Leasehold vs. freehold

If there was a prize for the country that uses the most amount of quaint words and archaic concepts, Britain would surely be world champions.

To the longlist of penny-farthings and peppercorn rents we can add leasehold and freehold — two hangovers from the age of the horse and cart, but which you really ought to know about. So, what is a leasehold property and what does freehold mean? Here’s everything you need to know.

What is the difference between freehold and leasehold?

If you buy a freehold property, you own not just the building itself but the land it sits on.

In contrast, a leasehold is a time-limited form of ownership which allows you to live in a property for a specified number of years.

As a leaseholder, you own the boundary of the dwelling — your ‘demised premise’ — rather than communal areas and the surrounding plot of land.

In broad brushstrokes, most houses are freehold and most flats are leasehold, or share of freehold (more on that one later).

An estimated 18% of housing stock in England is leasehold — some 4.3 million homes, of which 2.9 million (67%) are flats, and 1.4 million (33%) are houses. So if you’re buying a house, chances are you’ll become a freeholder.

What does freehold mean in reality?

Of course, these off-the-shelf definitions only scratch the surface. What does freehold or leasehold mean in terms of your life as a homeowner?

Owning the freehold is advantageous in many ways, but there are responsibilities too. If you’re a purist, it’s nice to know that you own every brick in your home.

The flipside, of course, is that you’re responsible for everything. If your outside drains are blocked, there’s no landlord who’ll magically appear; it’s all down to you and your baking soda. If there’s a sudden storm that leaves a hole in the roof, get ready to make an insurance claim. To top it all off, you have a legal obligation to keep the building up to standard, including the roof, outbuildings, and external features.

The freeholder is responsible for the upkeep of the building. The leaseholder is generally responsible for their part of the property.

If you’re buying a home to live-in, you might not have to think too deeply about these responsibilities. You probably already know that homeownership comes with slings and arrows; mowing the lawn and cleaning the gutters are par for the course.

Most freeholders will simply live in their properties, pay the mortgage, and not have to dwell on service charges, ground rent and other gremlins unless you grant a lease, in which case you become a landlord.

But in legal terms, a freeholder — often used interchangeably with ‘landlord’ — can be anyone from your local council to the Duke of Westminster. So if you’re a leaseholder, it’s worth finding out who the freeholder is, as they’re the ‘competent landlord’ to whom you may have to request a lease extension one day.

Why is the length of a lease important?

You might not plan on living for the next 80 years, but the length of your lease still matters. Essentially, your lease gives you the right to live in your home for a certain length of time. All things being equal, the value of your property will decrease over the course of the lease.

If you’re selling your home, a buyer won’t necessarily baulk if you have a long lease — say, 100-plus years — but if your property has 85 years left on the lease, you should start thinking about a lease extension. That’s because when a lease has 80 years left, something called ‘marriage value’ kicks in — trust us, it’s less cosy than it sounds — meaning you owe your freeholder 50% of the added value to your home that a lease extension would generate, plus the usual costs of renewing the lease.

In essence, the closer your lease slides towards the 80-year mark, the more wary buyers will be.

How much does a lease extension cost?

A property with a 95-year lease might cost £7,500 to extend — a rough ballpark by the way — whereas a 60-year lease might cost £25,000-£30,000 to renew. But there are many variables.

Some of the factors that influence the eventual premium you pay the landlord include the value of the land — in reality, this means the current house price — and the size of the property and garden.

What’s certain is that the longer you leave it, the cost of a lease extension increases dramatically. If a lease completely runs out, the freeholder can technically recover the property as they now own it, though, in reality, this never happens. Moreover, if your lease dwindles too low, prospective buyers may struggle to get a mortgage on the property as lenders would deem it a risky bet.

In terms of who you pay, there are three pieces of the pie: your surveyors, your solicitors, and the amount you pay the freeholder to extend, which is referred to as the ‘premium’, as well as their legal and valuation costs. In a worst-case scenario, you’d have to pay legal costs too (more on that later). Remember, the freeholder makes money by extending your lease, so if you don’t like the idea of shovelling even more cash into a stranger’s hands, your best bet is to renew before the dreaded 80-year mark!

How to renew a lease

If extending a lease was as simple as booking a holiday or buying a car, the world would be a simpler place. Unfortunately, there are several hoops to jump through before you can put your new lease document firmly in the desk drawer.

