How To Identify Leasehold vs. Freehold – What Is The Difference?
Many people want to buy a home, but sadly a significant number of them simply won’t be able to in the current market. With the number of properties requiring an offer over – meaning a more than asking price offer – going up significantly, the number of homes that are simply out of reach is increasing. As a result, some are looking into the terminology surrounding real estate, hoping to get a better deal shortly. Tenure is an essential one. What is tenure? It’s the many different ways you can own a property in the UK, and there’s one key difference to note here – the difference between leasehold and freehold property. Many use these two terms interchangeably, thinking they are the same. In reality, there is a big difference between leasehold and freehold properties. Not sure about the answers to what is a leasehold property and what is a freehold property. This quick guide will show you the difference between the two terms and help you understand which might be right for you.
Home Ownership: Freehold vs. Leasehold
In the UK, there’s a great debate raging – leasehold vs freehold – UK home buyers are working to learn the difference between the two and understand which is better. The bottom line is that there are two basic ways of legally owning a flat, house, or any other property: freehold vs leasehold. Although real estate agents, lenders, and brokers usually do not discuss these two categories of home ownership with the potential buyer, understanding the difference is key if you’re in the market for a home. With a freehold property, the property is owned outright – meaning one person owns the property. No one else is involved. With a leasehold property, you have a landlord who remains in control of many aspects of the home. For people who have always wanted to own their own home, buying a leasehold property can turn out to be a big regret.
Unfortunately, many potential home buyers never consider differentiating between freehold and leasehold properties when it comes to buying a home. They simply look at a home, its beauty, and its location and determine that this is what they want- never asking if the home is free or leasehold. Let’s take a moment to dig a bit deeper into these two kinds of properties and understand what the difference might mean for you as a home buyer.
A Quick Guide to Freehold
It may first help explore the idea of freehold and how it works for property owners.
What does freehold mean?
If you’ve ever asked yourself, what is freehold property, you’re not alone. When you use the term freehold – meaning you are the legal owner of the land and building outright – you are referring to a property that is owned by just one person. If are a freeholder – meaning you own the land and home outright – in the Land Registry, you will be listed as a tenure-freeholder who has an absolute right to the property. You’ll see quite a bit of freehold property for sale out there today.
What is a freehold property?
In most cases, a free-standing home is usually a freehold property. The home belongs to an owner and there are no holds on the land.
What does the share of freehold mean?
If you’ve seen the term “share of freehold,” it’s quite different from an actual freehold. Share of freehold – meaning you own a leasehold and a share (or part) of the freehold itself – can’t be used interchangeably with any term. What does the share of freehold mean to potential home buyers? A shared freehold is a property, usually like a group of flats, where the owners each get the leasehold for their flat, and a section of the freehold for the building and the land it’s on. It’s essentially a collective freehold.
A Quick Guide to Leasehold
Freehold properties are desirable for many, but lots of people love living in a leasehold property too. Understanding what that looks like may help you discover a path toward homeownership you hadn’t previously considered.
What does leasehold mean?
When you use the term leasehold – meaning a property that is owned by one person but leased to a buyer for a specific period – you are referring to a property that is owned by one person but lived in (for the long term) by another person. What is a leasehold owner? The owner can be an individual, a company, or even the government.
What is a lease?
When you use the term lease – meaning a legal contract between the landlord and the person who lives in the property – you could be referring to any number of situations. It applies when you rent an apartment, home or a room in a home. The lease may be verbal or written and in both cases is legally binding.
What is a Leasehold When You See It In Housing Ads?
Asking “What is a leasehold property and what does it mean?” It’s a tough term to master. In simple terms, a leasehold just says you have leased property from a freeholder (another name for a landlord). In most cases, the leasehold property is leased for many decades- it is usually for a fairly long term and varies from 30 to 100 years. Here are the key features of leasehold property:
- In all cases, when you buy a leasehold property, there is a contract that needs to be signed with the freeholder. This contract documents your rights, obligations, responsibilities, and duties while you reside in the home. At the same time, the contract will document the responsibilities of the freeholder. This contract is legally binding.
- In general, the landlord is usually required to maintain the common areas of the property, like the parking lot, staircases, entrance hall, garden, swimming pool, roof, and exterior walls. In some cases, depending on the type of leasehold property, the leaseholder – meaning you – may have the ‘right to manage the lawn, front door, storage area, etc. And if you forget your responsibilities, you will be reminded by the landlord. In most cases, several warnings are issued, and if you still neglect your responsibilities, this will be followed by a monetary penalty.
- Almost universally in the UK, all leasehold properties come with a maintenance fee. In addition, you may have to pay a share of the insurance for the building and some service charges, which are usually payable every year. When the landlord has to repair the elevators, fix the leak in the swimming pool, or install security cameras, all the extra fees are then passed on to the leaseholders. And without fail, as the cost of living goes up each year, so do the maintenance fees.
- Unlike a freehold property, the leaseholder is not responsible for paying the ground rent- this is paid by the freeholder.
- As a leaseholder, if you want any major repairs or renovations done in your home, you will first need to get permission from the freeholder. For example, if you want to add a jacuzzi or a deck to your home, this requires permission from the freeholder. There is usually a committee that looks at all the requests for repairs/renovations from the leaseholders. Permission is often not granted for all major works; even if given, it has to conform to the style and design of the rest of the properties. You may even need permission to plant a tree in front of your home.
- There are other restrictions. In many cases, the freeholder may have other restrictions that may include the idea you can only have some kinds of pets, you aren’t allowed to have others live in your home, and you can’t sublet the space. Read the lease carefully to better understand what you can and can’t do.
