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Understanding Freehold and Leasehold

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Introduction

The terms ‘freehold’ and ‘leasehold’ refer to the two different ways in which properties in England and Wales can be owned.

Scotland has its own version of freehold, called ‘feuhold’. Leasehold exists, but is much less common there than in England and Wales.

This article explores the differences between freehold and leasehold, and provides an outline of some of the main issues surrounding leasehold, the more complex of the two.

Defining the terms

Freehold

If your property is freehold, you own it, and the land on which it is built, outright. When you die, it is part of your estate and can be bequeathed to your heirs. Your entitlement to do with it as you please is limited only by planning and other laws. Any necessary repairs are your responsibility, but you can generally choose not to carry them out if you so wish.

For these reasons, freehold properties (or, in the case of a flat, a property with a share of the freehold) are usually more desirable than leasehold ones, and so are often worth more.

Leasehold

Though houses can be leasehold, this type of ownership applies more usually to flats. Under a leasehold agreement, you own your property only for the period stated in the lease. The freeholder (who, as we have seen, owns the property outright) grants you the right to do so, and ownership reverts to him when the lease expires.

The length of a lease, naturally, diminishes over time; its initial term can be up to 999 years. Not surprisingly, the duration of the lease purchased has a direct bearing on a property’s value. In some cases, leaseholders have the right to extend their lease or even buy the freehold.

Because leasehold is, in effect, a form of tenancy, an annual fee (known as ground rent) is payable to the landlord (that is, the freeholder or his managing agent). Ground rent may be a nominal sum. A maintenance (or service) charge is also levied, to cover things like managing the building, external redecoration and repairs, gardening, window cleaning, buildings (though not contents) insurance, and so on. Such charges may rise annually without limit, but they are required by law to be reasonable.

The leaseholder usually owns everything within the walls, including the floorboards and plaster, while the freeholder owns the structure, the land on which it is built, and the common parts (which include communal entrance halls, staircases and so forth). The freeholder may be an individual, a company, a local authority, a housing association or a residents’ management committee, under which leaseholders join forces to buy the freehold of their building.

Leasehold’s main advantage is that it assigns clear responsibilities for upkeep and repairs, protecting individual leaseholders in the event of, say, a leak from a flat above. On the downside, it can be more difficult to obtain a mortgage on a leasehold property; much will depend on the length of time the lease will have left to run after the end of the mortgage term.

The lease

This is a legally binding document detailing the rights and responsibilities of freeholder and leaseholder and stating the terms and conditions under which the property is occupied and used. These conditions are imposed to protect all interested parties, including the freeholder and any other tenants.

Leaseholders are usually entitled to ‘quiet enjoyment’ of their property. Their responsibilities include paying the relevant charges on time, keeping the inside of the property in good order, conducting themselves in a neighbourly fashion, and not doing some things (for example, sub-letting or making certain alterations) without the freeholder’s permission.

The freeholder’s responsibilities include maintaining the common parts and the fabric of the building, ensuring that each leaseholder complies with the terms of the lease, collecting contributions from individual leaseholders, and keeping the accounts.

If you are considering the purchase of a leasehold property, be sure you understand what the lease entitles you to, and your obligations, before you sign. You should seek the advice of a solicitor experienced in this field.

If things go wrong

If you break the terms of your lease, you may lose your property or be required to compensate the freeholder. However, before taking legal action, the freeholder must give you written notice and time to make reparation.

In the same way, a leaseholder can take the freeholder to court if he infringes the agreement – for example, by failing to maintain the common parts adequately or imposing exorbitant maintenance charges.

Leasehold management

Leasehold properties can be managed in various different ways. In some cases, the freeholder or residents’ management committee deals directly with management issues. In others, an agent is appointed to handle them. In the latter case, the agent’s fees (either a percentage of the service charges or, as is more common nowadays, a fixed amount) are included in the service charges, each leaseholder paying a share.

Purchasing the freehold

Subject to certain complex conditions, leaseholders have the right to buy the freehold of their property. This process, known as enfranchisement, can be a long and costly one. Different rules apply to houses than to flats. The Leasehold Advisory Service www.lease-advice.org can provide full information.

Since the introduction of the ‘right to manage’, leaseholders may be entitled to manage the building as if they were the freeholder even if they do not own the freehold.

Commonhold

This is a new system of joint ownership introduced in 2004. It is considered to be better than leasehold for some types of property, especially blocks of flats. Under commonhold, a company, known as a commonhold association, owns the freehold of the building and is responsible for maintaining the common parts. The owner of each flat is a member of the association and must agree to certain terms and conditions (usually similar to those of a lease). Like leasehold, commonhold has both advantages and disadvantages.

Being relatively new, commonhold is not, as yet, widespread. Some commonhold developments are now being built, but housebuilders have tended to hang back, to see how well the new system works in practice before committing themselves.

You may be able to convert an existing leasehold into a commonhold, but the process is complicated and expensive. You and the other leaseholders in your building must first acquire the freehold, and you must all agree to convert. Again, the Leasehold Advisory Service can provide details.

© Copyright Buy Associates Limited 2007

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