Leasehold vs freehold: What’s the difference?

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Leasehold

If you plan to buy a property in UK, you may have come across the terms of leasehold and freehold. These are two different forms of property ownership that have significant implications for your rights, responsibilities, and costs as a property owner. 

In this article, we will explain the difference between leasehold and freehold properties, the pros and cons of each type, and how to convert a leasehold property to a freehold property.

What is a leasehold property

A leasehold property is a type of property ownership where you have the right to use and occupy the property for a specified period, usually 99 years. However, you do not own the land on which the property is built. The land is owned by the landlord or freeholder, who grants you a lease agreement that defines your rights and obligations as a leaseholder.

As a leaseholder, you have to pay an annual ground rent to the freeholder and a share of the maintenance and repair costs of the common areas of the property. You may also have to pay other charges, such as service charges, insurance premiums, or sinking funds. 

You also have to abide by the terms and conditions of the lease agreement, which may restrict your ability to make alterations, sublet, or sell the property without the freeholder’s consent.

What is a freehold property?

A freehold leasehold estate is a type of property ownership where you own both the property and the land on which it is built. You have full ownership rights and responsibilities and can occupy, use, modify, rent, or sell the property as you wish. You do not have to pay any ground rent or service charges to anyone or follow any rules imposed by a landlord.

However, as a freeholder, you are solely responsible for maintaining and repairing your property and ensuring that it complies with all legal and safety standards. You also have to pay all the taxes and utility bills associated with your property.

What are the advantages and disadvantages of leasehold vs freehold properties?

Leasehold properties have some advantages over freehold properties, such as:

  • They are usually cheaper than freehold properties of similar size and location.
  •  They may offer access to amenities and facilities that are shared with other leaseholders in the same building or complex.
  •  They may be easier to finance, as lenders may consider them less risky than freehold properties.

However, leasehold properties also have some disadvantages, such as:

  • They have limited ownership duration, which means that your rights will expire when the lease term ends unless you can extend or renew it.
  •  They may lose value over time as the lease term gets shorter, making them harder to sell or mortgage.
  •  They may incur additional costs and charges that are beyond your control, such as ground rent increases or service charge disputes.
  •  They may limit your freedom and flexibility to make changes or decisions regarding your property without the freeholder’s approval.

Freehold properties have some advantages over leasehold properties, such as:

  • They offer full and permanent ownership rights, which means that you can enjoy your property for as long as you want without worrying about losing it.
  •  They may increase in value over time as land prices appreciate, making them more attractive to buyers and investors.
  •  They give you more autonomy and control over your property without having to deal with any landlords or intermediaries.

However, freehold properties also have some disadvantages, such as:

  • They are usually more expensive than leasehold properties of similar size and location.
  •  They may require more maintenance and repair work that you have to pay for yourself.
  •  They may be harder to finance, as lenders may require higher down payments or interest rates than for leasehold properties.

Will I be able to renew or extend my lease?

If you own the property for a period of two years or more, and if the lease is less than 80 years, then you have the right to lengthen your lease.

It is advisable to renew early, as the shorter the remaining lease, the more expensive it may also be extended.

Most often, a lease is extended by 90 years. For instance, if the lease has 70 years to run and you extend the term, the new lease period would be 160 years.

The most common cost of extending a lease is 50 per cent of what is referred to as the ‘marriage value’ of the property, which is defined as the added value gained by having a longer lease.

That is, you will be paying about half the incremental resale value you would (in theory) realize upon selling.

The price of lengthening may also be based on any alterations you’ve made to the house and how much your property is worth.

The cost of extending may also depend on:

  • any modifications you may have made to the property
  • the amount it can be sold for.
  • The amount of ground rent that you currently pay

Costs will also include:

  • property valuation
  • legal fees
  • Stamp Duty (when leasehold extension is more than £125,000).
  • Land Registry update fees

How can I convert a leasehold property to a freehold property?

If you own a leasehold property and want to convert it to a freehold property, you have two options:

  • You can buy out the freeholder’s interest in the land by paying an agreed upon by both parties. This is called enfranchisement or outright purchase.
  •  You can apply for a statutory extension of your lease by 90 years at a nominal ground rent. This is called lease extension or renewal.

Both options require legal formalities and fees that vary depending on the location, size, value, and remaining term of your lease. You may also need to hire a solicitor or a surveyor to help you with the process. Before you decide to convert your leasehold property to a freehold property, carefully weigh the costs and benefits and consult an expert if needed.

Conclusion

Leasehold vs freehold properties are two different forms of property ownership that have different implications for your rights, responsibilities, and costs as a property owner. Leasehold properties offer limited ownership duration, lower purchase price, and shared amenities but also incur additional charges, restrictions, and depreciation. We hope this article has helped you understand the difference between leasehold and freehold properties and how to choose the best option for your needs.

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