Your ultimate guide to Leasehold vs Freehold
Whether you are planning to move to the UK or moving homes within the UK, there is always one big factor for a property. If you decide to purchase a property, should I buy a Leasehold or a Freehold?
- Leasehold means you buy the right to use the land for a set period in return for some form of payment.
- Freehold means you own the land and property outright
- A brief history of leasehold in the UK
- Leasehold vs Freehold
- What is a peppercorn ground rent?
- What is a 999-year lease?
- How do I find out how many years are left on the lease?
- How do I find the boundary of my property?
- Can I extend or renew my lease?
- Can I buy the freehold of my property?
- What is a share of freehold?
- Should I buy a Leasehold or Freehold?
A brief history of leasehold in the UK
Leasehold is a relic of property ownership dating back to the 11th Century. There was no concept of the property ladder for the general population, and feudal lords held the rights of the land in the name of the King, these feudal lords allowed “leasing” of a plot of land to Serfs who in turn worked on the land and paid either in food or services to the feudal lords.
The modern concept of leasehold took shape towards the end of the 1800s, whereby Landlords began renting out land for a fixed period of 99 years; this allowed the leaseholders to pass on the risk of developing the land whilst still retaining its rights and collecting “Ground rent”.
By the 1920s, the government introduced various legislation, and the Rent Acts evolved the concept further. Longer leases, such as 125-year leases became more common; however, the fact remains that the landowner still retains the rights to the land and leaseholders were often at the mercy of their Landlords.
By the late 1980s, the Landlord and Tenant Act (1987) gave leaseholders the right of first refusal, where the landlord must formally inform the leaseholders of their intention to sell the freehold and must provide the leaseholders time to consider the offer and cannot sell to other parties during that time or at a lower price than what was offered to the leaseholders or on different terms at a later date.
Successive governments introduced the Leasehold Reform Housing and Urban Development Act (1993), which further protected leaseholders' rights to extend or acquire their freehold.
Today it is more common to see 999 year leases with a “peppercorn” ground rent in new builds as the developers are also the Landlords, and the landlord operates together with property management companies to collect the service charges.
Leasehold vs Freehold
In a quick summary, leasehold is typically cheaper than freehold to purchase. However, if you want to avoid the headache of arranging for maintenance of your property, then leasehold is a good option; after all, homeownership of a Freehold property is essentially a lifetime of small projects and maintenance that you need to take on as a homeowner.
What is a peppercorn ground rent?
Peppercorn ground rent is used to describe a nominal amount to pay as a consideration in a contract; in effect, there is nothing to pay.
This is usually found in 999-year leases or very old leases where the freehold is required to charge a nominal ground rent to retain the ownership of the land.
What is a 999-year lease?
From a common law perspective, a 999-year lease is essentially a permanent lease of the property, which is great for the leaseholder; however, you may need to scrutinise the Ground rent and maintenance cost of the property under such leases.
However, some mortgage lenders are wary of lending for such properties because of the common practice of landlords to include a “Doubling of Ground Rent” clause in the lease. For example, if a lease is 999 years and the ground rent starts at £295 per year. However, the ground rent is stated to double every ten years; it may seem like an innocent arrangement at first, but once you do the maths, it becomes apparent that it is not a suitable lease.
|Years since start of lease||Ground rent (per year)||Total rent paid|
Have these questions in mind when you are going through a purchase of a 999-year lease property:
- Are there any terms on the transfer of the freehold?
- What are the options for buying the freehold later?
- Are there any terms on the Ground rent and increase of Ground rent?
- Are there any terms on the maintenance and service management of the property?
999 years is not necessarily harmful, and it can be the best of both worlds as the leaseholders have the security of property ownership and leave the maintenance of the property's common areas to the Freeholder.
How do I find out how many years are left on the lease?
When you buy a leasehold property, you should look for the remaining years on the lease, which will be advertised by the seller already. Always remember to confirm the duration of the lease separately using the land registry services.
You can request a copy of the lease from your solicitor, or you can purchase a copy of the lease from the Land Registry.
How do I find the boundary of my property?
When purchasing a freehold property, you should clarify the boundaries of your property. This is usually provided as part of your property survey during the early stages of the property purchase.
You can request a copy of the boundary information from your surveyor, or you can purchase a copy of the boundary information from the Land Registry
Be wary of freehold properties built within a gated community or private community, as the roads leading to your property and the shared pavements may not be council owned. There might be a service charge against the communal roads and pavements.
Can I extend or renew my lease?
If you have owned your property for two years or more, you have the right to extend your lease if your lease has less than 80 years remaining; the shorter amount of time remaining on your lease, the more expensive it becomes to extend your lease.
For each lease extension, it is usually done in 90-year increments, and multiple factors contribute to the cost of a lease extension:
- 50% of the Marriage value, the value the property will gain by having a longer lease.
- Any improvements were made to the property.
- The cost of the property.
- Current Ground rent paid per year.
Fees you will have to pay to extend a lease:
- Legal fees.
- Property Valuation.
- Land Registry Update fees.
- Stamp Duty (If the lease extension is over £125,000).
Can I buy the freehold of my property?
As a Leaseholder, you have the right to buy the freehold of your property, granted that you have owned the property for more than two years.
The process is very straightforward if you are the sole property owner (i.e. a house). However, if your property is a block of flats, you will need all the other residents to buy the freehold jointly, forming a share of the freehold.
What is a share of freehold?
A share of the freehold is shared ownership of the Freehold title, usually created when all residents of a block of flats buy the freehold of a property.
A company will be formed to hold the Freehold title, and the shares of the company will be distributed amongst the Flat owners of the building.
This does not mean the residents can breach their leases; however, it does mean the Flat owners can get together and decide the lease terms, for example, granting all residents 999-year leases at peppercorn ground rent.
Additionally, the flat owners of the building will have much greater control over the day-to-day management of the building, and it becomes easier to sell the property as the lease terms are usually more favourable.
The drawbacks to a share of freehold are the administration required for the upkeep of the property and the company itself, a Director is usually appointed and is needed to carry out the necessary administration tasks, and poor building management can lead to a range of issues.
Should I buy a Leasehold or Freehold?
From an ownership perspective, freehold is better if you understand that you will have to carry out all the maintenance and take on the associated costs. Leasehold especially favourable 999-year leaseholds can be an excellent value for money and strike a good balance between ownership and maintenance requirements.
Short leases of less than 80 years are not worthwhile investments. The time and money spent on extending the lease and the difficulties in getting a mortgage for such properties make it a bad investment.
Leasehold has deep ties with UK’s history. Freehold is more expensive but grants the owner more freedom. Leasehold has restrictions but is cheaper, and you pay someone to maintain the building. Never get a lease under 80 years; however, extending leaseholds is becoming more affordable and accessible through legislation introduced by the government.