One of the most important distinctions buyers must understand when buying a property in the UK is whether the property is leasehold or freehold. This distinction impacts ownership rights, responsibilities, and long-term financial commitments. Despite ongoing reforms, confusion over leasehold and freehold ownership remains a major issue for homebuyers.
Raza, has over 24 years of experience in legal practice. His current practice focuses on Family, Immigration, Personal Injury, and Conveyancing Law. He is the founding and Managing Director of RMZ Law Offices.
What is the Difference Between Leasehold and Freehold?
- Freehold: The buyer owns the property and the land it stands on indefinitely. They are responsible for maintenance and do not have to pay ground rent.
- Leasehold: The buyer owns the property for a fixed term (e.g., 99, 125, or 999 years), but the land remains owned by a freeholder. Leaseholders may need to pay ground rent, and service charges, and adhere to restrictions set by the freeholder.
The Leasehold Controversy: Why Are Reforms Needed?
Leasehold ownership has faced growing criticism due to unfair practices such as escalating ground rents, costly lease extensions, and limited control over property alterations. Some common issues include:
- Ground Rent Scandals: Some leasehold agreements include ground rents that double every 10 years, making properties difficult to sell.
- Expensive Lease Extensions: Extending a lease can cost thousands of pounds, and shorter leases can make properties less desirable.
- Lack of Control: Leaseholders often need permission from the freeholder for major changes, and disputes can be costly.
Government Action: Leasehold Reform in Progress
To address these concerns, the UK government has introduced measures to improve leasehold ownership:
- Abolishing Ground Rents: The Leasehold Reform (Ground Rent) Act 2022 bans ground rents on most new residential leases.
- Right to Extend Leases: Proposed reforms aim to make lease extensions cheaper and allow leaseholders to extend leases by 990 years with zero ground rent.
- Easier Freehold Purchase: Plans are in place to make it simpler for leaseholders to buy their freehold.
A Leaseholder’s Journey to Freehold Ownership
When a buyer purchases a leasehold property, they may not be aware of potential issues such as escalating ground rent clauses and short lease terms. Over time, this can make selling the property difficult, as mortgage lenders may be reluctant due to unfavorable lease terms. Lenders are often reluctant to offer mortgages for properties with a lease term of less than 70 years, as the property’s value decreases with a shorter lease. Additionally, if the ground rent exceeds £250 per year outside London or £1,000 per year in London, it may deter lenders from offering financing. In some cases, leaseholders join forces to purchase the freehold, gaining full control over their building, eliminating ongoing lease-related expenses, and securing a more attractive investment for future buyers. This highlights the importance of reviewing lease terms thoroughly before committing to a purchase.
What Homebuyers Need to Know Before Purchasing
- Check the Lease Length: Properties with leases under 70 years can be costly to extend and may be difficult to finance, as lenders are often reluctant to offer mortgages on properties with short leases
- Understand Additional Costs: Review service charges, ground rents, and other fees before buying, especially if the ground rent exceeds £250 per year outside London or £1,000 per year in London, as this can impact future resale value and mortgage eligibility.
- Know Your Rights: Leaseholders have right to extend leases, challenge unfair charges, and in some cases, buy the freehold, which can give them greater control and reduce future costs.
- Seek Legal Advice: A conveyancing solicitor can help identify potential issues in the lease, such as escalating ground rent clauses or unfavorable terms, ensuring you are fully informed before committing.
The Future of Leasehold in the UK
The push for leasehold reform signals a shift towards fairer homeownership. As new laws come into effect, leaseholders can expect greater protections and more affordable paths to freehold ownership. However, buyers must remain vigilant, understand their rights, and seek expert advice to make informed decisions.
For now, leasehold ownership remains a complex issue, but with ongoing reforms, the balance of power may finally be shifting in favor of homeowners.