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Published On: June 4, 2024 | Blog | 0 comments

Leasehold vs Freehold: Legal Guide for Property Owners

The main difference between leasehold and freehold property ownership lies in control and duration. Freehold ownership means owning the property and the land it stands on indefinitely. Leasehold ownership, however, means leasing the land from the freeholder for a specific period, which can affect long-term rights and costs, including service charges and ground rent.

If you are looking to purchase a house to get on the property ladder from an investment point of view or simply to live in, this comprehensive guide will help you make the decision between whether to buy a leasehold or a freehold property, and what legal rights do you have for both.

 

5 Major Differences between Leasehold and Freehold Properties:

Let’s break down the differences between a leasehold property and a freehold property in detail:

Property ownership

  • Freehold: Owning a freehold means possessing both the property and the land it stands on indefinitely, providing more control over the property.
  • Leasehold: In contrast, leasehold ownership involves leasing the property from the freeholder for a fixed term, which may restrict certain freedoms and introduce additional costs.

Service Charges

  • Freehold: Generally, no service charges as owners are responsible for their property and land.
  • Leasehold: Leaseholders often pay service charges for maintenance of common areas, which can vary and are determined by the freeholder.

Remortgaging

  • Freehold: Remortgaging is typically straightforward, without the complexities of lease terms.
  • Leasehold: The length of the lease can impact remortgaging prospects, with longer leases being more favorable.

Ground Rent

  • Freehold: No ground rent is payable.
  • Leasehold: Leaseholders pay ground rent to the freeholder, a charge that can increase over time and is a key consideration in leasehold ownership.

Gardens

  • Freehold: Owners have full control over their gardens, without restrictions.
  • Leasehold: Garden use may be subject to terms set by the lease, potentially limiting alterations or usage. The leaseholder may also need to apply for a licence for alterations before being able to make the changes.

Basically, here’s the difference between leasehold and freehold property ownership:

Aspect Freehold Leasehold
Property Ownership Owns property and land indefinitely Leases property for a fixed term
Service Charges No service charges Pays service charges for common areas
Remortgaging Straightforward Impacted by lease length
Ground Rent No ground rent Pays ground rent, which can increase
Gardens Full control over gardens Subject to lease terms. May need a licence for alterations

 

What is a freehold property?

In the UK, freehold property refers to outright ownership of the property and the land on which it stands, with no time limit on the length of ownership. This type of ownership allows for greater control over the property compared to leasehold ownership, where the property is leased from the freeholder for a specific period.

 

Can I buy the freehold of my leasehold property?

Yes, leaseholders often have the statutory right to buy the freehold of their property, either individually or as part of a group, subject to certain conditions. This process is known as collective enfranchisement. Contact us if you are looking to purchase the freehold of your property.

 

How much does it cost to buy a freehold?

The cost of buying a freehold varies and incurs several fees:

  • Legal fees: a solicitor to handle the purchase. 
  • Valuation fees: a surveyor to value the freehold.
  • Land Registry fees: charged by HM Land Registry for updating the property records.
  • The freeholder’s legal and valuation fees: you will typically be responsible for covering the freeholder’s legal and valuation costs.

The total cost is influenced by the property value, the remaining lease length, and ground rent payable.

 

What does owning a share of freehold mean?

Owning a share of freehold allows leaseholders to collectively own the freehold of the building, giving them more control over building management and service charge costs. Here’s our guide on shared freeholds if you’d like to know more about it.

 

What are the advantages of owning a freehold property?

  • Full control over the property and land.
  • Full control over service charges.
  • Easier to sell and potentially more valuable.

 

What are the disadvantages of owning a freehold property?

  • Responsible for all maintenance and repair costs.
  • Managing disputes with neighbours or issues with shared services can be challenging.

Basically, the pros and cons of owning a freehold property are:

Pros of Freehold Cons of Freehold
Having complete control over property Responsible for all repair costs
Complete control over service charges Responsible for all maintenance costs
Easier to sell Responsible for managing disputes with neighbours
Potentially more valuable than a leasehold property Responsible for shared services with neighbours

 

What are your legal rights as a freeholder?

