Freehold vs leasehold: What’s the difference?

Leasehold Flat

If you’re house hunting, especially if you’re looking to buy your own flat, you may have noticed there’s a section called “Tenure.” This is where you’ll find out if a property is being sold under leasehold or freehold terms. So, what’s the difference between a freehold and a leasehold?

A freehold is where a person owns both the property and the land on which the property is built. Technically, though, all land in England and Wales is owned by the Crown but in practice the freeholder owns the property’s land.

A leasehold is a legal agreement between an individual and the landlord of a property, who may also be known as the freeholder. It is usually for a set number of years and, once a lease is in existence, the leasehold title can be sold on to others. When a lease ends the ownership of the property goes back to the landlord.

In short, leaseholders have the legal right to live in a property for a set number of years, whereas the freeholder owns the land on which the property is built. Flats are most commonly owned under leasehold, although it’s possible for a house to be leasehold too especially if it’s purchased under a shared ownership scheme.

If we’re talking about the leaseholders and freeholder of an apartment block, the differences look a little like this:

 

Freehold vs Leasehold

What to look for when considering a leasehold property

Similarly to most contracts, a lease can often be negotiated. The most common negotiations made on a lease can include:

  • General terms: This entails the length of the lease, monthly payment date, payment methods and so on.
  • Upkeep: The agreed maintenance and repairs responsibilities to be carried out by the freeholder
  • Forfeiture: The consequences if the lease is not paid – especially if the tenant loses their job or becomes ill
  • Ground rent calculations: The method for calculating ground rent over the years. For example, will the freeholder double the ground rent every ten years or will it rise in conjunction with Retail Price Index? The way in which ground rent increases are calculated could have a detrimental effect on future costs.
  • Alterations: If the tenant wishes to make major changes to the property, will the landlord take their share of any potential profits?

However, you should be aware, that the ability to negotiate will only apply on the first grant of the lease. If you are buying an existing leasehold title from someone else, you will not be able to negotiate the terms. Although it is sometimes possible to negotiate a variation with the landlord if the lease contains a particularly onerous term.

Buying the freehold

It can be a good idea for the leaseholder to purchase the freehold. If the property is a flat, then there are a few more obstacles to consider:

  • Collective enfranchisement: Getting together with the other leaseholders of the building is a requirement, as the right to acquire the freehold is a ‘collective’ right. This means an individual leaseholder can’t act on their owner, but a group of leaseholders in a building can.
  • Valuation: It’s essential for the leaseholder to get an accurate valuation of the freehold from a surveyor.
  • Mortgage: The leaseholder should look at their finances and determine how much they may need to extend their mortgage by and whether or not they can afford it from the outset.
  • Setting up a company: It may be advisable to set a company up to be the nominee purchaser to avoid any potential pitfalls. This may not be necessary though depending on the number of flats taking part in the collective enfranchisement.

Are you looking to extend your lease or purchase the freehold of your leased property? Our Enfranchisement team are always happy to help:

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