The two main forms of property ownership are leasehold and freehold. Most houses are owned freehold, while flats are usually owned on a leasehold basis. We’ll explain the difference between the two and some of the things to watch out for.
This article provides general information. It is not legal advice and you should always seek professional help if you need it.
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What is a freehold?
Buying a property freehold means you own the whole property and the land it’s built on. You own it outright, until the time you choose to sell it. You’re responsible for maintaining the property, and (subject to your mortgage arrangement) you can choose what to do with it, including whether to rent it out. Most houses are sold on a freehold basis.
What is a leasehold?
Buying a leasehold effectively means paying a freeholder for long-term rental of your part of the property. The freeholder owns the fabric of the building (the external walls and the roof, for example) and the ground it’s built on, and they’re responsible for maintaining it.
This arrangement is commonly used for flats, as a way of managing ownership of the whole building as well as individual flats. Occasionally, houses are sold on a leasehold basis. For example, houses in some modern developments have been sold leasehold, with the developer keeping the freehold or selling it on to another company.
When it comes to flats, the freehold arrangement varies from property to property. The freehold may be owned by a separate freeholder (effectively a landlord), or owned jointly by the leaseholders if there’s a ‘share of freehold’ arrangement.
Sharing the freehold
If the freehold is jointly owned by the property’s leaseholders, when you buy your flat you also buy a share of the freehold. This means that you and the owners have a shared responsibility for the communal areas and the structure of the building. You’re effectively leasing your flat from yourself (and the other freeholders), and you also share ownership of the entire building.
If there are four or fewer freeholders, you can share the freehold by naming all the owners on the title deeds. If there are more than four freeholders, you have to set up a management company to own the property jointly.
Leasing from a freeholder
The other common situation is that a ‘landlord’ freeholder owns the building, and you lease your flat from them. Normally, you’ll pay them an annual maintenance charge, and you may also pay an annual ground rent charge. The amount you pay varies a lot depending on the property, but the estate agent should give you an idea of the charges during the viewing.
In general, the freeholder is responsible for maintaining the structure of the building, paying the bills for the communal areas, and paying for the buildings insurance. Freeholders rarely do these things themselves, but usually hire managing agents to deal with them on their behalf. You and the other leaseholders pay for these costs indirectly through the maintenance charge.
Pros and cons of leasehold
If you own your property leasehold and there’s a separate freeholder, on the plus side you usually don’t have to arrange things like buildings insurance, building repairs and maintenance for the communal areas.
On the other hand, you have to shell out for service charges and ground rent, and you rely on the freeholder to carry out repairs and fulfil other duties. Disputes between freeholders and leaseholders are quite common.
As you near the end of your lease, your flat will be worth less and you may struggle to find a buyer. To extend the lease, you’ll have to get the freeholder to agree, and they’ll usually charge you a fee.
If you want to rent out your leasehold flat, you’ll usually have to get permission from the freeholder, and you may have to pay a charge.
Pros and cons of freehold
If you own a flat and you share ownership of the freehold, you and the other owners can make decisions about the property, and you just need to get the agreement of the other owners if you want to extend your lease. This often means that flats that include a share of the freehold sell for more money than leasehold flats.
As a group, you can agree the amount that you pay annually to cover things like buildings insurance, communal bills and a sinking fund for any repair work that crops up. Often, this amount is lower than the amount you’d pay to a freeholder or their managing agency, as they may add admin charges and management fees on top of the actual costs.
The major downside of sharing the freehold is that it can involve quite a lot of work and negotiation with the other freehold owners. In particular, if you haven’t set up a managing company, it can be quite difficult to agree on things like payment of communal bills. If you can’t get in contact with one of the freeholders, if someone doesn’t pay their share, or if one of the freeholders won’t sign the document to extend a lease, for example, it could be a headache.
If you buy a freehold house, then you’re not sharing the freehold with anyone, and there aren’t really any major downsides. You own the property entirely and there’s no ground rent or service charge to pay. You don’t need to worry about a lease that will eventually expire, and you don’t have to rely on someone else to keep the building in good repair.
Tips for buying leasehold properties
- Find out the length of the lease. Anything less than 80 years could be cause for concern.
- If there aren’t many years left on the lease, find out the cost of extending it, and see if this can be done as part of the sale.
- Make sure that the communal areas are well-maintained and that the communal electricity bills are up-to-date.
- Find out the ground rent and the service charges, and check if there’s anything in the lease about them being increased.
- Ask about any upcoming building repairs or maintenance work that the leaseholders may have to contribute towards.
- Check the lease to make sure you can rent out your part of the property, and to find out if you’ll have to pay fees to do so.
- Get the contact details of the freeholder or managing agent, or the other freeholders if you’re buying a share of the freehold.
Do you have any more questions on freehold vs leasehold arrangements? Ask us in the comments.