What is a leaseholder legally required to do and what happens if you don’t?
A leaseholder must stick to the lease terms, whatever they are. If the leaseholder fails to abide by the terms of the lease, he or she could be evicted.
What are some common conflicts with leasehold properties?
Some leaseholders run into conflict with their freeholders. It’s not that there’s a question of who owns that property. Instead, the major causes of disputes are escalating fees and rigid rules. Some freeholders overcharge for their services, and there is little that leaseholders can do about it. In many cases, the ground rates may vary from £100-£250 for an ordinary flat, the yearly charges can soar to over £1000. And despite charging these exorbitant fees, some freeholders don’t keep building maintenance at adequate standards or keep the area safe and clean. In most cases, the leaseholders are not able to have much say in the regular maintenance. In some cases, freeholders keep a record of every breach of contract that leaseholders make and often reproduce these records in court when trying to evict a homeowner, which can further inflame a situation.
What’s the typical length of a lease?
When you have completed the minimum duration of the lease, which is 30 or 40 years, the property then goes back to the freeholder. Over the past few decades, though, the government has introduced measures that give protection to people who purchase leasehold properties; these measures make it easier to extend the leasing – meaning they make it simpler to purchase the property. The current rules allow the owner to extend the lease on the flat by 90 years on top of the unexpired term.
- If you can extend the lease, this means you will not be responsible for the ground rent. In some cases, you may be able to negotiate new terms for a lease as long as you have shown that you are a reliable homeowner.
- However, you can only extend the lease on a flat if you have held the lease for at least two years; in addition, the flat was initially leased as long-term property – usually greater than 21 years.
- Once you decide to extend the lease, the freeholder may accept, reject or negotiate your offer. If your offer is rejected, you can file suit in court.
The Key Difference Between the Two Types of Properties
Understanding whether a leasehold or a freehold property might be right for you depends a bit on your preferences. Here are a few of the key differences between the property types.
- Cost: Overall most freehold properties are much more expensive to buy compared to leasehold properties. In most cases, freehold properties refer to independent homes, whereas leasehold properties refer to apartments or flats. In general, leasehold properties are much cheaper to purchase on the front end, but they often come with many fees, including ground rent, maintenance fees, administrative fees, etc., and you have to pay these fees annually, which can amount to a significant amount of money.
- Control: The question of who owns a property doesn’t come into play with freehold properties. With freehold properties, the owner retains full control of the property. The owner can do whatever he/she wants on this land, including making renovations or repairs. With leasehold properties, the owner is not at liberty to do what he or she wants. The landlord determines what the owner can do, and in all cases, there are many rules and regulations to be followed.
- Responsibility for the property: With freehold properties, the owner assumes total responsibility for the property. This means the owner is responsible for the repairs and mowing the lawn, etc. With a leasehold property, most of the external repairs are done by the freeholder. However, the cost of these repairs and renovations is eventually passed on to the leaseholder.
- Selling the Property: Selling a freehold property is straightforward with few restrictions; the freehold property belongs to the owner, and he or she can sell it at any time. The property value is not affected by home ownership. On the other hand, leasehold properties can take time to sell. Some potential home buyers do not want to be inundated with restrictions even though the property may be cheap. Leaseholders own the property until the lease expires, but only long-term leased properties retain their value. Short-term lease properties are often difficult to sell as their value often drops as the lease terms end.
- Extra perks: An owner with a family who wants to do little work in the home and enjoy amenities like the sauna, swimming pool, exercise room, gym, or kid’s playground may find that the leasehold property is better suited for his family. Perks are common with leasehold properties. With freehold properties, there are no extra perks unless the owner installs them.
Why do Homeowners Prefer Freehold Properties?
For most, the key difference between freehold and leasehold properties is the reason so many prefer freehold to leasehold – it’s the true owner of the property itself. Without question, buying a freehold property is the preferred option for home buyers, but there are so many benefits with a freehold:
- If you own a freehold property like a home, there will be no annual ground fees.
- The freehold property is yours, but you are still supposed to maintain it. Even if you do not maintain it, there is no landlord to tell you what to do. No one can come onto your property, clean up the place and then later send you a big bill for the cleanup. However, the city council may intervene and ask you to clean up the place by removing weeds or mowing the lawn-but other than that; you are the boss of your home.
As a freeholder, you’ll never have to pay ground rent – meaning you own the home and the ground it stands on completely.
What Is a Freehold Owner Required to Do?
When it comes to ownership of property, freehold means the owner has complete ownership of a property and the land it sits on. In some cases, freehold property owners are responsible for all costs of the property, such as cleaning, insurance, and repairs. Also with freehold properties, there are no maintenance fees unless several homeowners share similar services such as the maintenance of a communal garden or snow cleaning. In short, as a freehold property owner, you’re both not required to do anything, yet you’re in charge of everything about your property.
Which Option is Better: Freehold or Leasehold Property?
The bottom line on the freehold vs leasehold UK home buyer debate is simple. Choosing between freehold and leasehold property is not that difficult. While most potential buyers are attracted to leaseholder properties because they are a lot cheaper than freehold, in the end, the costs of maintenance and other fees add up, and you will end up paying much more than a freehold property.\
Freehold properties tend to be more expensive to purchase, but the person who owns a house has complete control of the property; and more importantly, the property can be passed onto future generations.
Even though current laws allow a property leasehold to get an extended contract, this is an expensive venture, and still, the buyer does not have complete control of the property. In the end, a freehold property may initially be more expensive to buy, but in the long run, you will own something that will be yours forever.
So, leasehold or freehold? In the end, it’s really up to you.