Leasehold vs freehold
By Joe Elvin
Article 10 of 13
Leasehold vs freehold
Learn the key differences between leasehold and freehold properties, plus how to extend a lease and how leasehold property management works.
Flats are most commonly owned on a leasehold basis, while houses are normally sold as freehold properties.
If you buy a leasehold property you'll be known as the 'leaseholder'. This means you own the property but not the land it stands on. Buying a freehold property means that you're the sole owner of both the building and the land it stands on.
With leasehold properties, the land remains owned by the landlord, who's also known as the 'freeholder'. Ownership of the property will revert back to them once the lease runs out. Leaseholders have to get permission from the freeholder to make certain alterations to the property and will often have to pay an annual fee to a managing agent.
- For personalised advice on mortgages for leasehold and freehold properties, call Which? Mortgage Advisers on 0808 252 7987
Leasehold property: how long should be left on a lease?
A lease is a legal document that determines how many years the property's owner can live in the building. When buying a leasehold property, the longer the lease has remaining, the better.
Most leasehold properties are sold with leases that still have decades left to run. However, once a lease has less than 80 years remaining, it becomes more expensive to renew it and harder for potential buyers to be granted a mortgage.
To avoid having to shell out thousands on a renewal, buyers should look for a property with a lease that's unlikely to drop below the 80-year mark while they live there.
Extending a lease
If you're a leaseholder yourself and have been living in the property for more than two years, you may have the right to formally extend your lease using a Section 42 notice. Once the notice has been successfully lodged, you have the right to an extension of 90 years to the current term and for your ground rent to be reduced to zero.
You can also negotiate informally with the freeholder to extend the lease, with recourse to the Leasehold Valuation Tribunal (LVT) if there's a disagreement.
With informal lease extensions, you have the option to negotiate over the length and cost of the extension. Informal lease extensions tend to be finalised far quicker. However, you have no legal right for your ground rent to be reduced and it's even possible that the freeholder might try to increase it.
- The Association of Leasehold Enfranchisement Practitioners has members who are specialists in helping owners of flats extend their leases.
- The Leasehold Advisory Service has a lease extension calculator which will help you work out how much extending your lease is likely to cost.
Leasehold property management
Most freeholders will appoint managing agents to look after communal areas of leasehold properties. These agents will charge leaseholders an annual fee to cover ground rents, maintenance service charges and buildings insurance premiums.
Leaseholders can opt to arrange these services themselves under a scheme called 'Right to Manage' (RTM), providing more than half of the building's tenants agree to participate. However, it's generally recommended for professional managing agents to be left in charge of leasehold properties housing more than six people.
The key weapon for leaseholders who find themselves in a dispute with their managing agent or landlord over service charges is the Leasehold Valuation Tribunal. If you feel your service charges are unreasonable, your buildings insurance is overpriced or the quality of services provided is poor, and you can't reach an agreement through negotiation, the LVT can arbitrate.
Leaseholders can also go to the LVT if they want an extension to their lease or want to buy the freehold but aren’t able to come to an agreement with the existing freeholder on a price.
If you own a home on a freehold basis, you own the property and the land that it stands on. It is part of your estate and can be passed on to your heirs when you die.
The only limitations in terms of what you can do to modify the property are legal and planning ones – otherwise, it's up to you what you do with the house and its land.
One downside to owning the freehold is that repairs are up to you to organise and pay for. However, on balance, the advantages of owning a freehold property tend to outweigh the disadvantages. For example:
- Freehold houses, or flats with a share of the freehold, are usually more desirable than leasehold properties and tend to be worth more.
- With leasehold properties, the lease lasts for a fixed number of years and, if the lease term ends without being renewed, possession of the property passes back to the freeholder. This makes the property decrease in value as it nears the end of its lease. You don't face this problem with a freehold property.
- Freehold properties aren't subject to the various charges that a landlord can apply, which tend to be difficult to challenge.
- In fact, freeholders don't have to deal with a landlord at all, as they have overall responsibility for the property (or their share of the property).
Buying the freehold on your home
Owning a property on a leasehold basis can be less advantageous for homeowners, so you may want to consider buying your property's freehold.
Buying a share of the freehold, or 'collective enfranchisement' as it's known, is the ultimate example of leaseholders acting together, in this instance to own the property outright.
Buying the freehold involves serving a Section 13 Notice on the freeholder and requires that 50% or more of owners agree to participate in the acquisition of the freehold. Once the freehold has been purchased, the lease can fairly easily be extended to 999 years.
What problems could you face buying the freehold?
There are some barriers that could get in the way of leaseholders going down the collective enfranchisement route. As well as the cost of purchasing the freehold, which can be high, there is the need to create a new company that has directors willing to put in the work and effort to manage its affairs.
If only half the owners in a block want to participate, then the cost to each leaseholder will effectively double compared with the cost of a plan that manages to attract participation from 100% of owners.
For more advice on buying the freehold, talk to the Leasehold Advisory Service.
- Last updated: December 2016
- Updated by: Joe Elvin