Leasehold vs Freehold Explained

When you buy a freehold property, you own both the building and the land it sits on outright, with no time limit on your ownership. You are responsible for maintaining the property and have full control over alterations and improvements (subject to planning permission and building regulations). There is no ground rent to pay and no freeholder to answer to.

Most houses in England and Wales are freehold. Freehold ownership is the simplest and most straightforward form of property ownership. You can stay in the property for as long as you wish, pass it on in your will, and sell it without needing anyone's permission. The only ongoing obligations are to your mortgage lender (if you have one), the local council (council tax), and compliance with general law.

Leasehold ownership means you own the property for a fixed period of time, as set out in a lease agreement with the freeholder (also called the landlord). When the lease expires, ownership reverts to the freeholder. Leases on residential properties are typically granted for 99, 125, or 999 years, though some older leases may have started at shorter terms and now have much less time remaining.

Most flats in England and Wales are leasehold because the freehold of the building is held by a single entity (often a company, housing association, or individual), and each flat owner holds a lease. Some newer houses are also sold as leasehold, particularly on new-build estates, though this practice has been controversial and is being reformed.

As a leaseholder, you own the right to live in the property for the duration of the lease, but you do not own the building or the land. The freeholder retains ownership of the structure, common areas, and grounds. The lease sets out the rights and obligations of both parties, including what you can and cannot do with the property.

Ground rent is a payment made by the leaseholder to the freeholder, as specified in the lease. It is essentially rent for the land on which the property stands. Ground rent can vary enormously — from a nominal "peppercorn" (effectively zero) to hundreds of pounds per year.

Some leases, particularly those created in the early 2000s to mid-2010s, contain escalating ground rent clauses where the ground rent doubles every 10 or 25 years. These can cause ground rent to reach thousands of pounds per year over the life of the lease, and have made some properties difficult to sell or mortgage.

The Leasehold Reform (Ground Rent) Act 2022 ensures that ground rent on new leases granted after 30 June 2022 is set at zero (a peppercorn). This applies to new builds and new leases, but does not retrospectively change the terms of existing leases. If you are buying a property with an existing lease, check the ground rent terms very carefully.

Service charges cover the cost of maintaining and managing the building and common areas. They are payable by leaseholders and typically cover building insurance, maintenance and repairs to the structure, cleaning of common areas, gardening and landscaping, lift maintenance, management fees, and contributions to a sinking fund or reserve fund for future major works.

Service charges vary widely. A small purpose-built block with no lift might charge £1,000 to £2,000 per year, while a luxury development with a concierge, gym, and swimming pool could charge £5,000 to £10,000 or more. Before buying a leasehold property, request the last three years of service charge accounts and check whether any major works are planned.

You have the right to challenge unreasonable service charges through the First-tier Tribunal (Property Chamber). The freeholder or managing agent must provide a clear breakdown of charges and consult leaseholders before carrying out major works costing more than £250 per leaseholder (known as Section 20 consultation).

If you own a leasehold property and have been the registered owner for at least two years, you have the legal right to extend your lease by 90 years on top of the current remaining term, with the ground rent reduced to zero (peppercorn). This is known as a statutory lease extension under the Leasehold Reform, Housing and Urban Development Act 1993.

The cost of a lease extension depends on several factors: the current lease length, the property value, the ground rent, and the capitalization rate used in the calculation. As a general rule, the shorter the remaining lease, the more expensive the extension. The cost increases dramatically once the lease drops below 80 years, because the freeholder becomes entitled to a share of the "marriage value" (the increase in the property's value resulting from the longer lease).

For example, extending a lease from 75 years to 165 years (90-year extension) on a flat worth £300,000 might cost £20,000 to £30,000. Extending the same lease from 60 years would be significantly more expensive, potentially £40,000 to £60,000 or more. This is why it is advisable to extend your lease before it falls below 80 years.

Collective enfranchisement: If you and other leaseholders in your building are dissatisfied with the freeholder, you may have the right to collectively purchase the freehold. At least 50% of the qualifying leaseholders must participate, and the building must meet certain criteria (for example, at least two-thirds of the flats must be held by qualifying tenants). The cost is shared between the participating leaseholders and includes the price of the freehold plus legal and valuation costs.

Right to Manage: Even without buying the freehold, leaseholders can take over the management of their building through the Right to Manage (RTM). This allows you to appoint your own managing agent, control the service charge, and have a say in how the building is maintained. At least 50% of the qualifying tenants must participate, and the process does not require you to prove any fault by the current management.

The UK government has been implementing significant leasehold reforms to protect leaseholders and improve the fairness of the system. Key reforms include the abolition of ground rent on new leases (from June 2022), proposed changes to make lease extensions cheaper and simpler, and planned reforms to allow leaseholders of houses to buy their freehold more easily.

The Leasehold and Freehold Reform Act 2024 introduced further changes including removing the requirement to own a leasehold for two years before extending, increasing the standard lease extension term from 90 to 990 years, and reforms to how the premium for lease extensions is calculated. These changes are being implemented in stages, so check the latest position with your solicitor.

If you are considering buying a leasehold property, stay informed about these reforms as they could significantly affect lease extension costs and your rights as a leaseholder. Your solicitor should be able to advise on how current and upcoming legislation affects the specific property you are looking at.

Before buying a leasehold property, make sure your solicitor checks the following:

Remaining lease length: Aim for at least 80 years, ideally 90 or more. Below 80 years, mortgage options narrow and extension costs increase sharply.

Ground rent terms: Check the current amount and any escalation clauses. Avoid properties with doubling ground rent clauses unless the seller agrees to address this before sale.

Service charge history: Request the last three years of accounts. Check the trend and whether a sinking fund exists for major works.

Major works: Ask whether any major works are planned (such as roof replacement, external repainting, or lift replacement) as these could result in a significant one-off charge.

Restrictions: Check for restrictions on alterations, subletting, pets, and use of the property. These can affect your lifestyle and the property's attractiveness for future resale.

Insurance: Confirm who arranges the buildings insurance and whether the premium is reasonable. Some freeholders charge excessive commissions on insurance policies.