What's the deal with freehold and leasehold?

By Iona Bain
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There are two fundamentally different forms of legal ownership: freehold and leasehold.

Although estate agents tend to gloss over it, the difference can be between a home that is worth buying and one that isn’t – getting it wrong can be hugely expensive.

Freehold

If you own the freehold, you own the building and the land it stands on outright, in perpetuity. Your name is in the land registry as “freeholder”. You pay no ground rent, and responsibility for maintaining the building is all yours. Houses are normally sold freehold.

The freeholder will normally be responsible for maintaining the common parts of the building, such as the entrance hall and staircase, as well as the exterior walls and roof. However, other leaseholders might have claimed their “right to manage”, in which case it is their responsibility.

Leasehold

Leasehold, more typical in flats, means that you only have a lease from the freeholder or landlord to use the home for a number of years. The leases are usually long term – often 90 years or 120 years but can be as high as 999 years – but can be as short as 40 years.   Clearly, the shorter the lease, the less value the property will have.

Leaseholders pay maintenance fees, annual service charges, a share of the buildings insurance, and normally an annual “ground rent” to the freeholder. It could be as little as £100 a year or as much as £1000.  You need permission for any major works to the property, and may face restrictions such as not owning pets or sub-letting.  You are subject to a contract so could forfeit the lease if you don’t pay up or breach the conditions.

Disputes and tensions are common, with leaseholders resenting increases in fees and lack of maintenance, and freeholders pointing to noisy occupants or works done without permission.

Leases of less than 90 years mean action may be needed to extend the lease. There are rules pertaining to houses and flats, and the leaseholder’s rights to extend – but it can be expensive.

Extending a lease

In flats, you normally have the right to extend your lease by 90 years, pay no more ground rent, and negotiate new contract terms, providing you have held a ‘long lease’ (over 21 years) for more than two years. You can make an offer and negotiate with the landlord.

For houses, you can usually get an extension of 50 years and don’t have to pay for it – but the ground rent will go up.  Otherwise the rules are similar.

Properties with leases of less than 80 years are marked down in value and may be unattractive to buyers and to mortgage lenders, so prospective buyers will often insist that the lease is extended first before a deal can be struck.

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