Freehold vs leasehold- what's the difference?

Understanding freehold and leasehold ownership

When investing in commercial property in the UK, you will encounter two terms to describe the legal ownership of properties, freehold and leasehold. Freehold entails owning the building and land it is on. Leasehold, whereas, means you may own the property but not the land, and therefore are required to submit rent payments to the freeholder. 

What is leasehold ownership?

Leasehold ownership means the landlord, or freeholder will own the property during the lease period. This type of property ownership is common when purchasing apartments which belong in a larger building. 

Should I buy freehold or leasehold property?

Freehold properties are commonly the most sought after. When you buy a property that is freehold, you own both the property and the land outright. However, with leasehold ownership, you own the building for a fixed period of time, and you will be subject to a contract between yourself and the freehold owner.

There are many reasons why investors prefer to opt for freehold properties wherever possible, but there are some things they should keep in mind when weighing up a property that offers either form of ownership, such as the options stated below. With a leasehold property, a person has the right to use a property for a set period of time that is agreed upon in exchange for rent. Once this period of time is over, the property returns to the freehold owner.

How does length of lease impact my mortgage?

It is usual for lenders to need the lease to run 25-30 years after the end of your mortgage. If you want to get a 25-year mortgage the lease needs to be 50-55 years before its termination. This means that it can be difficult to sell a property if the lease is less than 80 years. You can apply to your landlord for a new lease on the flat if you need it to last longer to gain a mortgage.

How do maintenance fees and services differ?

Ground rent is the annual payment made to the landlord, or freeholder who owns the property. When searching for a commercial property, we recommend confirming details of the ground rent before signing agreements. Ground rent can be paid at either a fixed, or escalating rate- which means it could increase after the first year. 

With a leasehold property, you won’t have to pay annual ground rent if you are a freehold owner. You will have to be responsible for maintaining the fabric of the building, including the roof and the outside walls. If you are a leaseholder, then you are not responsible for maintaining and running the building. Usually, the landlord will appoint a managing agent to do this for them. If there are any major works that the leaseholder would like completed to the property, then they will need to obtain permission from the freehold owner. In some cases, leaseholders share the costs of paying a service charge to the landlord where you will be asked to pay a sinking fund to cover any unexpected maintenance work.

Disputes between freeholders and leaseholders

Both leasehold and freehold owners have rights that protect them from either party taking advantage. The main source of contention between the two parties is related to fees. Leaseholders can often feel that the freeholder is over-charging and not doing enough to maintain the building, while freeholders frequently complain that leaseholders breach the terms of their lease.

How to select your property ownership type

When looking for a commercial property, it is crucial to decide in which capacity you want to assume ownership. Financially and legally, you should look at your options, and consult with a professional to see which type of ownership best suits your circumstances. Similarly, it depends on your individual requirements and lifestyle choices. Contact our team today so we can assist you in selecting the best commercial property option for you.