 

Challenge a breach of lease

As a freeholder, you have the right to conduct a lease compliance review to identify any potential breaches and take suitable action. Our team has the knowledge and expertise to navigate the complexities of leasehold law and can help you exercise this right.

Freehold Disposals

Have you received a Section 13 Enfranchisement Notice? If yes, then a majority of the flat owners in the building are seeking to purchase the freehold interest from you. Provided the claim is valid, you are required by law to sell.

Do call us as soon you become aware of any Section 13 Enfranchisement Notice for our complimentary enfranchisement guide. Our mandate will be to maximise the amount you receive for the freehold interest and to establish whether the claim is valid. We regularly assist freeholders come up with a strategy for selling off their freeholds.

Counter Lease Extension Notice

Have you been served with a Section 42 (Initial Notice)? If yes, then your leaseholder has exercised the statutory right to extend their flats’ lease. You have two months from the date of the tenant’s notice to respond. Failure to respond allows the leaseholder to proceed with the extension on the terms of their notice.

For initial advice, a quotation or to arrange a meeting with one of our solicitors, please contact us on 020 7940 4060 and ask for a member of the Leasehold Service Team.

 

What is a flying freehold?

A flying freehold occurs when part of one property extends over or under part of another property, without both parts being under the same ownership. This can lead to complexities in property rights and responsibilities for maintenance, as the overlapping parts may not have clear ownership or access rights defined, often found in buildings converted into multiple dwellings or properties with extensions.

 

What is a leasehold property?

In the UK, a leasehold property is one where the ownership is temporary, granting the right to occupy and use the property for a specified period (the lease term), often decades or centuries long.

The land the property stands on is not owned by the leaseholder; instead, it remains under the ownership of the freeholder. This arrangement typically involves annual ground rent and service charges.

 

Can you extend a lease?

Yes, leaseholders in the UK have the statutory right to extend their lease under certain conditions, which can increase the property’s value and make it more appealing to buyers. The are two major factors to consider when extending your lease:

  1. The Premium: Extending a lease usually requires paying a premium to the freeholder. The amount depends on factors like the property’s value, ground rent payable and the remaining lease term.
  2. Fees and Taxes: In addition to the premium, leaseholders must cover legal fees, valuation fees, and possibly stamp duty, depending on the premium amount.

Contact us if you want to extend the lease on your property or if you need guidance on premiums.

 

Should I buy a leasehold house?

Buying a leasehold house suits those comfortable with certain restrictions and recurring costs like ground rent and service charges. It’s vital to consider the lease length, as a shorter lease can affect property value and saleability. Thoroughly reviewing the lease terms and understanding the obligations and costs involved are essential steps before proceeding.

 

How is the law around leaseholds changing?

On November 27, 2023, the UK government introduced the Leasehold and Freehold Reform Bill, a significant development in the real estate field. The Bill is set to reform the leasehold system and was passed on 24 May 2004 before parliament dissolved. The new Leasehold and Freehold Reform Act has yet to come into force.

Here’s our complete guide on the Leasehold and Freehold Reform Bill, if you want to know more about how the leasehold laws are changing.

 

What are the advantages of buying a leasehold property?

  • Often more affordable upfront compared to freeholds.
  • Maintenance and repair of common areas are usually managed by the freeholder.
  • Leasehold properties, especially in developments, often come with access to shared amenities like gardens, gyms, and pools that would be unaffordable or unavailable in a freehold.
  • The freeholder is usually responsible for the building’s exterior and structural repairs, reducing the maintenance burden on the leaseholder.
  • Leasehold arrangements, particularly in flats and managed developments, can offer a sense of community and shared interest in the property’s welfare and appearance.

 

What are the disadvantages of buying a leasehold property?

