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Leasehold vs freehold

Find out what leasehold and freehold mean, plus how to extend a lease or buy your freehold and what people mean by 'the leasehold scandal'

In this article
What is leasehold? What is freehold? Video: leasehold and freehold explained How long should a lease be when buying a flat?
Service charges and sinking funds What is ground rent? Leasehold 'scandal' and the future of leasehold

Depending on whether you buy a freehold or a leasehold property, there may be limits on what you can do to your own home.

In this guide, we explain everything you need to know about leasehold and freehold ownership. 

The government is planning to overhaul the leasehold system - find out about the latest proposals here.

What is leasehold?

If you buy a leasehold property, you'll have the right to live in the home for a set amount of years (specified on the lease), but you won't own the land it stands on. In this arrangement, you're known as a 'leaseholder'. 

In England, Northern Ireland and Wales, flats are most commonly owned on a leasehold basis, while houses are normally sold as freehold properties. In Scotland, very few properties are sold as leaseholds.

With leasehold properties, the land is owned by the landlord, who is called the 'freeholder'. Once the lease runs out, ownership of the entire property will revert back to them.

Leaseholders have to get permission from the freeholder to make certain alterations to the property. They will also have to pay rent each year – known as 'ground rent' – and will often have to pay an annual fee to a managing agent.

 

What is freehold?

When you buy a freehold property, you become the sole owner of both the building and the land it stands on.

As a freeholder, you won't need to pay ground rent, service charges or permission fees, but you will be responsible for the maintenance of the building. 

Video: leasehold and freehold explained

How long should a lease be when buying a flat?

Your lease is a legal document, which will tell you how long you’re allowed to live in the building as well as what you need to pay towards insurance and upkeep.

When first drawn up, residential leases usually last for up to 125 years, although it’s possible to have a lease for up to 999 years.

As a general rule, the longer left on your lease the better, as properties with short leases can be difficult to sell.

Leasehold

A lease with fewer than 80 years remaining can seriously affect both the value of your property and the amount it will cost you to extend the lease. 

Many mortgage providers will refuse to lend on a property with fewer than 80 years left.

When buying a leasehold property, check how many years are currently left on the lease and how many will likely remain by the time you come to sell.

Should you extend the lease when you buy the house?

You only gain the legal right to extend your lease after living in the property for two years, so if you're buying somewhere with a short time remaining on the lease and you want to get it extended, you have two options.

The first, and safest, option is to ask the seller to extend the lease before you actually buy the property. Provided they've owned the property for at least two years, they will have the legal right to extend the lease – although it could take time.

Extending a lease when buying a flat is fairly common, so a specialist property solicitor or conveyancer should be able to deal with much of this process on your behalf.

The second option is to buy the property and then see whether the freeholder is willing to extend the lease despite you not yet having earned the legal right to request this. This is of course a riskier option as it's dependent on the goodwill of the freeholder – if they say no, you'll need to wait two years.

You'll only be able to take this path if there's enough time remaining on the lease to meet your mortgage lender's requirements.

Service charges and sinking funds

Your monthly mortgage repayments won't be the only ongoing cost you’ll need to factor in if you’re purchasing a leasehold property - you’ll also need to pay service charges, and these can can add a significant sum to your monthly bills.

When you own a leasehold flat, you’ll usually pay a service charge to your landlord or management company to maintain any common areas of the building.

This charge generally covers the cost of supplying important services to the building, or for employing a managing agent to do so on the freeholder's behalf.

While some older leases have fixed service charges that must be paid every year, most newer agreements instead include ‘variable service charges’, which allow the freeholder to estimate the cost for each year. This allows freeholders to raise fees to finance major one-off expenses, for example refurbishing a lift or updating a fire alarm system. 

 

How much should a service charge cost?

 

You'll need to check what the service charge will cost before buying a leasehold property, as your lender will want to factor this into your mortgage application.

Your lease will give full details of how much you’ll need to pay and what you’re paying for. 

Service charges can vary significantly, and there’s no ‘one size fits all’ calculation to work out what the charge should be.

 

How often will I have to pay a service charge?

 

Service charges are usually paid once or twice a year. Most are paid in advance based on the freeholder’s projected costs, though on some older leases they are paid in arrears.

How much you’ll pay can vary significantly, but your freeholder will need to produce an end of year statement itemising how much they have spent on the upkeep of the building.

If the freeholder has spent considerably less than they have recouped in service charges, the terms of your lease may entitle you to be credited for some of this amount, or it may instead be transferred into a reserve (or sinking) fund for future works.

 

What is a sinking fund?

 

A reserve or ‘sinking’ fund should cover any large-scale or prohibitively expensive works that the building requires.

Not all leasehold agreements include sinking funds, but those that do require leaseholders to contribute to fund any major structural works down the line.

If your freeholder wants to carry out any work that will cost each leaseholder more than £250, they’ll need to consult you first.

 

What can I do if my freeholder doesn't maintain the property properly?

 

If you wish to take over the management of your building, you and your fellow leaseholders can apply for the Right to Manage. 

