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Leasehold vs freehold

Find out what 'leasehold' and 'freehold' mean, plus how to extend a lease, buy your freehold and what's going on with new-build leasehold houses.

In this article
What do 'leasehold' and 'freehold' mean? How long should I have left on my lease? Service charges and sinking funds What is ground rent? How do I extend my lease?
Buying your freehold How do leasehold tribunals work? Leasehold issues with new-build homes Which? investigates the leasehold scandal Mortgage advice for leasehold properties 

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.

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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.

Leasehold

 

How many years should remain on your lease when you buy?

A lease with fewer than 80 years remaining can seriously affect both the value of your property and the amount it’ll 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 property, check how many years are currently left on the lease and what is likely to remain when you sell in future.

Should you extend the lease when you buy the house?

While you gain the legal right to extend your lease after living in the property for two years, in some instances you may be able to extend it before you even move in.

For this to happen, the transaction has to be initiated by the freeholder. So, rather than serving notice that you want to extend the lease, he or she will instead serve notice on you.

If you want to extend the lease when buying the house, you could make your offer subject to the lease being extended -  the seller would then have to negotiate this with the freeholder.

Alternatively, if it’s less of a priority, you can choose to negotiate a lease extension after you have your initial house offer accepted. 

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

Find out more: finding the best places to live 

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. 

 

Who has to pay a service charge?

 

Leaseholders usually pay a charge to the freeholder or their management company for a range of services, including but not limited to maintaining, repairing, insuring and managing the building.

There’s no ‘one size fits all’ calculation to work out approximate service charges. Your lease will give full details of how much you’ll need to pay and what you’re paying for. 

You should get clarification about service charges before you buy a home, as your lender is likely to factor these outgoings into your mortgage application.

In Scotland, service charges are known as ‘factoring charges’, but cover the same costs.

 

How much should my service charge cost?

 

Service charges are usually paid yearly or twice-yearly. 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 provides protection against 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 need to create a company with the other leaseholders, which would then 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 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.

 

What rights do I have to extend my lease?

 

To be legally entitled to extend your lease, you’ll need to have lived in the property for two years. You can sometimes get around this by negotiating to extend the lease when you first buy the property.

If you have lived in the property for two years or more, you have the legal right to add 90 years to the existing lease, according to regulations set out in the Leasehold Reform Housing & Urban Development Act (1993).  

Your legal right to extend your lease doesn’t change, regardless of how many years are left on it.

If you wish to extend your lease, you can either negotiate informally with the landlord or have the property professionally valued and instruct a solicitor to deal with the extension. The formal process will start with you or your solicitor serving ‘Tenant’s Notice’ on the freeholder.

Leasehold extension costs can be complicated and time-consuming, so we recommend taking professional advice to ensure you get the best deal.

 

What should it cost me to extend my lease?

 

This depends on a whole host of factors.

In addition to the cost of the lease itself, you’ll need to pay your own valuation fee and solicitor’s fee, and the ‘reasonable’ costs of the freeholder (which can include their valuation costs and legal fees too).

The freeholder also has the right to request a deposit of £250 or 10% of the cost of the proposed new lease, whichever is greater.

Leaseholders sometimes worry that any improvements they have made to the property could make their lease extension more expensive, but any renovations made by a current or previous leaseholder must be disregarded when the cost of the lease extension is calculated.

In addition, if your lease has fewer than 80 years left when you come to extend it (or try to buy the freehold), you could face a bill in the form of marriage value. 

 

What is marriage value?

 

Marriage value can be very complicated, but in simple terms, if the overall market value of the property (both leasehold and freehold) is increased by extending the lease, you could have to pay 50% of the value of this increase to the landlord.

There are some exceptions - for example, the financial value of any home improvements you've made won’t be included in the calculations.

With this in mind, it’s best to speak to a specialist valuer about how marriage value might affect you if you extend your lease.

 

What can I do if my freeholder won't agree a price?

 

If you negotiate informally, freeholders will sometimes demand way over the odds. This could be because they place an unrealistic value on their property, or they suspect a leaseholder won’t want to pay for formal valuations and legal costs.

If you have a valuation done and your freeholder won’t negotiate on terms, your solicitor can serve notice on them and compel them to comply.