  • Annual ground rent and service charges.
  • Restrictions on property modifications and use.
  • Depreciating asset as the lease shortens.
  • Failing to comply with lease terms could lead to forfeiture, where the leaseholder loses their property as ownership reverts to the freeholder.
  • Leaseholders may face escalating ground rent or service charges over time, impacting affordability and saleability.

In summary, here are the pros and cons of buying a leasehold property:

Pros of Leasehold Cons of Leasehold
Potentially more affordable than freehold Annual ground rent and service charges
Maintenance costs are usually managed by freeholder Restrictions on property modifications
Repair costs are usually managed by freeholder Value decreases as the lease shortens
Often have access to shared amenities (gardens, gyms, pools, etc) Failing to comply with lease terms could lead to forfeiture

 

What are your rights as a leaseholder?

As a leaseholder, you have rights including:

  • Challenging excessive service charges.
  • Extending the lease.
  • Buying the freehold collectively.
  • Forming or joining a Right to Manage company to take over the building’s management from the landlord.

Contact us if you are looking to extend your lease.

 

What to do if you’re unhappy with the property management?

If you are unhappy with your property management, you can take the following steps:

Step 1: Discuss with fellow leaseholders

Start by discussing the issue with other leaseholders to see if they share your concerns, which can strengthen your position.

Step 2: Directly engage with the freeholder

Contact the freeholder or managing agent directly to discuss and potentially resolve the issues.

Step 3: Seek advice from your tenants’ association

A tenants’ association can offer advice and support, and may have additional influence.

Step 4: Opt for mediation

Mediation can offer a cost-effective way to resolve disputes without going to court.

Step 5: Consider appealing to the First-tier Tribunal

If mediation fails, applying to the First-tier tribunal can be the next step, offering a legal resolution for a judge to decide a key issue concerning the building. Contact us if you are interested in making an application to the Tribunal. The types of cases where you can make an application to the Tribunal and where we regularly act are:

  • Appointment of a manager.
  • Determination of reasonable service charges.
  • Applying to vary a lease.
  • Dispensation of the consultation requirements in Section 20.
  • Breach of lease.
  • Exercising the Right to Manage.
  • Determination of reasonable costs of the freeholder in an enfranchisement or lease extension case.
  • Determination of disputed terms in an enfranchisement case or lease extension matter.
  • Determination for the price of an enfranchised house.
  • Determination of the premium for a lease extension or enfranchisement where the landlord is missing.

Step 6: Consider an appeal

If the tribunal’s decision is unsatisfactory, you have the option to appeal, seeking a review or change in the decision.

 

What is commonhold?

Commonhold is a form of property ownership in the UK where each owner holds the ownership of their unit within a building or estate, and common areas are managed collectively by a commonhold association. This alternative to leasehold eliminates issues like expiring leases and escalating ground rents, offering a more democratic ownership structure where owners have a say in the management of shared facilities and areas.

 

FAQs regarding Freehold vs Leasehold Properties

 

Can I change a leasehold property to freehold?

Yes, leaseholders can collectively buy the freehold of their building, converting the status of the building as a whole.

Are there any additional costs to owning a freehold?

While you avoid ground rent and excessive service charges, you are collectively responsible for all maintenance costs.

Can leasehold properties have hidden costs?

Yes, apart from ground rent and service charges, there can be fees for alterations or transfers.

What happens when a lease runs out?

The property reverts to the freeholder unless the lease is extended.

Do leaseholders need consent from the freeholder for property changes?

Yes, leaseholders often need permission from the freeholder for significant alterations.

Is insurance handled differently for leasehold vs freehold?

Leaseholders typically contribute to a building’s insurance through service charges, while freeholders must arrange their own.

Can a freeholder refuse to sell the freehold?

In certain circumstances a freeholder can refuse to sell the freehold, but legislation often supports leaseholders’ right to buy.

Do freehold properties have any restrictions?

Very rarely do freehold properties have any restrictions, but some may have covenants affecting how the property is used or altered.

Is it harder to get a mortgage on a leasehold property?

It can be harder to get a mortgage on a leasehold property, especially if the lease is short, as lenders have strict criteria.

* Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*

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