Leasehold vs freehold – what's the difference?

Our guide looks at the pros and cons of owning a leasehold property and answers some common FAQs. So, how is it different to owning the freehold? Does it really matter which one you buy?

Written by

Daniel Evans

Mortgages expert

Posted

24 AUGUST 2021

3 min read

What is a leasehold property?

A leasehold property is one that you own for a fixed period of time under a legal agreement with a landlord called a lease. The lease tells you how many years you’ll own the property for before ownership returns to the freeholder. Leases tend to be long-term and can be anything up to 999 years. In some cases, however, they can be as short as 40 years – sometimes, in rare cases, even as short as 20 years. 

Around 19% of English property is leasehold – that adds up to some 4.6 million homes, according to official government statistics. Most of the England’s leasehold property is in London, where 34% of housing stock is leasehold, and the North West, with 31%.

What is a freehold property?

If you own a freehold home, you own both the property and the land outright on a permanent basis. You can then lease the property to others. The freeholder, who is named as such in the land registry, is usually responsible for the repair and maintenance of the building’s outside and common areas. 

Most houses in England and Wales are owned on a freehold basis, although most flats are leasehold. In England in 2019-2020, 32% (1.5 million) of leasehold properties were houses, compared with 68% (3.2 million) being flats. Leasehold estates are more common if you buy through a shared-ownership scheme.

Scotland has its own version of freehold, called 'feuhold', and leasehold property is rare. Also, the rules about leasehold properties are different in Northern Ireland.

What are the pros and cons of leasehold vs freehold?

Leasehold

Pros:

Leasehold properties are often cheaper to buy.
You can share responsibility for repairs and maintenance with the freeholder.
Under the Leasehold Reform Act 1967, you have the legal right to buy your home outright if you meet certain criteria. So, being a leaseholder can be a stepping stone to taking full ownership of your home. This process, known as enfranchisement, is often complicated, so do seek legal advice.
If you’ve lived in a leasehold property for at least two years and meet the criteria, you can extend your lease for a further 90 years if it’s a flat, 50 years if it’s a house. This reduces the ground rent to a peppercorn payment.

Cons:

Leaseholders usually have to pay ground rent, maintenance fees and annual service charges. These can be steep, so make sure you find out exactly what they are – and how much they’re set to rise by each year.  
If you want to alter or extend your home, then you’ll need to get permission from the landlord. That said, your landlord cannot unreasonably withhold consent.
You may also need permission from the landlord if you want to rent out the property.
If your lease is for less than 70 years, it may be harder to get a mortgage.
You might not be able to keep a pet (or you may have to pay a fee to do so).   
Some freeholders exploit people – for example, by hiking up ground-rent charges or not maintaining the property as they should.

Freehold:

Pros:

You’ll have full ownership of your home.
There’s no annual ground rent to pay.

Cons:

Freeholds are often more expensive, as you own both the land and property.
You’re responsible for the building’s upkeep and buildings insurance.

What disputes could arise between a leaseholder and a freeholder?

Disagreements between leaseholders and freeholders are common. There’s lots of room for conflict – for instance, if a leaseholder does building work that the lease doesn’t allow.

On the other hand, leaseholders often complain that they’re made to pay excessive service charges, which they then can’t challenge. Another frequent allegation is that freeholders don’t properly deal with maintenance issues. 

Resolving these disputes can be very expensive, as you may have to pay solicitors’ and court fees, or even for further building works. So, it’s important you understand the terms of any freeholder or leaseholder agreement before signing up to it.

What is the Right to Manage and when can it be used?

If you’re unhappy with the way your building is being managed and you live in a leasehold flat, you may be able to:

ask a housing tribunal to appoint a new manager, you’ll have to be able to prove bad management and have given them a chance to fix the problems
take over the management responsibilities, known as your ‘Right to Manage’ (RTM)

With the Right to Manage, you don’t have to prove that the leaseholder is a bad manager and you don’t need a court order. Essentially, the rules were put in place to allow the homeowners to take responsibility for their block in the form of a Right to Manage company. There are rules about which leaseholders are eligible to take the decision and more than half of the qualifying tenants need to agree to the plan.

If you want to do this, a notice will have to be served on the landlord and, after a set time, the management transfers to the new RTM company. While this sounds simple, in practice it can be much more complicated.

The leaseholders will have to decide whether to do the day-to-day management or employ a managing agent to do it on their behalf. The property will have to be maintained and all the obligations and legal requirements relating to things like company law, housing law and health and safety will pass over to the RTM. But it will also mean that the leaseholders will be able to run things their way and have control over the decisions for their block.

