Leasehold v Freehold?

“Tidy your room.” “Pick your clothes up.” “Take down those posters.” “Turn down the music, that gangster rap.” “Why is there a family of squirrels living under your bed?”

A couple of flashbacks for me there, but at some point, we have all had these phrases or something similar politely asked or ferociously bellowed at by exasperated parents berating the state of our childhood bedrooms.

But ‘it’s my bedroom!’, ‘What’s it got to do with them?’ we think before responding maturely and articulately with statements such as “I hate you”.

It’s an interesting argument that will no doubt rumble on, dividing families for years to come.

Whose room is it? It’s your bedroom but in their house. A fact that is seen in the coldest light of day shortly after you’ve departed the family nest for further education or a misadventure to Peru. The transformation from teenage safehold to dad’s hobby room is completed quicker than you can say, “But that’s my room.”

It’s a similar situation to owning a freehold or leasehold property, hopefully, though with fewer tantrums. Who owns the property as a whole? Who owns the ground the property sits on? Or the block that the flat resides in (like your bedroom in your parent’s house)?

Furthermore, what is better to own, freehold or leasehold, and what are the benefits or pitfalls to be aware of? Let’s have a look. And the tenuous link to my teenage years is complete.

Freehold

In the example above, Mum and Dad’s house is the freehold property. So, they are the ‘freeholders’.

It means that they own the land the property is built on and the whole of the building for an unlimited duration. This is called ‘Title Absolute’.

More than likely, they will own beyond the footprint of the house with some land around it in the shape of a front garden, a rear garden, a path to the house, driveway, garage or beyond, like a paddock perhaps.

On purchasing the property and any associated land, a title deed is provided, including a redline 2D Title Plan, which demarcates the extent of your ownership.

That’s 2D, but what about 3D?

How deep does land ownership go?

It depends on what’s valuable under your feet. Under common law, the landowner owns any and all minerals and mines that lie beneath their property.

However, anything currently or previously deemed as valuable has been snapped up by the Crown, the UK Government in other words. Thanks a lot!

The Coal Industry Act 1994 and Petroleum Act 1998 takes away ownership of any coal and petroleum, including mineral oil and natural gas, respectively, giving it to the Crown. Of course, gold and silver is gobbled up by the state for good measure, too.

How high does land ownership go?

That will depend on the height of your skyscraper, or for those who aren’t Middle Eastern Sheiks or property moguls; you are limited to around 500 feet.

Consider, however, that the Shard in London is 1,016 feet tall. The airspace above your land is split into two, The Lower Stratum and The High Stratum.

The Lower Stratum is the airspace immediately around and above your property up to 500 feet and is where the landowner’s rights are limited to. This is to avoid interference by other parties and factors impacting a landowner’s enjoyment of their land.

Consider right of light, oversailing rights etc.

The High Stratum is deemed to be above the height that is reasonable and necessary for a landowner to use their land in an ordinary way and to get enjoyment from it. This space is between 500 to 1000 feet above the property.

Benefits of freehold properties

• No enforced charges
• Complete ownership
• Unlimited time ownership
• No landowner enforced limitations of use.

Negatives of freehold properties

• All costs are down to you, maintenance, insurance, management etc.

Leasehold

In the main, the term leasehold is linked to flats and apartments, whether conversions or purpose-built. It is not unheard of, but it is less likely to see a house being sold as leasehold.

Back to the Mum and Dad home example. Dear old Mum and Dad own the land and the house (the freehold), but they lend (or lease) the bedroom to their ungrateful offspring.

In the real world, a flat is usually part of a block, a larger building that has been divided into and contains other dwellings. The flats are then sold as leasehold, whilst the builder or a business retains the freehold.

The exception is usually when a house has been converted to flats, and the flat owners share the freehold in the same building.

A leaseholder doesn’t ‘own’ their property in the same way that a freeholder does. Instead, they are essentially leasing the property off the freeholder, like a long-term rental.

