Leasehold vs Freehold: What’s the difference?

No matter if you are selling a flat or a house you will find it useful to know the difference between freehold and leasehold, as these are the two most common types of ownership here in the UK.

What is a freehold property?

Freehold refers to a situation where one person has complete unconditional ownership of a house or flat and the land on which it’s situated, without any restrictions.

There are many perks to having a freehold property, not least the fact that you are the outright owner. This means that it’s your name that will be listed as owner with the HM Land Registry, which is the UK government division that oversees the registration of properties in England and Wales.

Unlike leasehold agreements that involve one party paying an annual ground rent to another, because freeholders own the property completely, they don’t have to pay any rent on it.

As a freeholder, you’ll have the responsibility to ensure that the exterior walls and the roof of your property are maintained and kept in decent condition.

Freeholders generally have no time limit on their ownership of the property and its land, unlike leasehold agreements that give you the right to live in a house or flat for a set period.

If you want to sell an entire house then this will typically be a freehold sale, because standalone houses are generally not leasehold. However, this isn’t always the case and there are some detached homes that are leasehold rather than freehold.

What is a leasehold property?

Leasehold properties can be either flats or houses that someone owns for a set amount of time, but they don’t own the land on which the home is located. The person living in the property will pay a landlord an annual ground rent throughout the terms of the leasehold agreement. But once the lease has expired, the ownership of the property will return to the freeholder unless you opt to extend your lease.

The exact duration of leasehold ownership varies and will be set by both the landlord and renter when writing the terms of the agreement. They can last a relatively short time, such as 50 years or less, but they typically have much longer rental terms. Most typical leasehold agreements last for about 90 years to 120 years, and some even extend to almost 1,000 years.

In addition to specifying the duration of the lease, the leasehold agreement will also set out any other conditions, restrictions, rights, responsibilities, and other terms.

Most leasehold agreements will put the responsibility on the freeholder to ensure that the common areas of the building are maintained and kept in good condition. This can include any staircases, the entrance area, the outside walls, the roof and other parts of the building.

Still, there are some agreements where the leaseholder claims a "right to manage", which means they take on the responsibility to keep the common areas in decent condition.

The terms of the agreements could also put certain limitations on what the tenant can do, such as prohibiting subletting of the home or banning tenants from having pets.

A leaseholder will have to pay several fees to the landlord, including fees for maintenance of the property, a portion of the building’s insurance, yearly service charges, and more. Those charges are all in additional to the annual ground rent that the leaseholder has to pay.

In a leasehold property, tenants typically have to ask permission from the building’s owner to make any significant changes such as extensions or other renovations.

Although leasehold agreements are legally binding, if the tenant breaks any of the terms of the lease then they risk forfeiting the agreement and losing their right to live in the property.