See more about to go about the process and the rights and obligations that go with of the Right to Manage.

Where can I get help on leasehold and freehold agreements?

If you have any concerns about being a homeowner, you should seek professional legal advice.  

Read more about buying the house you rent from your landlord. Citizen’s Advice offers practical advice both for current homeowners and people who want to be. The government-funded, independent Leasehold Advisory Service has lots of advice for residential leaseholders in houses and flats too.

Who’s responsible for maintaining communal areas – the leaseholder or the freeholder?

When it comes to common areas, like the roof, stairwell, or outside walls, the freeholder is usually responsible for maintaining them. But, as a leaseholder, you’ll have to pay an annual service charge, which goes towards paying those bills.

Are leasehold properties harder to sell than freehold?

Leasehold properties have more potential pitfalls than freehold homes, which some buyers may find off-putting. For example:

The lease may not be long enough.
There’s usually more paperwork involved, as the buyer needs to study the lease and make sure the terms are acceptable.
Leases can be extremely complicated, particularly when it comes to shared gardens and the like. It can be hard to prove exactly what you do and don’t own.

However, if your property is otherwise desirable and you market it at the right price, you shouldn’t have any problem selling it.

How do I extend the lease on my flat?

If you’re a leaseholder and want to extend your lease, you can ask your landlord to do so at any time.

Assuming that you meet the criteria, you can buy the extension of the lease on a flat for 90 years and that on a house for 50.

Your first step should be to contact your landlord. You’ll also need to speak to a conveyancing solicitor, who can put the wheels in motion for you.

Frequently asked questions

How much does it cost to extend the lease on a flat?

That very much depends on where you live, and how long the lease has left to run. If the lease has less than 80 years left to run, you’ll have to pay a premium (sometimes known as the marriage value), which can considerably ramp up the cost. Essentially, this premium reflects the increased value of the home following the lease extension. And because the landlord has granted the new lease, the legislation requires that this increase in value is shared equally between the landlord and the leaseholder.

The total cost of the new lease will be the premium, plus both yours and the landlord's "reasonable" professional costs. Stamp duty will also need to be paid above £125,000.
As these costs can be substantial, you should make sure you get estimates from everyone involved – such as solicitors or conveyancers and surveyors –before you decide to go ahead.

But the government has been looking closely at leasehold arrangements. New laws may follow to allow leaseholders to extend their lease to 990 years, with a ground rent of zero. However no firm timetable has been set out for this process and it may take some time before it comes into force.

How do I buy the lease to my property?

If you want to buy the freehold of your property, it will depend on whether it is a house or a flat. Here we’ll outline the broad principles, but you should get advice from a solicitor and surveyors who have experience in this kind of complex transaction about your particular situation and who can help you understand how much it might cost.

Buying the freehold of a house

The rules around buying a lease are set out in The Leasehold Reform Act 1967. To be eligible to buy the lease, leaseholders must have the right to buy the freehold and have held the lease for at least two years. The lease must be for longer than 21 years or include the right to renew it.

You can, in the first instance, ask the freeholder if they are willing to sell the freehold. They don’t even have to respond to the request, but if they do agree to sell you can then negotiate the price.

If the freeholder doesn’t respond or the negotiations fail you can then use the more formal tribunal legal process, if you’re eligible. The process has strict timescales and there are some protections for leaseholders. You can go straight to the tribunal process if you prefer.

Buying the freehold of a flat

If you live in a flat and you want to own the freehold, you’ll need to get together with the other leaseholders in the building and using a process called Collective Enfranchisement to join together to buy the building’s freehold.

If at least 50% of the tenants who are eligible participate and the building qualifies under the rules, the landlord can’t refuse.

There’s a complicated formula set out in the Leasehold Reform Housing & Urban Development Act 1993 (as amended), which is used to calculate how much leaseholders will have to pay for the premium to buy the freehold. A surveyor can help estimate what the costs would be for the participating leaseholders. Leaseholders will have to decide how to hold the freehold – usually this will be as a company, where they will all be members. The company will then be the purchaser of the freehold.

Any participating leaseholders will be liable not only for their own fees and costs but also the freeholder’s professional fees – whether the transaction takes place or not. If the landlord doesn’t agree, they will need to serve a counter notice on the tribunal by a fixed date.

If there isn’t agreement, the two sides have time to negotiate. If, at the end of the set period an agreement hasn’t been reached, the tribunal will make a ruling.

Get more detailed advice on buying the freehold of flats and houses.

Can I change the lease on my flat?

If there’s a clause in your lease you don’t like, speak to your freeholder in the first instance. If they refuse to change it, it’s possible to go to tribunal and have a court decide.