Here’s how to renew a lease in five not-so-simple steps:

1. Check your eligibility and cash flow

First of all, the law states that you have to live in a property for two years before you can renew your lease. However, there are exceptions that may preclude you from qualifying; for example, if your landlord is a charitable housing trust.

If you’re unsure about whether you qualify for a lease extension, the Leasehold Advisory Service is a great source of information; they’re a government-funded organisation which offer free, 15-minute telephone consultations if you book in advance.

You should also make sure you have enough funds in reserve to finance the lease extension; everyone’s situation differs, but in terms of pound sterling we’re talking thousands (or tens of thousands) rather than hundreds. Once you’ve served your notice, you can’t withdraw from the process unless you pay your freeholder’s legal and valuation costs, as well as the fees you’ve incurred up until that point.

If you’re eligible for a lease extension, you can legally add up to 90 years to your lease at a ‘peppercorn rent’, which means there is no ground rent owed.

2. Instruct a surveyor and solicitors

To get the ball rolling, you’re recommended to instruct a surveyor and solicitors.

You can do this in whichever order you choose, and there’s a good chance that whoever you contact first will know a good solicitor or surveyor you can get in touch with. Before you make an approach, make sure you’ve got a copy of the current lease to hand — both your surveyor and solicitor will need a photocopy.

The role of a surveyor (or ‘valuer’) is to inspect your property, take some pictures and measurements, then produce a written report which outlines their professional opinion on how much you should offer the freeholder for the lease premium.

You might think you’re saving money by skipping this part, but a valuation from a reputable surveyor will give you a sound footing for settling on the eventual price and can represent you in a tribunal if needed. They should also be able to give you a best and worst-case scenario so that you can budget accordingly.

It’s essential that you engage a reputable solicitor with experience of property law and lease extensions. They will ensure you serve a valid notice on your landlord, respond to their requests, recommend any changes to the lease wording, and ultimately deal with the conveyancing to rubber-stamp the lease; for example, by submitting the Land Registry application to update your title.

3. Negotiate with your freeholder, or serve your notice

There are two ways to extend a lease — the statutory route, based on the Leasehold Reform, Housing and Urban Development Act 1993, or by private negotiation with your landlord if they are so inclined.

You should definitely try the latter approach first. But do you know who your freeholder is? In some cases, this will be straightforward — the local council, for example — but some landlords can be a mysterious, hard-to-reach person or company in a far-flung land.

You have the right to find out the name and address of your freeholder under The Landlord and Tenant Act 1985, and once you make a request, by law you must receive an answer within 21 days. Bear in mind that if you try to extend a lease during a sale, it’s a bit of a hassle because you’re at the mercy of your freeholder, who could be hard to track down.

If your landlord is the council, you can at least be reassured that they’ll follow the correct legal processes and will have overseen many lease extensions before.

Once you know who you’re dealing with, simply contact your freeholder — known as your ‘competent landlord’, regardless of their competence — to see if they are amenable to informal negotiation. If so, you could shave thousands off your solicitors’ fees. But in many cases, the landlord will choose the statutory route; local councils, for example, may feel obliged to follow the same legal procedure in all cases. In this scenario, your solicitors will serve the landlord your valid ‘tenant’s notice’, which includes your offer for the premium. Your landlord must respond before the date stated in your notice, or your offer stands.

4. Agree on the premium (or go to court)

When you receive a counter-notice, the landlord will either accept your offer — the ideal scenario — or propose new terms. If it’s the latter, this is where your surveyor comes back into play.

Remember when we said they were important? If your landlord’s proposed premium is significantly higher than your offer, your surveyor can support with your negotiations (if necessary in court at an independent tribunal). If the price differential is relatively small, you may wish to accept the counter-notice rather than pursue the matter in the courts, which can be expensive. One way or another, your new lease will be granted if the correct procedures have been followed.

5. Complete the acquisition

At long last, your solicitors will be in a position to complete the procedure and will raise the final bill, so make sure you’ve got funds left over! They will carry out the final conveyancing formalities and register the new lease with the Land Registry, which proves you own the flat. Even if though it’s cost you time and money, your lovely new lease will help protect the value of your home.

How much does a lease extension add to my house price?

Yes, lease extensions can be costly, but the upside is that you’ll eventually sell your home for a higher price than you would otherwise achieve. But when is it worth extending a lease? Our rough guide can help you do your sums.

Service charges explained

When viewing a leasehold property, it’s important to ask what the service charge is. This can help you do your maths before you wade in with an offer. But what do you get for your money?

