Leasehold vs Freehold: Everything You Need to Know

What Freehold Means

When you buy a freehold property, you own the building and the land it sits on outright, with no time limit. You are responsible for maintaining the property and the land, and you have the freedom to alter, extend or demolish the building (subject to planning permission and building regulations). There is no landlord, no ground rent and no service charges payable to a management company.

Most houses in England and Wales are sold as freehold. When estate agents describe a property’s tenure, “freehold” is generally the simplest and most desirable option. You have complete control over the property for as long as you own it, and there are no ongoing fees beyond the normal costs of maintenance, insurance and council tax.

Advantages of freehold

• Full ownership with no time limit on your tenure
• No ground rent or service charge obligations
• Complete control over maintenance and alterations (subject to planning)
• No risk of a landlord increasing charges or failing to maintain the building
• Generally easier and cheaper to sell

Responsibilities of freehold

The flip side of control is responsibility. As a freeholder, all maintenance costs fall on you. If the roof needs replacing, there is no landlord or management company to share the cost with. You must also maintain buildings insurance and comply with any restrictive covenants on the title (for example, some freehold properties have covenants preventing certain types of development or commercial use).

What Leasehold Means

A leasehold property is one where you own the right to occupy the building for a fixed period of time, as defined in the lease. The land (and sometimes the building structure) is owned by the freeholder (also called the landlord). When the lease expires, ownership of the property reverts to the freeholder unless you extend the lease.

Most flats in England and Wales are leasehold, because the freehold structure does not work well for properties that share communal areas such as hallways, roofs and gardens. However, some houses are also sold as leasehold, particularly in parts of the North West, where developers historically sold houses on long leases with ground rent.

What the lease contains

The lease is a legal document that sets out the terms on which you occupy the property. Key provisions include the length of the lease, the ground rent payable (if any), the service charge provisions, the landlord’s obligations (typically to maintain the structure and communal areas), the leaseholder’s obligations (typically to maintain the interior and pay charges), any restrictions on alterations, subletting or use, and the procedure for extending the lease.

Key risks of leasehold

• Diminishing asset: As the lease gets shorter, the property becomes harder to sell and mortgage, and the cost of extending increases.
• Rising costs: Service charges and ground rent can increase over time, sometimes significantly.
• Lack of control: Major decisions about the building (maintenance, improvements, insurance) are made by the freeholder or management company.
• Restrictive terms: The lease may prevent you from making alterations, keeping pets, running a business or subletting without consent.

Service Charges

If you own a leasehold flat, you will almost certainly pay a service charge. This is a payment to the freeholder or their managing agent to cover the cost of maintaining and insuring the building and any communal areas. Service charges can vary enormously, from a few hundred pounds a year for a small low-rise block to several thousand for a larger development with lifts, a concierge, gym or landscaped gardens.

What the service charge covers

Typical service charge items include buildings insurance, maintenance and repair of the structure (roof, exterior walls, foundations), communal area cleaning and lighting, lift maintenance, garden upkeep, management company fees and contributions to a sinking fund or reserve fund for major future works.

Sinking funds and major works

A well-managed block will build up a sinking fund (also called a reserve fund) through regular service charge contributions. This fund pays for major works such as roof replacement, external repainting or window upgrades. If there is no adequate sinking fund, the freeholder can issue a Section 20 notice requiring leaseholders to pay a one-off levy for major works. These can run into thousands or even tens of thousands of pounds.

Your rights regarding service charges

The law provides several protections for leaseholders. Service charges must be reasonable, and the landlord must consult leaseholders before carrying out major works costing more than £250 per leaseholder. You have the right to request a summary of costs and inspect receipts. If you believe the charges are unreasonable, you can challenge them at the First-tier Tribunal (Property Chamber), which can determine whether charges are payable and whether the standard of work was acceptable.

Ground Rent

Ground rent is a payment made by the leaseholder to the freeholder as specified in the lease. It is separate from the service charge and is paid for the right to occupy the land. Ground rent can be a fixed amount, or it can escalate over time according to a formula set out in the lease.

The Leasehold Reform (Ground Rent) Act 2022

The Leasehold Reform (Ground Rent) Act 2022 was a landmark piece of legislation that set ground rent to zero (“a peppercorn”) on most new residential leases granted on or after 30 June 2022. This means if you buy a newly built flat or a new lease is granted after that date, the ground rent should be zero. However, this does not apply retrospectively to existing leases.

Doubling ground rent clauses

Some older leases, particularly those created by certain housebuilders in the 2000s and 2010s, contain clauses that double the ground rent every 10 or 25 years. A ground rent that starts at £250 per year could become £500, then £1,000, then £2,000 and so on. At these levels, the property can become unmortgageable because lenders will not lend on leases with high or escalating ground rents. If you are buying a leasehold property, check the ground rent provisions in the lease very carefully. Your solicitor should flag any escalating ground rent clauses.

What level of ground rent is acceptable?

Most lenders will not lend on a property where the ground rent exceeds 0.1% of the property value or £250 per year (whichever is greater) at the start of the lease, or where it is likely to exceed these thresholds during the mortgage term. If you are buying a leasehold property with ground rent, ensure it meets your lender’s criteria.

