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.
What do 'leasehold' and 'freehold' mean?
If you buy a leasehold property, you own the building but not the land it stands on. In this arrangement, you're known as a 'leaseholder'. On the other hand, when you buy a freehold property, you become the sole owner of both the building and the land.
In England and Wales, flats are most commonly owned on a leasehold basis, while houses are normally sold as freehold properties - however, there are exceptions. 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.
How long should I have left on my lease?
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.
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Service charges and sinking funds
The cost of buying the property isn’t the only thing you’ll need to factor in if you’re purchasing a leasehold house or flat. 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 freeholders' 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.
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 concern 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. For more information, see our ‘leasehold issues with new-build homes’ section, below.
How do I extend my lease?
It's best to have as long a lease as possible, as a short lease can make your property worth less.
Many leaseholders have a legal right to extend their lease, but it can be a complicated business, and throw up a wide range of questions. In this section, we answer the most common questions around extending leases.
Buying your freehold
Buying the freehold can give you more control over what you pay out in maintenance charges and protect the value of your property.
Buying a share of the freehold in a block of flats differs from buying the freehold of a house.
When you buy the freehold of a house, you'll outright own the land your property sits on.
If you buy your flat’s freehold, however, you’ll jointly own the land with your fellow freeholders - meaning you'll have a share of the building's freehold.
You can usually extend your lease to 999 years for free (aside from legal fees), freeing you to manage your own service charges, and potentially increasing the value of your property too.
How do leasehold tribunals work?
If you can’t agree on a price to extend your lease or buy your freehold, you can escalate the matter to a tribunal.
A tribunal is a last resort, but the threat of this and the associated costs can sometimes encourage an out-of-court settlement, particularly if the freeholder is either not responding or is holding out for an unreasonable sum of money.
Before applying to a tribunal, it’s best to try and sort matters out amicably. The government-backed Leasehold Advisory Service (LAS) provides free advice, and civil mediation services are available too.
If a tribunal is the only option, you can apply by downloading a form from the UK government website (or the Residential Property Tribunal Wales website, if you live in Wales) and you might need to pay a fee. You’ll then be informed if the tribunal will consider your case.
What happens next depends on whether you’ve requested an oral in-person hearing, which you or your lawyer will have to attend, or a paper decision.
If you request a paper decision, you should hear back within six weeks, and if you’re unhappy with the final decision you can submit an appeal within 28 days.
Leasehold issues with new-build homes
Leasehold issues with new-build homes have been a hot topic in the media, and the government has now announced plans to stop unfair practices in the market.
A significant number of new houses have been sold as leaseholds in recent years - and at times, the terms offered to leaseholders have been concerning.
While it’s important to clarify that these pitfalls don’t affect everyone who has bought a leasehold new-build property, some homeowners have been adversely affected by ‘doubling’ ground rent schemes and spiralling freehold quotes.
In this section, we explain the most common issues and look at how the industry and lenders are reacting to these problems.
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
Mortgage advice for leasehold properties
Finding a mortgage for a leasehold property can be complicated, so it's a good idea to speak to an independent mortgage broker who can advise on the best lender and deal for your situation.
For impartial expert advice on getting a mortgage call Which? Mortgage Advisers on 0808 252 7987.
You can also fill in the form below to get a free call back at a later date.
Correct as of date of publication.