When you decide to invest in real estate, you start looking for the right property or land to invest in. Imagine that you get the perfect property with a big deck and patio, fittings to your liking, and a location to die for, only to find out that the property is on leasehold.
Understanding the difference between leasehold and freehold properties is key when buying or selling property. It is essential to weigh the pros and cons of each type of ownership and consider the long-term implications of the decision.
1. What is a Freehold Property?
Possessing a freehold (free from hold) property implies that you have outright authority over the property indefinitely.
The owner (the absolute freeholder) can make any amendments to the building and has the authority over the share of land where the property has been built. He has to maintain the building himself and can put it to legal use or sell/transfer/mortgage/rent it if he wishes. He has complete possession of the building in terms of renovating, modifying, or so. He requires no one’s allowance to do so from the state.
Even though there are local regulations the owners of such properties must adhere to, they pay nothing once they become the property’s freeholder, whether it be a fee for rentals or servicing.
2. What is a Leasehold Property?
In a leasehold property, the leaseholder only owns the property for the duration of the lease, which can range from a few years to several decades. During this time, the leaseholder is responsible for maintaining the property, paying ground rent, and potentially other fees to the freeholder. Once the lease expires, ownership of the property reverts back to the freeholder.
A lessee has no rights to the land on which the property is constructed. He only has rights over the use of the property for a limited time as per the legal lease agreement. Furthermore, a leasehold property requires one to pay for the servicing charges, amendments, and maintenance. It all is listed in the clause section of the contract.
The lease period can range from 30 years to 999 years. A lessee is bound to use the property per the legal agreement made between him and the lessor, and he could pay for anything ranging from ground rent to other services, etc.
If you want to purchase a leasehold property, look for properties leased for over 90 years. Properties that have been on lease for less can cause later problems in property valuation. In addition, getting a mortgage on properties that have not been on lease for 30 years is challenging.
3. Freehold Vs. Leasehold Property
Both freehold and leasehold properties possess many aspects to distinguish between them. Some important ones involve the below-listed elements, which, when read thoroughly, will provide a logical explanation and a clear choice between the two. Over and above, the aspects that better suit your location, investment amount, and purpose/needs will help you choose the right one.
3.1 Ownership Rights
Being aware of your rights as an owner of the property ensures that you aren’t inviting any finance-related risk. When it comes to ownership rights, there are two aspects you need to consider:
- How much control do I have over the property?
- Who owns the land on which the property is standing?
A. Freehold Property
In the case of a freehold property, the buyer has full rights to the property and the portion of land on which it is constructed. The owner can do whatever he wants with the property until it is something illegal.
So, he can put it on sale, renovate it, build it from scratch, or gift it to someone, and do whatever his heart desires. He will never have to take anyone’s permission and will not face any restrictions to bring about any modification to the property. Consequently, he can remain the sole owner of it forever as long as he pays off whatever mortgage is associated.
This also means that the buyer is responsible.
Moreover, his ownership rights to the freehold property aren’t bound to any specific time limit. With sole ownership of the property comes the responsibility of maintaining and looking after it. It could be any part of the property, like flooring, walls, or so. The maintenance and every other factoring charge or servicing costs will be looked after by the buyer/new owner once the property is possessed.
B. Leasehold Property
In the case of a leasehold property, the one who purchases the property on lease from a lessor (signing an agreement) owns (has a right to use it) it, but not forever. Else, the actual owner remains the same. It’s granted to the lessee for a fixed/decided period per the agreement he signs with the lessor.
Moreover, his ownership rights do not involve the share of the land on which the property is standing. The land remains solely with the owner. Over and above, the new owner cannot amend the property without asking. This way, he buys the property for a definite ownership length, which is limited and has an end date. Once the lease period ends, the ownership rights to the property are granted back to the lessor.
The ownership rights with the lessee stay until the ground rent or lease is paid as per the paperwork. The rights, however, can be extended. Yes, the lease period can be elongated with the required remuneration paid for the same.