Lease Length and the 80-Year Cliff

The remaining length of a lease is one of the most important factors affecting the value and mortgageability of a leasehold property. New leases are typically granted for 99 or 125 years, but as time passes the lease gets shorter.

Why 80 years matters

Once a lease falls below 80 years, the cost of extending it increases significantly because an additional element called “marriage value” becomes payable. Marriage value represents the increase in the property’s market value that results from the lease being extended, and the freeholder is entitled to 50% of it. This means extending a lease with 79 years remaining can cost substantially more than extending one with 81 years remaining.

Mortgage lender requirements

Most mortgage lenders require a minimum lease length at the end of the mortgage term. The typical requirement is that the lease must have at least 70 to 80 years remaining when the mortgage ends. For a 25-year mortgage, this means the lease needs at least 95 to 105 years remaining at the time of purchase. If the lease is shorter than this, you will either need to extend it before or shortly after purchase, or find a specialist lender willing to lend on shorter leases (usually at higher rates).

The impact on property value

As a rough guide, a lease with fewer than 80 years remaining will be worth noticeably less than an equivalent property with a longer lease. Below 60 years, the discount can be 20% or more, and the pool of potential buyers shrinks dramatically because most will struggle to get a mortgage. Below 30 years, the property is effectively a wasting asset and may only be attractive to cash buyers.

Extending Your Lease

If you own a leasehold flat and have been the registered owner for at least two years, you have a statutory right to extend your lease by 90 years on top of the remaining term, and to reduce the ground rent to zero. This right is set out in the Leasehold Reform, Housing and Urban Development Act 1993.

How the process works

The statutory lease extension process involves serving a formal notice (called a Section 42 notice) on the freeholder, specifying the premium you propose to pay. The freeholder then has two months to serve a counter-notice accepting, rejecting or proposing a different premium. If you cannot agree on the premium, either party can apply to the First-tier Tribunal to determine it. The whole process typically takes 6 to 12 months.

How much does it cost?

The premium for a lease extension depends on the current lease length, the property value, the ground rent and the discount rate used in the calculation. As a very rough guide:

• Lease with 90+ years remaining: £5,000 -- £15,000 for a typical flat
• Lease with 80-89 years remaining: £10,000 -- £25,000
• Lease with 70-79 years remaining: £20,000 -- £50,000 (marriage value kicks in below 80)
• Lease with 60-69 years remaining: £30,000 -- £80,000
• Lease below 60 years: highly variable, potentially £50,000+

These figures are illustrative only. You should get a formal valuation from a specialist lease extension surveyor (RICS-qualified) before proceeding. You will also need to pay your own solicitor’s fees and the freeholder’s reasonable legal and valuation costs.

Informal vs statutory extensions

Some freeholders will offer an informal (voluntary) lease extension. While this can be quicker, be cautious: informal extensions may not reduce the ground rent to zero and may not give you the full 90-year addition. Always compare any informal offer against the statutory route and take legal advice before agreeing.

Buying the Freehold

If you own a leasehold house, you generally have the right to buy the freehold under the Leasehold Reform Act 1967. The process is called enfranchisement, and the price you pay depends on the rateable value of the property, the remaining lease term and the value of the site.

Collective enfranchisement for flats

If you own a flat in a block, you and your fellow leaseholders can collectively buy the freehold under the Leasehold Reform, Housing and Urban Development Act 1993. To qualify, at least half the flats in the building must be owned by qualifying tenants, and at least two-thirds of the flats must be held on long leases. The leaseholders form a nominee purchaser company to buy the freehold, and the costs are shared between participants.

Right to Manage

If buying the freehold is too expensive or complex, leaseholders in a block of flats can instead exercise the Right to Manage (RTM). This gives the leaseholders control over the management of the building without buying the freehold. At least half the flats in the building must participate, and there is no need to prove fault on the part of the landlord. The RTM company takes over responsibility for maintenance, insurance and service charges.

New Builds and Shared Ownership

The government has taken significant steps to reform the leasehold system for new-build properties. Since June 2022, most new-build houses in England must be sold as freehold, and ground rents on new leases have been set to zero under the Leasehold Reform (Ground Rent) Act 2022.

New-build flats

New-build flats are still predominantly sold as leasehold because the freehold structure does not easily accommodate shared buildings. However, new leases granted since June 2022 must have zero ground rent. Lease lengths for new flats are typically 125 or 999 years, giving buyers a very long term and removing the lease-length concern for the foreseeable future.

Shared ownership

Shared ownership properties are always leasehold, as you are effectively buying a share of a lease from a housing association. The lease length is typically 99 or 125 years. You pay rent on the share you do not own, and a service charge for communal areas. As you staircase (buy additional shares), the rent on the unowned share decreases proportionally.

Since April 2024, shared ownership leases come with a 10-year initial repair period during which the housing association is responsible for certain repairs. This is an improvement on previous arrangements where shared owners bore the full cost of repairs despite owning only a share of the property.

Leasehold reform: what is coming

The Leasehold and Freehold Reform Act 2024 introduced further changes including making it cheaper and easier to extend leases, increasing the standard lease extension term, banning the sale of new leasehold houses (with limited exceptions) and strengthening leaseholders’ rights regarding service charges and building safety costs. Some provisions are already in force while others await secondary legislation. If you are buying a leasehold property, check the latest position with your solicitor, as the landscape is actively changing.