If your freeholder still refuses to negotiate, you will be able to make a complaint to a first-tier tribunal and have the price decided there.

 

What can I do if I can't contact my freeholder

 

By law, you have the right to know your freeholder’s name and address. The freeholder or their managing agent can be fined if they fail to respond to a formal request for this information.

If you can’t find your freeholder, you can apply to a tribunal for a manager to be appointed, or you can consider buying the freehold yourself. See our 'buying your freehold' section below.

 

Should I remortgage to cover the cost of extending my lease?

 

Some leaseholders choose to remortgage to fund their lease extension. This can be tricky, as you won’t necessarily know straight away how much money you’ll need to raise.

Of course, there are various factors at play when it comes to deciding whether you should remortgage your home. 

It's worth getting a professional valuation, to see if extending your lease would add sufficient value to your home to justify remortgaging, and to speak to an impartial mortgage broker such as Which? Mortgage Advisers (0808 252 7987) about what deals are out there for you.

The good news is that once you’ve formally agreed to extend your lease, your freeholder has to wait a month before serving a completion notice, with payment then due a minimum of a month afterwards - which means you’ll have at least two months to arrange your finances.

 

Are there any pitfalls to avoid?

 

It’s important to take independent financial advice before jumping into the lease extension process.

If you’re in dispute with your freeholder for a different reason, this shouldn’t affect your ability to extend your lease, as long as you meet the eligibility criteria (ie that you have lived in the property for at least two years).

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 I buy a share of the freehold?

 

Collective enfranchisement

You can buy a share of the freehold of your building along with your fellow leaseholders. You’ll need support, though - to collectively buy the freehold rights, you’ll need at least half of the other leaseholders to agree to buy a share.

As with extending your lease, you’ll need to have the property valued and take the relevant legal advice.

If you agree to club together to buy the freehold, you’ll need to collectively serve a section 13 notice on the freeholder, decide who your trustees are going to be and set up a company to manage the building (or find a managing agent).

One option is to register a commonhold. A commonhold is a type of freehold ownership and involves forming a Commonhold Association with your fellow leaseholders to oversee the maintenance of the building.

Right of first refusal

If you live in a flat and your freeholder decides they want to sell part or all of the freehold, they legally have to offer the leaseholders the right to buy it before selling it to a third party. (Note that this doesn't apply to leasehold houses.)

If the freeholder offers a right of first refusal, the leaseholders have two months to accept the offer. The same rules apply as collective enfranchisement, in the sense that at least half of the qualifying tenants must accept the offer jointly.

If you reject the right of first refusal, the freeholder can sell to a third party, but not for less than the figure offered to the leaseholders for the first 12 months. 

 

How much more expensive is it to buy the freehold?

 

Whether buying a share of the freehold will cost more than extending your lease depends largely on your building.

For example, if it has a basement or loft space that could be developed (thus adding value to the property), then it could be prohibitively expensive to buy your freehold. Your first port of call is to discuss this with a chartered leasehold valuation surveyor.

It’s also worth mentioning that having a share of the freehold (compared to having a newly extended lease) is unlikely to make a significant difference to the value of the property.

If you are selling your flat after buying a share of the freehold, you can add the freehold share in as part of the deal or negotiate separately.  

 

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.

 

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? readers 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. 

 

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. 

 

Unfair leasehold practices

 

While these practices are causing concern for some new-build home buyers, they could soon be outlawed. 

In July 2017, the government consulted on plans to ban new-build houses being sold as leasehold (except in 'exceptional circumstances') and to put an end to ground rent 'doubling' clauses. 

Last December, the government confirmed it would follow through with these plans and would work with the Law Commission to try to create redress for existing leaseholders facing these issues. 

 

Housebuilder redress schemes and issues getting a mortgage

 

House builders and mortgage lenders are beginning to respond to these issues. The developer Taylor Wimpey has set aside £130m to ‘alter the terms of the doubling lease’  for buyers who bought one of their properties. 

Nationwide building society has stopped lending against new-build leasehold properties where the ground rent is more than 0.1% the value of the property or the lease has less than 125 years remaining on it for flats or 250 years for houses. 

Santander has also banned lending on homes with ground rent doubling clauses.

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 0800 197 8461.

You can also fill in the form below to get a free call back at a later date. 

Correct as of date of publication.

 
 

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