In places like Scottsdale (Arizona), leaseholds are referred to as a leased property type. You can construct a building/house on the leased land, and even when the lease ends, the house/building belongs to you. Such agreements also come with a pre-decided ending date (which could be 99 years); they are different from a typical lease situation and can be booked for longer.
As you do not buy the land in case of a leasehold property, it is cheaper than freehold properties. The only downside is that you must renew your lease on time if you want to sell or buy leasehold properties.
Tenure is a decided period for which you occupy a property.
A. Freehold Property
There is no tenure on a Freehold Property; once you buy a freehold property, you own the place forever (or as mentioned by town planning authorities).
B. Leasehold Property
There is tenure on a leasehold property. This period is based on the agreement clause and can be 30 years, 60 years, 99 years, or even 999.
In most scenarios, buyers lease the property for 30 to 99 years. The lease tenure can be elongated if the tenant wants to stay in the property or use it for longer. You can pay for the same to elongate the lease or ask the lessor directly to extend the lease period.
|Note: A tenant can opt for the lease extension only if the original lease expiration date is yet to arrive. All in all, by extending the lease period, you are increasing the overall property value. Consequently, capital from a bank becomes more manageable when a property’s valuation is higher.|
When purchasing a leasehold property, double-check the period left on the lease. Opt for legal guidance before leaping into such decisions.
To avoid disagreements and debates later on, you must know about the approvals you will require during property amends or major construction-related works.
A. Freehold Property
In the case of a freehold property, the owner doesn’t necessarily require anyone’s approval to make amendments to the property. The owner has complete ownership over the property and the land. So, they can do whatever they please, and no one will ever question them, even if they are constructing something new on the same land. As a property owner, you can do things without asking for permission, like getting a pet, inviting people, or even throwing a party.
|Note: If the property you own is quite old and requires a change in structural components, you may have to ask the respective authorities.|
B. Leasehold Property
In the case of a leasehold property, the tenant does not permanently buy or own the property. So if he wishes to change something or build anything, he cannot do it without the lessor’s consent, which can be either the local authority or the government.
The authority has the right to may or may not approve any requests made by the tenant. Additionally, the tenant must agree to whatever terms the owner sets or discusses with him. So, if you feel like having a pet at home or inviting people over to the party, you might need to check the rulebook or ask for permission from the landlord.
3.4 Transfer Rights
A. Freehold Property
Transferring a freehold property is hassle-free and unrestrictive as the transfer rights of such properties belong to the property owner until he sells it and transfers it to someone else. Moreover, the paperwork involved in this case is way less as no consent is required. In addition, if you own a freehold property, you also have the right to create a will to transfer the property after you die.
B. Leasehold property
In a typical scenario, a leasehold property owner or lessee has no transfer rights on the property. They have no rights to sell it to a third party unless they have the consent and signature of the property holder. However, in some situations, the lessee can have the transfer rights for a fixed time with consent from the owner.
Transferring a leasehold property is no easy fleet. It is very complex and challenging because of the involvement of attorney power.
3.5 Purpose of investment
A. Freehold Property
These properties are excellent from an investment point of view as they get counted as a fixed assets.
Also, freehold properties are good investment options because of their security and capital growth. Over and above, a freehold property can be used in several ways to earn profit. You can use commercial purposes or sell it at a higher price when the price of the property increases.
B. Leasehold Property
Leasehold properties are problematic- you have to abide by a contract, and you cannot make any changes to the property without the willingness and consent of the property owner. Most leasehold properties are suitable for residential purposes. However, they are not a profitable investment in the long run.
3.6 Cost Involved
A. Freehold Properties
When you purchase a freehold property, you get ownership of the land and the house built on it. Now, if you buy an apartment, the owner can be the shareholder of the property; however, you can stay in it for uncountable years. Also, you are allowed to make alterations & do renovations just after getting permission from the higher authorities. In this case, you are responsible for paying every charge based on property changes. Moreover, you need permission from the local council.
