Leasehold vs freehold: what's the difference?

When you buy a property freehold, you own the building and the land it’s on until you decide to sell it.

But if you buy a property leasehold, you own only the building (not the land it’s on) and only for a set number of years.

When the term of the lease expires, the property will belong to the landowner unless you can extend the lease.

Here you can find out more about the differences between freehold and leasehold properties, and the things you need to be aware of if you buy your home leasehold.

What does leasehold mean?

When you buy a property that is leasehold, you own it for a set length of time, which is the term of the lease.

Once the term of the lease runs out, ownership of the property transfers to the person (or entity) that owns the land (i.e. the freeholder).

In theory, the closer you are to the lease expiry date, the less valuable the lease becomes, meaning that if you are looking to sell on your lease to a new holder, you’ll find it more difficult to recoup your money if you are closer to the expiry date.

It could be a good idea to extend your lease before looking to sell it to make sure you are getting the best possible price.

How long can a lease be?

Newly-created leases can be anything from 99 or 125 years to 999 years.

A 999 year lease is effectively as good as freehold, and there can even be some advantages to owning some properties this way, rather than under freehold (see below).

However, shorter leases become problematic sooner than you may think. If a lease has less than 80 years left to run, it may make the property hard to sell, and it may even be difficult to remortgage.

What else is different about a leasehold property?

Most flats are leaseholds, although houses can be leaseholds – especially if they were bought through a shared ownership scheme.

With leasehold you do not own the land the property is on, and if it’s a flat you don’t own communal areas such as stairs or hall, nor the structure of the building itself.

Normally, leaseholders pay fees to the freeholder. But government legislation coming into force on the 30th June 2022 means that ground rent charges will be banned on most new residential leases, which will put an end to annual ground rent increases.

In preparation for the new changes, many freeholders have already moved their ground rents to zero, making day-to-day costs more affordable for individuals looking to buy.

The legislation will be reinforced in 2023, when ground rents of retirement properties are also moved to zero.

A lease will also tend to include certain restrictions; for example, you may not be allowed pets, and you may need to ask permission to make changes to the property.

If you break any conditions you could be taken to court and may risk losing your lease.

The freeholder is usually responsible for buildings insurance (though not contents insurance).

The freeholder should consult with you on certain maintenance costs and some charges you can challenge if you disagree with them.

What does freehold mean?

If you buy a property freehold, it means you completely own the property and the land it sits on (though of course your mortgage company could still repossess it if you don’t keep up repayments).

This kind of total ownership is known as ‘title absolute’ and sometimes by the curious term ‘fee simple’.

You are responsible for all costs relating to the property, e.g. repairs and buildings insurance.

Usually there are no maintenance charges, unless you share any services (such as communal gardens) with your neighbours.

Most houses are freehold (but do check this). With some flats, you may be able to share the freehold with your neighbours as part of a management company.

What are the pros and cons of leasehold properties?

When it comes to leasehold, there are probably more disadvantages than advantages (though there are a few potential upsides).

We’ll cover the drawbacks first.

What are the disadvantages of a leasehold property?

• You pay service charges and ground rent to the freeholder, which can increase
• You need written permission from the freeholder to change the property, and there may be large fees involved
• You may not be allowed pets
• You might not be able to run a business from home
• You may not be able to sub-let
• The fewer years are left on the lease, the harder it will be to sell the property (so you may not benefit from increasing property prices)
• Conveyancing fees are typically higher when buying leasehold
• You’re effectively renting and at the mercy of the freeholder.

The biggest issue facing leaseholders is that they lack independence when it comes to making decisions over what to do with the property.

From sub-letting, to having pets, to needing an address to register a business, a leasehold can sometimes seem like a more expensive rental agreement.

What are the advantages of a leasehold property?

If you are in a shared block of flats, there are some advantages to the property being leasehold.

• A leasehold property is usually cheaper (because of the risks involved)
• The freeholder is normally responsible for building maintenance in communal areas
• The freeholder is responsible for the structure and maintenance of the building
• The freeholder arranges building insurance

There can also be specific advantages for flat owners to continue owning their flats under a leasehold structure.

For example, flat owners can club together to buy the freehold on their block (see below) and then grant themselves 999 year leases.

The long lease gives them all the same security as freehold, but will also set out the rights and responsibilities of the residents, such as funding the maintenance of the building and placing restrictions on antisocial behavior.

This kind of arrangement combines the advantages of freehold with the few perks of leasehold.

How can I find out how many years are left on the lease?

If you’re considering buying a leasehold property, then the very first thing you should do is check how much of the lease is left to run.

The first few pages of your lease document should show how many years are left on your leasehold and help you find out when the lease started. It should say the date of the lease, the length of the lease term and the date that lease term started.

If you don’t have a copy of your lease you might be able to get one from your solicitor or mortgage lender, or you can order one from the Land Registry by post or online.

Can I extend or renew my lease?

You have the right to extend your lease if you have owned the property for two years or more, and if the lease has less than 80 years left on it.

It’s best to extend sooner rather than later, as the shorter the remaining lease, the more costly it may be to extend.

Usually when you extend a lease, you extend it by 90 years. So for example, if you have 70 years left to run, and you extend the lease, the new lease term would be 160 years.

The cost of extending a lease is generally 50 per cent of what is known as the ‘marriage value’ of the property – this is defined as the extra value the property would gain by having a longer lease.

In other words, you will be paying around half the extra resale value you would (theoretically) gain when you sell.

The cost of extending may also depend on any improvements you’ve made to the property and how much your property is worth.

The cost of extending may also depend on:

• any improvements you’ve made to the property
• how much your property is worth
• how much ground rent you currently pay

Costs will also include

• legal fees
• property valuation
• Land Registry update fees
• Stamp Duty (but only if the leasehold extension costs over £125,000).

Can I buy the freehold on my property?

You have the right to buy the freehold on your leasehold home, if you have owned the property for two years or more.

It’s best to do this formally with the help of a solicitor, via a First-Tier Tribunal (or a Leasehold Valuation Tribunal in Wales).

If you can’t come to an agreement with the freeholder, the Tribunal will establish the purchase price and terms.

Buying the freehold is more straightforward if your property is a house, since you are the only owner.

If you are in a block of flats, then you can’t own the freehold on the property unless all residents buy the freehold jointly. This can be trickier to arrange, but in many cases it’s worth trying.

Can leasehold rights be transferred?

As a leaseholder you also have the right to demand the freeholder’s management of the lease be transferred to a ‘right to manage’ company set up by you and other leaseholders.

By managing the leasehold yourselves, you may be able to cut costs such as insurance considerably (however, this won’t extend your lease).

Make sure to use our mortgage calculator to work how much you might be able to borrow.