#009 Leasehold v Freehold what’s the difference?

Episode 9
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Hello everybody and welcome to episode 9 of Ask the Estate Agent Podcast. This week’s episode is answering the question, what is the difference between Leasehold and Freehold property?

Undoubtedly one of the most important and often confusing subjects within property (particularly if you a buying a property for the very first time) and that’s understanding the difference between a Leasehold and Freehold property and what you should be looking for when buying either of these!

It is crucial to know the difference as ultimately this could be the difference between you owning your property outright and having a landlord.

When you have a leasehold agreement, it means that you have the right to lease the property for a number of years. You obtain this right from the freeholder, who will sometimes be the landlord, and the length of time for the leasehold can vary significantly, depending on the agreement. Leaseholds can be for as short a period as 40 years while the more common length of time is 90 to 125 years. There are even instances of leaseholds lasting 999 years, so it is important that you know how long your lease is valid for.

Leaseholders will hold a contract with freeholders

The leaseholder will hold a contract with the freeholder, with the freeholder generally being responsible for maintaining the condition of the common parts of the property but there will likely be some responsibilities handed over to the leaseholder. It is also common for leaseholders to have to pay maintenance fees or service charges. There is also likely to be an annual ground rent payable and there could be restrictions placed on the leaseholder such as not being able to sublet the property or own pets.

A freeholding is when the person owns the building and the land. When a freeholder is listed in the land registry, they will be regarded as owning the “title absolute”. Given the two options there is no doubt that the freehold option is the better option of the two.

If you are looking to buy property, you should be very wary of buying a property with less than 90 years with respect to a leasehold. Properties that hold a short lease can decrease in value dramatically, even though the general price of properties in the local area may be rising. This can provide difficulties for the owner. A leaseholder will find that there is likely to be a lower level of demand for the property when they come to sell it and there may be difficulties in obtaining a mortgage for a leasehold property.

While you may know these terms, you may not think that there is too much of a difference between the terms. This isn’t the case and many homeowners have found this out to their cost. If you know what you are getting into, a lease holding can be a viable and suitable option for many people, but you need to make sure that you are aware of the potential difficulties that you could face.

Things to consider when buying a leasehold property

With many people struggling to get on to the property ladder, it is important to review all your options. A leasehold property can be an ideal way to buy property for many people, but it is important to know what this sort of property entails. There are many things to consider when buying a leasehold property, most notably, what a leasehold property actually is.

First of all, when you take ownership of a leasehold property, you should be aware that you will own the leasehold property for a designated period of time. You will hold a legal agreement with the landlord, who is sometimes referred to as the freeholder which is referred to as the “lease”. The lease will indicate how many years you will own the property for.

When the lease comes to an end, the property is returned to the landlord who resumes ownership of the property. Flats are predominantly leaseholds but houses can be leaseholds too, especially if they are purchased through a shared ownership scheme.

There are a number of things to consider when buying a leasehold property.

How long is the lease set to run for?

It is vital that you understand how many years remain on the lease before you agree to buy the property. If the lease is less than 70 years, you will find it difficult to obtain a mortgage and if you do obtain a mortgage, you will find that selling the property is problematic (unless the lease has been extended).

If you are seriously considering a leasehold property, you should be looking for a lease that has at least 90 to 125 years left on it.

Are you able to extend the lease or can it be extended for you?

If you are considering a leasehold property, you should be looking into extending the lease. Before you purchase the property, you can request the current freeholder extends the lease for you. Alternatively, once you buy the property and own it for two years, you can extend the lease if you meet the qualification criteria. It is important to note that the less time left on the lease will make the extension process more expensive and more challenging.

You should also be aware that the freeholder is likely to charge you a fee for extending the lease of their property (which is understandable from their point of view). To determine the amount of money you are likely to pay to extend leasehold, contact the Leasehold Advisory Service (LAS) who can provide you with an estimation on how much you are likely to pay to extend the lease of a property.

Do I have to pay ground rent and if so, how much?

Ground rent is a sum of money that has to be paid to the landlord on an annual basis. This figure should be quite a low figure and many people find that their ground rent is £50 a year. Depending on the terms of the agreement, it may be required to be paid as an annual sum or it may be paid up over the course of the year. Reports suggest that ground rent in London is higher than the rest of the country, following the trend of general house prices in London and the rest of the UK.

It is important to be aware if the ground rent is fixed or it is escalating. A fixed ground rent will stay the same each year for the duration of the agreement. If the ground rent is classed as escalating, it will increase over the length of the leasehold.

As an example, a leasehold that spans 99 years, may see the ground rent pegged at £50 a year for the first 33 years, £100 per year for the second 33 years and then £150 per year for the final 33 years.

Are there are any other costs associated with leasehold property?

While you may think owning a leasehold property already incurs a number of charges, there are some other charges to consider. There may be specific building insurance clauses or charges associated with the leasehold, which can increase the amount of money the owner has to pay each year.

The terms and conditions may also impose an annual service charge (common for properties with shared areas like hallways, stairs or gardens) and again, these should be clearly stated in the agreement.

As with any legal contract, it is essential that people fully read and understand the terms and conditions stated within the contract before they sign anything.

In summary the differences between Freehold and Leasehold can be vast and have a significant financial effect on your future so identifying the difference and then investigating the points we have run through is an absolute must before you go ahead with any purchase. Your solicitor should assist you with this and highlight these areas during the conveyancing process but please do your own due diligence by asking these questions.

So that concludes todays episode on the differences between leasehold and freehold property. I hope you’ve found it useful and that it’s given you a few pointers to take away and investigate when your looking at a property to purchase.

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So don’t forget to contact us with any subjects you would like us to cover or questions you would like answering in the coming episodes and until next time I would like to thank you for listening and goodbye for now.

About the author, David Thomas

David Thomas is an Entrepreneur and passionate Estate Agent who loves helping others on their property journey.

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