I’m buying a house – what’s the difference between leasehold and freehold?
Leasehold vs freehold properties
There’s a lot to keep track of when buying a house, this includes understanding whether you own or rent the land the property you are buying sits on. In England and Wales, this will either be freehold or a leasehold.
Recently, things have got a little more complicated with the government proposing to ban leasehold titles all together because of a “ground rent scandal”. This might seem complicated, but hopefully we can help by explaining the key differences between the two so you can make an informed decision before you buy.
Why are they different?
How you own a property and what obligations or restrictions are placed on you can have a significant impact.
Houses sold as freehold, give the purchaser control over the property. Owners can make changes to the property without seeking permission from a ‘superior freeholder’. Purchasers own the property and the land it sits on for an unlimited amount of time.
Under a leasehold arrangement, purchasers own the property. But the land upon which the property sits is leased from the freeholder for a set period of time. To make changes to the property, you will need permission from the freeholder.
Additionally, under a leasehold agreement, you are required by law to pay an annual ‘ground rent’ and ‘service charge’. The ground rent can increase over time, what might start out as a small rent can increase drastically! The service charge is also an annual cost which can be prohibitive and is a constant drain on finances.
Can you extend or change a lease?
Whilst it’s common for a lease to last for hundreds of years (typically 999 years), they can be shorter.
You are entitled to ask the landlord to extend your lease at any time. In England and Wales, under the Leasehold Reform Act 1967 you may be entitled to an extension of 50 years on a house, or 90 years on a flat. Remember you need to qualify and you will have to pay. Sometimes fees can be significant.
If you are thinking of purchasing a leasehold property, it’s very important to check how long is left on the lease before you proceed. Some estate agents can gloss over this when selling a property. The cost of extending a lease can run into the thousands and can affect your chances of getting a mortgage or sell the property in the future.
Is it possible to buy the freehold from the landlord?
You can ask the landlord, provided certain criteria are met, but this can be an expensive, lengthy and combative process.
Right of first refusal
Importantly, landlords who want to sell the freehold of a building containing flats usually have to offer the leaseholders the first chance to buy it. The right of first refusal is governed by the Landlord and Tenant Act 1987 (the 1987 Act) as amended by the Housing Act 1996. This fact sheet provides a useful summary.
Pressure for leasehold reform
Buying and selling property on a leasehold basis has been common practice for many years. And, until relatively recently, few issues have arisen for those purchasing leasehold properties.
However, it’s fair to say that there’s been justifiable outrage across the media at the behaviour of some unscrupulous developers. Seemingly seizing an opportunity to make money, some national new-build house builders have knowingly sold properties on a long lease agreement, adding clauses that double the ground rent every 10 years. Notably, Taylor Wimpey has put aside £130m to sort the issues arising from adopting this approach.
Reassuringly, the government has responded positively to widespread pressure for reform. Speaking about the current Law Commission’s review of the leasehold sector, Housing Minister Heather Wheeler MP said,
“This Government is determined to reform the leasehold sector to better support homeowners. This includes making it easier for those who wish to exercise their Right to Manage and take direct control of their block. I welcome the Law Commission’s consultation proposals and encourage all those with an interest to come forward and offer their views.”
As the owner of a freehold property, you will be entirely responsible for maintenance and improvements yourself. This includes the walls (internal and external), the roof and all the land that the property sits on.
With leasehold properties, it could be that the leaseholder has responsibility for some maintenance and upkeep depending on the agreement. In some leaseholds, especially in flats, there may be a management company who fulfil duties and look after the communal areas in the property. This might include sorting out insurance, gardening, collecting ground rent and cleaning windows.
This service often comes with a service charge which is payable by you on top of the ground rent.
Naturally, not all freeholds are perfect. And not all leaseholds come with pitfalls. The most important thing is to do your research, be aware of the issues you could face and ask the right questions.
If you need any further information or would like to discuss your property issues with us, please contact us. We’re here to help.