Leaseholders pay a service charge to the freeholder, which may go into a ‘sinking fund’ allocated for communal repairs (though not every freeholder operates a sinking fund). Think of your sinking fund as a savings pot; your hope is that the fund builds up enough to pay for any repair jobs raised by the freeholder. Some freeholders manage properties themselves, while others will hire managing agents to take care of these matters on their behalf.

For a leaseholder — sometimes called a lessee — a managing agent is preferable because they’ll plan future works ahead of time and give you notice, whether that means decorations in communal areas, new electrical wiring or installing an entry phone system.

The freeholder is obliged to serve you notice, then obtain quotes, and prove they have got the best value for money for the job required. They can then legally increase the service charge and say, “we’re saving for this”. They need to show what they are spending their money on in order to make it happen.

Sometimes, your sinking fund might not cover the costs of a large repair job. The three most dreaded words for a leaseholder are ‘major works bill’, where your freeholder serves you a Section 20 notice, requiring you to contribute towards the cost of substantial works, such as replacing the roof or repairing the lifts, which can run into the tens of thousands.

If you don’t have a sinking fund set up — or if the sinking fund doesn’t cover the cost of the works — you and any other leaseholders are liable for ‘reasonable’ requests once the final repair bill is raised (unfortunately, ‘reasonable’ has a loose legal definition).

There is no limit to how much a major works bill can cost — yikes, right? — and your responsibilities will be outlined in your lease document. If you receive a major works notice, your freeholder has to follow a consultative process before they tender the works. They will provide an estimated charge, and will only send an actual invoice once they’ve completed the works. If you don’t have the cash to pay the bill, there are usually flexible payment options, such as extended terms.

What is share of freehold?

Sometimes, the purchase of a leasehold property includes a share of freehold. In this scenario, you and the other co-freeholders are jointly responsible for maintaining the building.

A share of freehold always has an underlying lease, and when you need to extend it, you would need to come to an agreement collectively with your freeholders in consultation with a solicitor. But rather than costing you thousands, you’re likely to spend something in the region of £500 to extend. So far, so good.

On the downside, there is every possibility you won’t agree with your co-freeholders on what repairs need to be carried out. If the other person has no interest in keeping the front garden in good condition, there is the potential for conflict.

There are other situations where you would need to liaise on practical matters with your co-freeholders. If another freeholder wants to sell their freehold and revert to a leasehold, they have to offer it to you first as a co-freeholder. If you decline, they could sell the freehold elsewhere, but in reality, this doesn’t happen.

It would be unusual if a leaseholder wanted to buy an entire freehold on a flat unless they were determined to avoid the costs of a lease extension. But if the freehold happens to be up for sale and you need freehold consent to carry out certain works, you may decide to purchase it.

Can I rent out a leasehold property?

If you’re buying a property on a buy-to-let basis, you’ll want to ask whether your lease permits you to rent out the property. Every lease is different, and some will preclude you from living the landlord dream.

On a property viewing, your estate agent might not know the exact details of the lease, so it’s a good question to ask a solicitor and see if they can request any amendments.

Some leases include outdated rules, like specific hours where you’re not allowed to make noise, or stipulations on hanging laundry. In practice, your freeholder may never pull you up on these, but it’s important to run it by a solicitor nonetheless.

Is freehold better than leasehold?

So, when all things are considered, should you run a mile from a leasehold property? Not necessarily.

Of course, freehold properties have many advantages over leasehold — the clue is in the word ‘free’. You won’t be paying a service charge and ground rent, and you’ll have greater control over what happens to your property and the land it sits on.

However, that doesn’t mean you should rule out buying a leasehold home. Leasehold flats are often cheaper — especially if the lease is running low — so if you’re on a budget and want plenty of floorspace without compromising on location, a leasehold property could be a smart solution.

And besides, perhaps responsibility is overrated. Do you really want to be calling up contractors for dozens of quotes on a missing roof tile? When it comes to maintenance, your only real responsibility as a leaseholder is to pay your service charge every month, whereas the freeholder needs to keep an eye on any essential refurbishments.

As long as you’re aware of the risks with eyes wide open, leasehold life definitely has its rewards.

Nested puts homeowners in control of their sale. Our agents provide you with smarter insights so you achieve the best price for your home on your timeframe. When you’ve found your new home, you have the power to move chain free, while we take care of your sale. Our buying agent will even negotiate up to 5% saving on your new home, so you get more home for your money.

If you’re interested in selling smarter, get in touch today. Nested.com - The modern way to move.