If you’re thinking of buying property that’s leasehold then it’s vital to understand what this means and how it differs from owning a freehold home.
Owning a leasehold property can affect what you’re allowed to do with your property, how much you’ll pay both to purchase it and in ongoing charges, and even your chances of getting a mortgage on it or selling it on.
In this article, we run through the key differences between leasehold and freehold properties and explain some of the options available to you if you get stuck with a short lease.
What does freehold mean?
Owning a property freehold means that you own the property and the land that it sits on outright; you are the “freeholder”. Your home will be registered under your name, and maintaining the property – inside and out – is wholly your responsibility. You won’t have to pay rent or fees to anyone either.
Whole houses, particularly standalone ones, are usually freehold, though this is not always the case.
What does leasehold mean?
When you buy a property leasehold, you own it for a certain period of time, known as the lease. When the lease runs out, ownership of the property reverts back to the person who owns the land (the freeholder or landlord). This means that your purchase effectively ends after the lease ends and you are no longer entitled to the property, regardless of how much you paid.
With a leasehold property, you do not own the land the property is on, and if it’s a flat, you don’t own the lobby, corridors, stairs, roof, or the building itself either. All of this is owned by the freeholder, which means they are also responsible for maintaining the communal areas. Leaseholders will usually have to pay a service charge to cover maintenance costs. Some leaseholders can claim a “right to manage” if they want to take charge of this, however.
The freeholder is typically responsible for arranging building insurance, but not contents insurance, so you would have to look into getting the latter yourself if you want your possessions to be protected. Learn more about how buildings and contents cover work in our article Your essential guide to home insurance.
Flats in a block of flats are almost always leasehold properties, though it is possible to own them freehold as well, which we’ll cover later on.
Leaseholds on newly-built houses are set to be banned under a forthcoming government bill, meaning that new houses in England and Wales will be freehold from the outset. This change will not apply to flats, however, which make up the majority of leasehold properties in the UK.
How do leases work?
You’ll set up a lease with the freeholder when you buy the property. These tend to be quite lengthy, from 90 or 120 years to even 999 years, so it’s quite uncommon to outright lose the property in the way mentioned above. This can still happen though, if you aren’t careful and end up being saddled with a very short lease.
However, even leases that feel quite lengthy can be problematic. A property effectively has less value the shorter the remaining lease on it is, so in a way the value is always declining over time. The value of a lease with years still in the triple digits is usually fairly stable, but once it goes under 90 or 80 years, it will start to drop dramatically.
In other words, a 90 year lease might sound ideal, but you could start to have trouble selling or remortgaging it after just 10 years, let alone 20 or 30. Always be wary of buying a property with a short lease, as it can cause huge problems further down the line unless you’re able to extend it.
What can I do in a leasehold property?
Many of the same limitations apply when leasing a property as when renting.
For example, the freeholder may prevent you from owning pets, subletting the property or running a business from your home. You may also have to seek their permission in order to make changes or refurbishments to the property. You need to be very clear about the exact terms of your lease and what you are and aren’t allowed to do in your individual case.
You will usually have to pay several fees to the freeholder, including maintenance charges, service fees and a portion of the buildings insurance. Make sure you’re clear on how much these costs are before you agree to buy.
The Leasehold Reform Act means that ground rent cannot be charged above a nominal “peppercorn” rent (usually about £1) on new leases bought after 30 June 2022. If you bought your lease before this date, however, you may still have to pay ground rent every year. The government is set to consult on capping ground rent at zero for all leaseholders.
Can I extend my lease?
Yes – leaseholders do have the legal right to extend their lease. Under current rules, this can be complex and expensive, with limits on how many years you can extend the lease for. You can also attempt to pursue an informal extension between you and your landlord without going through the same legal hoops.
Under the recent Leasehold Reform Act, your landlord cannot increase your ground rent after a lease extension. The maximum they can charge for the remainder of the original lease term is the amount you were paying already. In the period after this – that is, the new extended part of the lease – they cannot charge any ground rent.
The government is expected to consult on making it easier to extend a lease by introducing a standard calculation to determine the cost, removing the requirement for the leaseholder to have lived in the property for two years, and changing the length of a standard extension from 90 years to 990 years.
Extending your lease on a flat
With a flat, if you have already held the lease for over two years and originally signed on for a “long lease” (21 years or more) then you normally have the right to extend your lease by 90 years, though you may have to pay an expensive premium to do this.
If you qualify for an extension and your landlord tries to refuse instead of accepting or offering to renegotiate, you can challenge them in court. You can, of course, also try and negotiate for a longer lease before purchasing.
Check whether you qualify to extend your lease on a flat and find out more at the Leasehold Advisory Service.
Extending your lease on a house
With a house, if you have already held the lease for over two years and originally signed on for a “long lease” (21 years or more) then you normally have the right to extend your lease by 50 years. Unlike flats, you won’t have to pay an upfront premium.
If you qualify for an extension and your landlord tries to refuse, you can challenge them in court. As with a flat, you can also try and negotiate for a longer lease before purchasing.
You may want to seek legal advice for extending a lease on a house, as rules can be complex.
Check whether you qualify to extend your lease on a house and find out more at the Leasehold Advisory Service, or use their calculator to give you an idea of how expensive extending your lease could be.
Can I buy the freehold on a leasehold property?
Yes, you have the right to buy the property outright from the freeholder. However, buying a freehold as a leaseholder – known as “enfranchisement” – can be a complicated and expensive process, and you should seek legal aid from a solicitor. As with extending a lease, you must have been the leaseholder for at least two years and have signed a lease of over 21 years to be eligible to buy the freehold. If you and the freeholder can’t come to an agreement then a price can be set by the court.
Buying the freehold on a house is often more straightforward, as you are the only leaseholder. In a block of flats, the process is known as “collective enfranchisement”, and requires the involvement of all of the residents agreeing to own the property jointly. This can, as you might expect, be difficult to arrange, but is often worth the effort.
You can find out more about the possibility of collective enfranchisement at the Leasehold Advisory Service.
When will the leasehold system change?
Despite the positive changes introduced in the Leasehold Reform Act, many are still calling for additional reforms and even the abolishment of the leasehold system.
As mentioned earlier, the recent King’s Speech included confirmation that leaseholds on new houses will be banned, meaning that new houses in England and Wales will be freehold by default. This change has not been extended to flats, however, which make up 70% of leasehold properties in the UK, according to the Institute for Public Policy Research.
Further news is anticipated for existing leaseholders, with the government set to consult on changes such as the right to extend a lease by 990 years, a standard calculation to determine the cost of extending a lease, and the abolition of ground rent for existing leaseholds.
As you can see, buying a leasehold property can involve a lot of hassle. If you are buying a house then it is almost always worth trying to buy the freehold if you can so that you have complete control of the property and can avoid extra monthly costs. New build houses in particular are often sold leasehold, so make sure you know exactly what you’re signing up for when you buy.
If you are buying a flat then check out our guide on Buying leasehold property: how to avoid the pitfalls, and remember to always aim for as long a lease as possible to avoid problems further down the line.