To do this, you and the other leaseholders will need to create a company which would be responsible for organising maintenance and repairs.

While that might sound relatively straightforward, there are various stipulations and acquiring the Right to Manage can be a very laborious process. 

With this in mind, it’s best to take independent advice at the earliest possible stage.

What is ground rent?

In England and Wales, ground rent is traditionally a token fee paid to the freeholder in exchange for renting the land the property sits on.

On older properties, ground rent is usually paid annually and is often a relatively low amount - around £50-£100. Ground rent can either be fixed or escalate over time. 

If you extend your lease, your ground rent is reduced to zero, or what is known as a ‘peppercorn rent’. While you could, in theory, pay your freeholder a peppercorn, the term is generally used figuratively. In the past, the terms of a lease couldn’t be enforced unless there was a set ground rent, however tiny.

Ground rent shouldn’t be a major worry for the vast majority of leaseholders, but there are concerns about exploitative ground rent systems on new-build homes. These schemes often see ground rent costs multiplying over time, which we'll explain in the next section.

Leasehold 'scandal' and the future of leasehold

In recent years various leasehold issues with new-build homes have emerged, leading many people to talk about a leasehold scandal.

While it's usually only flats that are sold as leasehold, a significant number of new houses were sold as leaseholds in recent years - and at times, the terms offered to leaseholders of both new-build flats and houses have been concerning.

As a result, the government has banned the sale of new-build houses as leasehold, meaning they should always be sold as freehold in the future (except in exceptional circumstances).

This is one of a series of pledges the government has made to overhaul the leasehold system, which you can find out more about below. 

Issues with leasehold properties

 

Developers selling freeholds to investment companies

 

While most leasehold properties are flats, in recent years some developers have also sold houses as leasehold properties. 

Some developers have then sold the freehold on to investment companies without telling the leaseholders. This isn’t illegal, as the 'right of first refusal’ when selling a freehold only applies to flats, not houses. 

Some buyers have claimed they were not adequately informed, either by their conveyancer or the salesperson, about the possibility of the freehold being sold on. In several cases, the investment companies have charged extremely high prices to sell the freehold back to the homeowner. 

After freeholds have been sold on by house builders, some homeowners have also been faced with punitive 'permission fees' from their new freeholder. Which? members have told us about fees as high as £108 for a freeholder to respond to a letter, £252 to have a pet and £2,000 to be allowed to build an extension. 

While the leaseholder can still use their legal right to buy the freehold after two years, they’ll have to pay valuation and legal fees for both themselves and the freeholder, and may also have to cover the costs of a tribunal. 

Find out more: lease extension and buying a freehold

 

Spiralling ground rent charges

 

Spiralling ground rent charges have also affected buyers of new-build homes. 

While many leases specify ground rents that increase in line with inflation, some include a clause that doubles the cost every decade. 

This means that a ground rent costing £250 a year now could cost £2,000 a year in 30 years, or a remarkable £8m after 150 years. 

While this might not concern you as a new owner, it could make the property difficult - if not impossible - to sell later on, especially as mortgage lenders are beginning to refuse to lend on properties with this clause on their lease.

The government is planning to overhaul the ground rent system - find out more below.

 

House-builder redress schemes and issues getting a mortgage

 

House-builders and mortgage lenders are beginning to respond to these issues, with some of the biggest developers agreeing to remove ground rent 'doubling' clauses from leases. 

Altering the terms of the lease involves obtaining a Deed of Variation, where the developer changes the property's deeds to remove the punitive clause. If the freehold has been sold on to a third party, it can take many months to process the change as the developer will need to negotiate with the current freeholder.  

If you're the second or third occupant of the property, you might find it more difficult to get a Deed of Variation, as they tend to only be offered to homeowners who purchased the home direct from the developer. 

 

Government plans to overhaul the leasehold sector

The government has been investigating the leasehold sector since 2017, and is now moving closer to bringing in new legislation to remedy some of the above issues. So far, it has proposed the following changes to the system:

  • New-build houses will no longer be sold as leasehold (except in exceptional circumstances). 
  • Leaseholders will be able to extend their leases by 990 years. Upon extending a lease or buying a freehold, no further ground rent will be payable.
  • A new calculator will be introduced to set the price leaseholders will pay to extend their lease or buy the freehold. Discounts will be given for improvements made to the property by the leaseholder.
  • A 'Commonhold Council' will be set up, which will include leasehold groups and industry representatives. The aim will be to prepare the market for the introduction of a commonhold system for flats. Under commonhold, each homeowner in a block owns the freehold of their own flat and sets up a management company to deal with communal costs.
  • Ground rents will be set to zero on new retirement properties.

We'll update this guide as further information becomes available about when these proposals will come into force.

Which? investigates the leasehold scandal

In June 2018, Which? published a comprehensive investigation into issues surrounding leasehold homes, including ground rent doubling clauses, punitive permission fees, freehold purchasing problems and issues buying and selling leasehold homes.

Our full investigation can be read here: To have or to leasehold? Inside the scandal rocking the new homes industry

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