Buying a property is often described as buying a home. Legally, however, what you are buying may be slightly more complicated.

In England and Wales, most residential properties are owned either freehold or leasehold. The distinction affects how long you own the property, what responsibilities you take on, what charges you may have to pay and how much control you have over your home.

There is also a third form of ownership known as commonhold. Under commonhold, individual properties within a shared building can be owned outright, while the owners collectively manage the communal areas. It remains relatively uncommon and is not considered in detail in this article.

For most buyers, the immediate question is therefore whether the property is freehold or leasehold.

What is freehold?

When you buy a freehold property, you usually own both the building and the land on which it stands for an unlimited period.

There is no lease waiting to expire and no separate landlord above you in the ownership structure. Subject to any mortgage, the property is yours until you sell it, transfer it or leave it to someone else.

Freehold is most commonly associated with houses.

As the freeholder, you will usually be responsible for:

• maintaining and repairing the property;
• insuring the building;
• looking after the garden, boundaries and any private drains;
• complying with planning and building regulations.

You will normally have greater freedom to alter the property, although “greater freedom” should not be mistaken for “do whatever you like before the neighbours notice”. Planning rules, building regulations, restrictive covenants and rights benefiting neighbouring properties may still apply.

Estate rentcharges on freehold properties

Some freehold properties, particularly those on newer developments, are subject to an estate rentcharge or estate-management charge. This is usually paid towards the upkeep of shared areas and facilities that have not been adopted by the local authority, such as private roads, landscaped spaces, drainage systems, play areas or communal lighting.

Despite the name, an estate rentcharge does not mean that the homeowner is renting the property. The home remains freehold, but the owner is legally required to contribute towards specified estate costs. The amount may vary, and the obligation will usually be recorded in the title documents. Buyers should check what the charge covers, how it can increase and who controls the management arrangements. Freehold may mean owning the property indefinitely; it does not necessarily mean escaping annual invoices indefinitely.

Freehold therefore does not always mean free from charges. It seems the English legal system dislikes making something even as simple as property ownership a straightforward matter.

What is leasehold?

When you buy a leasehold property, you buy the right to occupy and use it for a fixed number of years.

The terms of that ownership are set out within the lease.

The lease is granted for a term of years, most typically the terms are either 99, 125, 250 or even 999 years, but they could be any number. Whatever the starting point, the remaining term reduces over time.

Leasehold ownership is most commonly, but not exclusively, associated with flats. This is largely because flats form part of a shared building. Someone must be responsible for the roof, foundations, hallways, lifts, insurance and communal areas. The leasehold structure provides a way of dividing those responsibilities and costs between the different owners.

The person or company that owns the building’s freehold is usually called the freeholder, landlord or sometimes lessor. The building may be managed by the freeholder, a managing agent or a management company involving the leaseholders themselves.

Do leaseholders own their property?

A leaseholder owns a legal interest in the property. That interest can usually be sold, mortgaged and inherited.

However, the ownership is not unlimited. It lasts only for the remaining term of the lease and is subject to the conditions contained within it.

A leasehold flat is therefore not the same as a rented flat under a normal tenancy agreement. Nor is it the same as owning the property outright forever. It sits somewhere between those ideas.

Why does the lease matter?

The lease is the main document controlling the relationship between the leaseholder and the freeholder.

It should explain:

• what parts of the property are included;
• who is responsible for repairs;
• how the building is insured;
• how service charges are calculated;
• whether alterations require permission;
• whether there are restrictions on pets, subletting or business use;
• whether any ground rent is payable.

Buyers should not assume that all leases are broadly the same. Two flats in similar buildings can have very different legal and financial arrangements.

The word “leasehold” tells you the type of ownership. The lease tells you what that ownership actually involves.

Service charges

Leaseholders will usually pay a service charge towards the cost of maintaining and managing the building.

This may include:

• building insurance;
• roof and structural repairs;
• cleaning and lighting communal areas;
• maintaining gardens, lifts and entry systems;
• management and professional fees.

The amount may vary from year to year. A building needing major repairs can produce a substantial bill, occasionally with the timing and charm of a tax demand.

