able to get a mortgage.

There are laws allowing you to extend a lease, but these require you to pay a fee to the freeholder.

What are ground rents?

As a leasehold is a tenancy, you have to pay rent to the freeholder. Historically this rent was set at such a low level it was called peppercorn rent (as the rent was a single peppercorn paid each year). Often this rent was paid as a lump sum at the beginning of the lease.

More recently, ground rents on new leases have increased dramatically as property developers have seen this as an additional way to make money. There are even cases where the rent is set at a low initial level but doubles every few years. What started small rapidly becomes prohibitively expensive.

It is important you pay the ground rent, as if you don’t the freeholder could cancel the lease, making you homeless.

Your solicitor will be able to help you understand the terms of a ground rent agreement.

What are service charges?

As the leaseholder isn’t responsible for the upkeep of the building (that responsibility lies with the freeholder), it’s likely you will have to pay a service charge.  The freeholder uses your service charge to cover the communal maintenance costs.

The freeholder can often decide what maintenance needs doing and so can set the fee you are charged. The fee usually increases each year, so make sure you consider this in your budget.

As well as maintenance, the building will sometimes need major building work, e.g. a new roof. When this happens, the freeholder will send you a bill for your share of the work. As it is the freeholder’s decision, it’s hard for you to budget for these costs. When you are buying a leasehold building, your solicitor will ask the freeholder for details of any planned works and how much money they have built up in their emergency fund.

Can I make changes to my leasehold property?

Your lease will set out what you can and can’t do in your home. Your solicitor will explain this to you. Usually you can decorate, change the carpets and change any fitted cupboards.

For everything else you will need to get the freeholder’s permission. If they grant you permission, they will often charge you a fee, as your home is now worth more than when you bought it. Most people find this unfair!

What if my home is on a private road?

When new roads are built, they are often adopted by the council. The council is then responsible for their maintenance. But some roads don’t get adopted and remain as ‘private’ roads.

Private roads are usually owned by a management company which is responsible for their maintenance. Traditionally the management company is owned equally by all the houses on the road. They appoint a small committee to run the company and act in a non-profit role, and each house makes a small contribution to the costs.

With the growth of large new build estates, the developers often sell the management company to an investment firm. The investment firm maintains the road but also looks to make a profit from the fees that each home has to pay.

Private roads have their advantages, such as privacy, security and less issues with parking. But if they are owned by an investment company, the fees you pay can become very expensive, making it hard to sell your home in the future.

When you buy a freehold or leasehold on a private road, your solicitor will make you aware of any fees you will have to pay.

Private estates

Even if your road has been adopted by the council, the public spaces might not have been, including any parks, pathways and grass verges. This is common on new build estates. You may have to pay a charge to cover the maintenance of the public spaces, in the same way as if your house was on a private road.

These arrangements have attracted bad press in recent times. They have been called ‘fleecehold’ due to how much the service charge is and the fact that the management company can set prices at their leisure.  Ultimately, management companies are trying to make a profit and it’s the property owners who provide it.

A management company can also place restrictions on what you do to your property, potentially limiting your ability to extend and even what colour you can paint the outside.

If you view a property on a housing estate, either existing or new build, be sure to ask if there is a service or estate charge.

 

Mortgages:

Batsrock Limited, trading as Wisey, acts as an intermediary for the purposes of introducing its customers to Yes Mortgage Services Limited, part of the H L Partnership.

Yes Mortgage Services Limited is an appointed representative of H L Partnership Limited which is authorised and regulated by the Financial Conduct Authority. Yes Mortgages Services Limited is a company registered in England and Wales with company number 08872874. The registered office address is Yes Mortgage Services Limited, Four Winds, 22 Windmill Lane, Avon Castle, Ringwood, Hampshire, BH242DQ.

You will not receive advice or any recommendation from Batsrock Financial. Such services will be provided by Yes Mortgage Services Limited