Leasehold vs. Freehold

In the UK, there are leasehold properties and freehold properties. This is something foreign buyers are usually not initially aware of; however, it is a relatively simple explanation. When you buy a leasehold property, you buy the right to live in the property for a certain number of years that is specified by the lease. The freeholder owns the building and the land. When you buy a freehold house, you become the sole owner of the property and the land it’s sits on. When you buy a freehold apartment, you become the sole owner of the apartment and a shared owner of the building and land it sits on. This post will go further into both forms of ownership and explain the main differences between the two. 

Leasehold 

As a leaseholder, you own the property for a set number of years. The number of years depends on the lease – it could be anywhere from a couple of years all the way to 999 years. When the lease runs out, the property is returned to the freeholder. Most apartments in London are leaseholds, so buyers shouldn’t be put off by this. For the most part, houses are freehold properties, however there are some new build houses that sell as leasehold (typically with long leases). A lease can be renewed, however this might be very expensive depending on the lease length, as the next section will explain.

What to look out for 

Leasehold properties that are 80 years or less. Lenders will probably not give you a mortgage on it, so the lease would need to be extended. When there is only 80 years or less left, this can be extremely expensive to renew (often more than the value of the asking price). According to moneysavingexpert.com, “Freeholders sit around praying you let your lease drop to below 80 years, as then they rake in the cash. This is because after that you will pay 50% of the property's 'marriage value' on top of a lease extension price. Marriage value is the amount of extra value a lease extension would add to your property.”

Other considerations  

If you want to make alterations to a flat, you will need to get permission from the freeholder. Some leaseholders will have to pay something called ground rent, which is usually very affordable (£50-£100), however can be more expensive for newer properties. 

Leasehold reforms 

It’s important to note that there are leasehold reforms that are being proposed (they are not activated yet). Here are some of the proposals as we know them so far:

 

  • The government made plans to prohibit selling new houses as leasehold, therefore only flats can be sold on a leasehold basis. In addition to this, they also promised to abolish ground rent.

  • Every leaseholder who can extend their lease will have the right to extend by 990 years, without paying ground rent. 

  • It will be much more affordable to extend or buy the freehold, as there will be charges involved that will be capped or removed. 

Freehold properties 

Freehold properties are generally considered more desirable than leasehold properties, as they are more straightforward – you own the property and the land it sits on until the time comes to sell. When it comes to apartments, you own a share of the freehold along with the other owners in the building. 

Summary/Recommendation 

I would never advise my clients not to buy a property simply because it might be a leasehold. In central London, most of the flats are leasehold properties. If you were to only look for freehold properties, you would be significantly reducing the number of properties to choose from. There are warning signs to look out for as mentioned (leasehold properties with 80 years or less, high ground rents, etc). The good news is that leasehold reforms are coming, which will make owning/extending leasehold properties much easier.  

Iyad Grahne