The lease is defined by a number of years, generally ranging from 99-999, which starts to count down once the lease is signed. That’s not to say that you can’t approach the freeholder to negotiate an extension.

The lease period expires once the countdown is complete and the property reverts to the freeholder.

Differing also from freehold, the leaseholder will only ‘own’ their property and perhaps an allocated parking space. They will not ‘own’ the communal hallways, stairwells, footpaths, communal gardens, access roads etc. but will have a right of use.

Benefits of leasehold properties

• The upkeep of the main property, the structural elements and the envelope of the building are not your responsibility. Those obligations fall on the freeholder to rectify and maintain. This will also include communal areas – entrance, lifts, corridors, gardens.
• The landowner arranges the buildings insurance.
• Problems with noisy neighbours – pass the issue to the freeholder to sort out who, if necessary, can contact the Police.
• Leasehold properties are generally less expensive to purchase.

Negatives of leasehold properties

• Potential to lose the property and your invested funds should the lease expire.
• Ground rent and service charges to pay.
• Possible restrictions of use as defined in the leasehold agreement, or it could be necessary to gain agreement from the freeholder first for items such as refurbishment works, extensions, running a business from home, housing of pets.
• May not be allowed to sub-let.
• Conveyancing fees can be higher.

How Long can a leasehold be?

New leases can be anything from 99 or 125 years to 999 years. The later time period is as good as owning a freehold property and will keep your investment and home safe.

You should look out for, avoid, or be aware of leases dropping to around or below the 80-year mark.

At this point, the property may become difficult to sell as mortgage lenders are less likely to lend on shorter-term leases.

Furthermore, at this time, if you engage with the freeholder to extend the leasehold or purchase the freehold, you will be in a weaker negating position and are likely to pay a premium.

What Should You Look For When Buying a Leasehold Property?

The length of the lease, over 80 years as a minimum plus the period you expect to live there.

That you have rights of access to the property over the communal areas such as paths, roads, entrance doors, stairwells and hallways, plus, you are allowed access to and the rights to use bin and cycle stores.

Ground rent and maintenance charges – current values and to understand the processes that allow those charges to change in the future.

Can I buy my Freehold?

Freeholds can be purchased should the current freeholder be willing to sell. This does, however, require all the leaseholders to want to buy the freehold, assuming each has the funds to do so. The freehold needs to be purchased in its entirety and not piecemeal.

Should all leaseholders agree to buy, it would be a shared freehold.

What is Ground Rent?

Ground rent is a charge levied by the freeholder on a leaseholder.

Generally, it is a nominal sum, less than £250 a year. However, this is at the discretion of the freeholder, although it is subject to what the leasehold agreement states relating to increases.

What are Service Charges?

The leaseholders pay the service charge into a management company account to cover the cost of maintenance works in the common areas, such as redecoration, replacement flooring, door entry systems services etc. In addition, a sinking fund can build savings for longer-term expenses, such as resurfacing the car park or replacing a foul water pump station.

Services charges must be reasonable and fair and can be questioned or appealed at a tribunal if deemed otherwise.

Summary

Freehold and leasehold are the two most common terms linked with property purchases.

A freehold property means that the landowner, the freeholder, owns the whole of the property and the land it is built upon. This is a permanent acquisition.

A leasehold is generally a term linked to apartments that sit in a larger building with other occupants, typically other apartments. This is an agreement that the leaseholder has with the freeholder to occupy the said apartment. This is not a permanent acquisition, and the lease has a reducing period, which can expire. Should this happen, the property is transferred back to the freeholder.

Photo by Toa Heftiba on Unsplash

About Matthew Griffiths

Matthew takes great pleasure in combining his two professions. One has seen him give two decades of service to the construction industry, from roles as an Estimator through to sitting on Boards. The second is his passion for the written word. He now has the best of both worlds, building homes and constructing written content.