Freehold or leasehold: What’s the difference?

When you buy a property for the first time you come across all kinds of new words and expressions that suddenly become important.

What does it mean if a property is a leasehold or freehold? Which is best and what should you look out for? To understand more about these terms and what they mean to you, read on.

What’s freehold? 

Freehold usually applies when you’re buying a house, rather than an apartment or flat. It means that you own the property outright, including the land it’s built on and any garden or driveway areas. It also means that you’re responsible for any maintenance cost to the property and its land. 

Generally, owning a freehold property makes things simpler. 

Some houses can be leasehold, however, especially if the property is part of a shared ownership scheme.

What's leasehold?

Leasehold usually applies if you’re buying a property that’s part of a bigger building – such as a flat in a house or apartment block.

It means that you only have the right to use a property and its land for the length of a lease agreement with the freeholder (the person that owns the freehold for the whole building). When the lease ends, ownership returns to the freeholder, unless you can extend it. Lease extensions are usually automatic for residential properties and the freeholder has no choice but to extend them as long as the leaseholder pays the lease extension fee, which an independent specialist surveyor determines. 

This is more of a theoretical problem than a real one, though, because leases are often 100 years long or more.

Having a leasehold property often also means that there are certain rules to follow, which are stated in the lease agreement. For example, you might need permission to make alterations to the property, or you must pay an annual or monthly fee to help maintain the property. The lease might also state who’s responsible for repairs, or for dealing with problems such as noisy neighbours.

What to watch out for
Details about the lease can have a big effect on the value of the property. The general rule is that if there are less than 80 years left on the lease, don’t buy unless you can definitely extend it. As the remaining time gets lower, the less desirable your flat will become. Part of this is the fact that mortgage companies are strict about lease length. They normally need the lease to run for at least 25 years beyond the end of your mortgage. So if you want a 25-year mortgage, the lease needs to have at least 50-55 years before it ends.

If you’re buying to let, pay close attention to the lease agreement details, as you may need to explain the rules to your tenants – or get more involved in the maintenance than you were hoping to.

Extending the lease
You can ask the freeholder to extend the lease at any time. And once you’ve owned your home for two years, you have the right to extend your lease by 90 years.

On the downside, the freeholder will charge you for extending the lease, and the cost will depend on the property.

If you and the freeholder can’t agree on the cost of extending the lease, you can appeal to the Leasehold Valuation Tribunal, which will probably involve appointing a solicitor and surveyor.

Find out more about leasehold property here.