Freehold Ownership

Definition: Freehold ownership means that the owner owns the building and the land on which it stands outright, indefinitely. The ownership is "free from hold" of any entity other than the owner.

Duration: Freehold ownership is perpetual, meaning the owner possesses the property until they choose to sell it or pass it on to heirs.

Rights: The owner has full control over the property, including the right to make alterations, develop the land, and transfer ownership as they see fit (subject to any relevant laws).

Responsibilities: The freeholder is usually responsible for the maintenance of the property, including the structure, roof, walls, and the land itself. They also bear the responsibility for any applicable taxes and other charges.

Property Value: Freehold properties typically have higher market values due to the permanent ownership of the land and building.

Common Usage: Freehold ownership is common for standalone houses, or plots of land.

Leasehold Ownership

Definition: Leasehold means that the lessee has the right to use and occupy the property, as described in the lease, for a specified period.

Duration: Long leasehold ownership is time-bound, typically ranging from 21 to 999 years. After the lease expires, the property reverts to the freeholder unless the lease is extended. Although the lessee can have a right to ‘hold over’ and remain in occupation subject to payment of the going rent.

Rights: The leaseholder has the right to occupy and use the property as per the terms of the lease agreement. However, their ability to make alterations or changes to the property is often restricted and requires the freeholder's consent.

Responsibilities: The leaseholder usually pays an annual ground rent to the freeholder and may also have to pay maintenance fees, service charges, and contributions to the building's upkeep. They are responsible for the interior of the property, while the freeholder usually handles the structure and common areas (in cases of flats or apartments).

Ground Rent: This is the periodic payment to the freeholder as described in the lease agreement. The freeholder cannot charge whatever they wish only what is described in the lease. It can be a small static amount such as £10 or it can be much higher with frequent rises such as doubling or to an index such as The Retail Price Index (RPI). Many lenders do not like rises more often than every 20 years, to the RPI or those that are higher than 0.1% of the capital value of the property. There is also a forfeiture issue for ground rents over £1,000 in London and £250 outside.

Property Value: Leasehold properties often have lower market values compared to freehold properties. The remaining term of the lease can significantly affect the property's value, as can a high ground rent. Shorter leases tend to decrease in value once they hit around 90 years unexpired. This is due, currently, to the inclusion of marriage value in the premium for the lease extension once a lease drops below 80 years and most knowledgeable or properly advised purchasers will want to know what the lease extension will cost once a lease hits 90 years or so.

Common Usage: Leasehold ownership is common for flats, apartments, and commercial properties. In some regions, houses may also be sold as leasehold.

Lease Extensions: The current legislation provides for a lessee that has been the registered owner for at lease 2 years to be able to force, in most cases, a freeholder to extend the lease by 90 years and reduce the ground rent to zero. For payment of the appropriate premium and reasonable costs (but not those of negotiation or Tribunal). The new legislation passed in wash up prior to the election is changing some of the lease extension provisions. Some of these are that the extension will be an additional 990 years, no two year ownership rule, most lessees no longer paying freeholder costs, no payment of marriage value, capping ground rents at 0.1% of capital value for the purpose of the valuation, and prescribing the rates to be used in the calculations. Although we have no dates as to when any of this may be active, nor do we have details on the rates that are to be prescribed.

In conclusion, the choice between freehold and leasehold will depend on factors such as cost, availability, financial capability, the intended use of the property, and long-term plans. Understanding the differences can help ensure that the ownership type aligns with your personal or investment goals.