Some developments also collect money into a reserve or sinking fund to help pay for future works. This can reduce the risk of large unexpected payments, although only if enough money has actually been collected.

Before buying a leasehold property, it is sensible to examine previous service-charge accounts, current budgets and any planned major works.

Ground rent

Ground rent is different from a service charge.

Service charges pay towards the running and maintenance of the building. Ground rent is a payment required under the lease simply because the property is leasehold.

Most new long residential leases granted since June 2022 cannot charge more than a nominal ground rent (referred to as a peppercorn rent). Older leases may still contain ground-rent obligations, including provisions allowing the amount to increase.

The length of the lease

The remaining lease term is one of the most important considerations when buying a leasehold property.

As the lease becomes shorter:

• the property may become less attractive to buyers;
• mortgage options may reduce;
• the cost of extending the lease may increase;
• the property’s value may be affected.

A lease with several hundred years remaining is unlikely to create the same practical concerns as one approaching a much shorter term. It remains leasehold, but the expiry date may be so distant that it is more of a legal technicality than an immediate problem.

Shorter leases require greater caution, particularly if the term starts to fall to 80 years or less.

There is legislation which allows you to extend you lease or in some cases to purchase the freehold of your property, subject to certain criteria.

Buyers should obtain specialist advice before committing to the purchase.

Restrictions on leasehold property

Leaseholders may need the freeholder’s consent before carrying out certain alterations.

A lease may also regulate matters such as:

• replacing windows;
• removing walls;
• installing hard flooring;
• keeping pets;
• letting the property;
• using it for business purposes.

These restrictions exist partly because one owner’s choices can affect everyone else in the building. A new wooden floor may look splendid to the owner and sound like a stampede to the flat below.

The restrictions should be checked before purchase, particularly where the buyer already plans to alter or let the property.

What does “share of freehold” mean?

Some flats are advertised as having a share of freehold.

This normally means that the owner has:

• a leasehold interest in the flat; and
• a share in the ownership or control of the building’s freehold.

The flat itself usually remains leasehold, and the lease continues to govern repairs, insurance and service charges.

Owning a share of the freehold can give flat owners more control over management and lease extensions. It does not remove the need to manage the building properly or pay for communal repairs.

A badly managed building does not become well managed merely because the people arguing over it also own the freehold.

Is freehold always better?

For a conventional house, freehold is usually simpler. There is no lease term to monitor, no ground rent and generally no separate landlord.

That does not mean every freehold property is automatically preferable. Restrictive covenants, shared access rights, private estate charges or repair liabilities may still affect it.

Leasehold is more complicated, but it can work perfectly well where:

• the lease is long and clearly drafted;
• the building is properly maintained;
• service charges are reasonable and transparent;
• adequate reserves are held;
• the management is competent.

The difficulty is not simply that a property is leasehold. The difficulty arises where the lease, finances or management arrangements are poor.

What should buyers check?

A buyer considering a freehold property should understand:

• the exact boundaries of the property;
• any restrictive covenants;
• shared access or repair obligations;
• any estate-management charges.

A buyer considering a leasehold property should also check:

• the remaining lease term;
• the ground rent;
• recent and expected service charges;
• planned major works;
• reserve funds;
• restrictions contained in the lease;
• the identity and reputation of the managing parties.

The legal documents should be reviewed by a conveyancer, while the physical condition of the property should be considered by a surveyor. One checks what you are legally buying. The other checks whether it is quietly falling apart.

Final Thoughts

Freehold ownership usually means owning the property and land indefinitely, with direct responsibility for their maintenance.

Leasehold ownership means owning the right to use the property for a fixed term under the conditions of a lease, usually with shared costs and responsibilities for the wider building.

Neither label tells the whole story.

The better question is not simply whether a property is freehold or leasehold. It is whether the ownership structure, legal obligations, management arrangements and likely costs are acceptable to the buyer.

It may be less exciting than choosing the kitchen, but kitchens rarely contain clauses requiring permission to replace them.

This article is for general information and discussion only. It does not constitute legal, financial, tax or professional advice. Any views expressed are general commentary and should not be treated as the settled or formal views or policies of the company. Readers should seek appropriate professional advice for their own circumstances.