6.1.5 Leasehold and freehold – some facts

Leasehold and freehold. Two terms we hear a lot of in the property market world, but do we really understand the distinction between the two?

Let's look at leaseholds. Did you know that the leasehold system dates back as far as the middle ages? Most flats in England and Wales are purchased on a leasehold basis. There are more than 2 million leaseholders in England and Wales. As leaseholders, they don't actually own the property outright, instead they've purchased from a freeholder the right to live there for a predetermined period, usually 99 to 125 years, though some leases can run for as long as 999 years. Leaseholders are required to pay a nominal ground rent, and considerable service charges. These are payable to the freeholder or an intermediary known as a managing agent who takes care of the property on the freeholder's behalf. Service charges include the costs of maintainence, repairs and building insurance. They may also include things like lifts, lighting, cleaning and gardening. Leaseholders can always ask for a statement of their service charges, they also have the right to inspect the freeholder's accounts.

There are some major disadvantages of owning a leasehold property. One of them is that the lease can, well, run out! Once the lease has expired, ownership of the property reverts back to the freeholder. However, the tenant can stay in the property, paying a market rent. It's also hard to get a mortgage for a leasehold property that has fewer than 50 years left on its lease. On the other hand, there are many short lease properties in the most expensive parts of central London. You can get as much as 50% off the purchase price of a flat if it has fewer than 40 years to run on its lease. It is possible to purchase leasehold extensions, or in many cases purchase a share of the freehold. However, buying the freehold may not always be of interest, as freeholders are responsible for managing maintainance, building insurance and other matters. An alternative to this is a resident's committee.

Though leasehold houses are common in some parts of the country, most houses in the UK are purchased on a freehold basis. Freeholders own their property outright, meaning they are fully responsible for the maintainence of the property. Since 2004 there has been a third form of property ownership. It's called 'commonhold' and it applies to new developments of flats. Under commonhold, each flat owner has a freehold stake in the building.