What is the difference between a Leasehold and Freehold?
PARVEEN KAUR SIDHU >
SolicitorFri 18 March 2022
Leasehold ownership of a flat gives the owner the right to own the property for a set length of time, this is referred to as the term of the lease. Typically, leases are granted for a fixed period of 99,125 or 999 years.
Freehold ownership is where a person or organisation has outright ownership, forever, of a property and the land on which it is built.
Almost all flats are leasehold. Flats are either in purpose built blocks of flats or created where a house has been converted into flats. If you own a leasehold property, you will be granted a fixed period lease (originally granted for a period of more than 21 years and generally significantly longer). The flat will be demised to you and you will have certain rights and obligations.
The freehold, where a long lease has been created, is a residual interest with limited financial value. In reality, because long leases can be extended by the leaseholder under statutory lease extension laws at relatively low cost, the freehold has little monetary or legal value. With many flats, the freehold interest will be owned by a limited company and the leaseholders will all own a share, so they have a share of the freehold. This often also applies where houses are converted into flats. The freehold may be owned by a company owned by the leaseholders or may be registered in the names of the current leasehold owners if there are only 2 or 3 flats.
A leaseholder will generally not own the land that the property is situated on or the structure of the building. Any communal areas, such as the stairwells and hallways will generally be part of the freehold and not part of the leases (although there will be rights of access).
As a leaseholder you will usually pay ground rent, which is typically a low amount of money and in some older leases described as a "peppercorn" and a proportion of the service charges and insurance of the building. The costs of the services are shared amongst the leaseholders.
Typical terms and problems with long residential flat leases
The lease, which is a contract between the landlord (usually the freeholder of the land) and the leaseholder (owner of the property) will set out the rights and obligations of the parties. If you buy an existing leasehold property, you will inherit the terms of the lease which already exists. With some properties, the lease may have been granted some decades ago, which can create issues as the clauses may not be acceptable, without variation, to a mortgage lender who may consider them out of date. The lease plan may also not reflect the flat as it now is. The lease may also need to be extended if it is approaching 80 years or less left to run.
The lease will set out covenants that the parties will agree to adhere to. For example, the freeholder)will usually be responsible for arranging the building insurance to cover the structure of the building.
The freeholder will also be responsible for services to the building, the repairs and maintenance of the structure of the building, including the roof/ gutters and communal areas such as stairway, gates, maintenance of communal gardens etc.
In return for the services, leaseholders will generally be responsible for paying a proportion of the total costs incurred or to be incurred by the landlord, these are referred to as ‘service charges’. Service charges are usually sent to the leaseholder by the way of a demand for payment, in advance or in arrears.
Prior to purchasing the property, it is worth checking how much ground rent, services chargers are payable to get an idea of the financial commitment that will be involved. It is also worth finding out whether you have access to any communal spaces or facilities on the land.
The lease will usually include restrictions, some examples of these restrictions could be:
- The owner/resident may not be allowed to keep pets
- They made need to ask permission to make changes to the property.
If any terms of the lease are breached, then the freeholder could take legal action against the leaseholder.for damages.
Buying a freehold property
Buying a Freehold title means that you will own the land in perpetuity (meaning effectively forever). Any historical rights granted for the benefit of the land, such as a right of way over neighbours land are passed to you as well as any covenants that may be a burden.
You will be responsible for insuring the Property and maintaining the Property at your own expense. Such costs could go into thousands if dealing with structural repairs or works. You will have the sole responsibility and discretion for these works.
Shared ownership is also available for Freehold Titles. You are still able to purchase off plan sites or newly built properties benefiting from a warranty. This means that you will own 100% of the Property, with some Freehold properties being bought under Help to Buy Schemes – subject to Help to Buy Criteria.
Disputes such as service charges disputes (and especially potential major works which the freeholder decides are necessary for the block or building) are a potential drawback with buying a leasehold property. Issues with mortgage lenders requirements can also be potentially problematic.
When buying a lease in a large block of flats, if you are unhappy with the services or charges of Managing Agents appointed by the freeholder, taking action can be difficult because you will generally need a significant number of other leaseholders to agree to take action.
If eligible, a leasehold owner of a flat has a legal right to compel the landlord to sell the freehold to them. There are different legal processes in place for buying the freehold of a house/flat.