If you’re thinking about buying a home, you’ve probably heard about freehold and leasehold properties. It’s a crucial distinction to understand before going through with a property purchase – you’ll want to know exactly what costs there are down the line. We explain what a leasehold is, and how it differs to freehold.
Owning a leasehold property can be a source of frustration for homeowners, forcing them to fork out for outdated “ground rent”, maintenance costs and lease extension fees. However, the new Leasehold and Freehold Reform Bill will make significant changes to leasehold laws.
A large number of people will be affected by the changes; data suggests there are nearly 5 million leasehold dwellings in England.
Here, we explain the key differences between leasehold and freehold, plus outline the changes proposed by the government.
In this article:
- What is a leasehold in property terms?
- What happens after a leasehold expires?
- What is freehold in property terms?
- What is the difference between freehold and leasehold?
- What are the new leasehold laws proposed by the government?
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What is a leasehold in property terms?
When you buy a property leasehold, it means that you don’t own the building or the land outright. Instead, you agree to live in the property for a fixed period of time, during which you may pay something called “ground rent” to the leasehold owner.
This is normally paid on an annual basis, and is usually a fixed amount stipulated in the lease agreement, but it can increase over time. Some lease agreements have clauses that stipulate that the freeholder is permitted to double the ground rent every decade, which can result in homeowners becoming trapped in homes that are incredibly difficult to sell.
As a result of such eye-wateringly expensive leasehold agreements, ground rents were banned on new leases on all homes purchased in England and Wales after June 30, 2022.
Generally speaking, ground rents on older, ex-council properties are cheap, costing about £10 a year. Meanwhile, ground rent on a new-build property tends to be more expensive at approximately £500 a year.
It’s crucial that you carefully check the details of any leasehold agreement, as they can vary from property to property.
Read more: Leasehold costs explained
What happens after a leasehold expires?
Leases usually last either 99 or 125 years. After this time, the freeholder takes ownership of the property.
However, you can extend a leasehold – by either 50 years for a house, or 90 years for a flat – in order to remain in a property. This is normally done well in advance of the lease ending, though you’ll need to own a lease for at least two years before you can renew it. Your right to renew a lease is protected by law.
For example, say you purchase a property for £300,000 with 60 years remaining on the lease, and you’re paying ground rent of £100 a year. According to The Leasehold Advisory Service’s online calculator, you’re likely to pay between £41,000 and £43,000 plus costs, such as legal and surveyor valuation fees, to extend your lease.
Generally speaking, you should consider renewing a lease before there are fewer than 80 years remaining, according to Leasehold Advisory Service. Some experts, such as conveyancer Garnett Wilson, suggest before there are fewer than 90 years left.
This is because it gets increasingly expensive to renew a lease the closer it gets to expiry, and it also becomes harder to sell a property when it has less time remaining on the lease. In general, the longer remaining on a property’s lease, the more it’s worth.
Read more: Should I buy or rent a house?
What is freehold in property terms?
A freehold gives you outright ownership of a property, including the building and the land it’s built on. This means that there is no ground rent to pay, though you may pay service charges in some instances, for example, if you own a flat in a wider apartment complex that charges them. This is now very common if you buy a new-build house on an estate.
What is flying freehold?
Flying freehold means that a freehold property extends over or under a different freehold property. Here are some examples of instances of flying freehold:
- Part of the property juts out over a shared passage
- There is a balcony in the property that protrudes over a neighbour’s property
- Your property is a maisonette, and there is another freehold property directly underneath or above yours
Generally, flying freehold does not tend to cause homeowners problems. However, issues can arise when there are disputes over which owner’s responsibility it is to make certain repairs. When buying a property, it is important to be well-informed regarding the nature of a flying freehold property, and where potential issues could arise.
You may also need to purchase something called flying freehold indemnity insurance when buying such a property, which is another cost to consider. This covers you in the instance that you have problems with neighbours relating to the flying freehold, and are forced to fork out.
Share of freehold is a type of homeownership that applies to flats. It means that the owner of the flat owns both the leasehold of the flat, plus a share in the freehold of the broader property that the flat is a part of, or the apartment block. This gives owners of a share of freehold a say in the overall maintenance or development of the property.
Generally, a freehold divided up in this way is shared between multiple leasehold owners within an apartment building. This means that they may be able to collectively decide to extend the lease, which may even be cheaper due to the fact that they can decide to charge no lease extension costs. Having a share of freehold ultimately gives apartment owners more control over their property.
What is the difference between freehold and leasehold?
If you purchase a freehold property, you own both the building and the land that it is built on. If you purchase a leasehold property, you do not own the building or the land. Instead, you may need to pay ground rent to the leaseholder in exchange for being able to live in the property for a certain amount of time and you will need to extend the lease before it expires. If you don’t, ownership passes to the freehold owner.
Is freehold better than leasehold?
The lack of ground rent and lease extension costs that comes with purchasing a property freehold makes this the superior option when buying a home. However, this means that if a property is freehold, it usually costs more.
There are upsides of leasehold properties to consider. They tend to be more affordable, making them a good option to consider for first-time buyers. Furthermore, owning a leasehold property means you’re not responsible for maintenance of the building, as this falls to the freeholder.
However, if you’re considering going down the leasehold route, it’s important to carefully check the small print of your lease contract. This is because in some instances, certain repairs are the leaseholder’s responsibility. For example, some leaseholders have found themselves legally liable to fix issues with cladding.
What are the new leasehold laws proposed by the government?
The government’s Leasehold and Freehold Reform Bill was introduced to parliament in November and, should it pass, will do the following:
- Make it easier and cheaper for leaseholders to purchase the freehold for their property
- Increase standard lease extension terms to 990 years for houses and flats. Currently, this period of time is 50 years for houses and 90 years for flats
- Make any potential service charges more transparent, so they are easier to understand and challenge.
- Make it cheaper and more straightforward for leaseholders to take over management of their building. This would give them the power to appoint a managing agent of their choosing
Find out more about the Leasehold and Freehold Reform Bill.
When will the Leasehold and Freehold Reform Bill take effect?
It is estimated that the bill will be passed by parliament and enshrined in law at some point in 2025, but this could occur as soon as the summer.
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