You can buy a freehold of the property if you are a leaseholder. For example, you can purchase a share of the freehold if you live in a flat. However, you can buy the complete freehold if the property is a house. Now, the process can be lengthy & expensive, and that’s why you need legal support. The charges of buying freehold properties vary based on multiple factors.
Factors and charges involved
You have to pay other additional charges, including the stamp duty, valuation cost, land registry fee, etc. Purchasing a freehold property is complex, especially if multiple tenants are involved. Therefore, consulting with independent legal & financial advice is suggested to safeguard from any expensive mistakes. Buying a freehold property is preferred over a leasehold property because it gives stability. The freehold properties can increase their value in the longer term. Investing in freehold properties gives better clarity on the future. Another reason people prefer to buy freehold property is to get exclusive property ownership rights.
B. Leasehold Properties & the Costs Involved
When you purchase a leasehold property, you have the complete right to live there for a significant period. In this property, the buyer is not the owner of the property & the land. In the case of leasehold property, you have to pay only the land charge/rent to the leaseholder. Once the significant period is over or expired, the property’s ownership can be returned to the owner.
Most of the leases are given for 99 years. Before investing in properties like this, you must evaluate the lease period. The lease can be extended up to 999 years by paying the price. When you own a leasehold property, you don’t have much freedom for renovation. You need to get permission from the freeholder to make any significant changes. Apart from that, there might be some limitations by the specific freeholders that you should follow.
The benefits of living in a property like this are you need to pay for the annual cost only. The leasehold is mainly reserved for apartments and flats, but this situation is not for every time. Can you elongate a lease? If you want to extend a lease, you can apply this with your landlord.
If you are qualified, you may be able to extend the lease on the flat for up to 50 years or 90 years. The cost of extending a lease varies as per the 2 parts. The premium price is termed the agreed price for extending the lease. The fee & taxes include the cost of hiring professionals & taxes.
Using the leasehold advisory service, you can correctly estimate how much it will cost to extend the lease. Over and above, freehold properties are highly expensive, whereas a leasehold property is not. Now, this makes a freehold property a little unfavorable over a leasehold one.
Service Charges On Leasehold Properties
As a leaseholder, your landlord is responsible for maintaining the building’s structure and communal areas. However, you may have to pay service charges for these expenses. Service charges can become costly, so budgeting your income is essential. The service charge covers the maintenance of communal areas, ground rent, insurance, and other costs. Before making any changes to the property, you should inform the landlord and get their permission.
In summary, as a leaseholder, you own the property but not the land and may have to contribute towards maintaining the building’s communal areas through service charges. The landlord is responsible for the building’s maintenance, but changes to the property might need their permission.
A. Banking Finance for a Freehold Property
In the case of freehold properties, getting finance from banks is much easier. Banking finance for freehold property refers to the financial services banks/financial institutions offer to individuals and businesses that own freehold property.
This includes mortgage loans, refinancing options, and other financial products. These are designed to help individuals and businesses manage their financial obligations. In this section, we will explore the different cost services involved in banking finance for freehold property and why they are important for property owners.
Banking finance service charges for Freehold are fees imposed by banks/financial institutions. It’s for the provision of financial services to Freehold property owners. These charges are usually assessed based on the type of services rendered, such as loans, mortgages, and other financial products.
- Mortgage Loan: This loan is secured by the freehold property and used to purchase the property or refinance an existing mortgage. The interest rate on the mortgage loan will vary based on the lender and the borrower’s creditworthiness.
- Refinancing Options: This is when an individual or business refinances their existing mortgage to take advantage of lower interest rates or to change the terms of their loan. This can be an effective way to save money on interest payments over the life of the loan.
- Financial Products: Besides mortgage loans and refinancing options, banks/financial institutions also offer a variety of other financial products. They are designed to help individuals and businesses manage their finances. These products may include lines of credit, personal loans, and credit cards.
Are Cost Services of any importance?
The cost services banks/financial institutions offer for freehold property are essential. This is because they provide individuals and businesses with the financial support they need to purchase and maintain their properties. With access to these financial products, property owners can take advantage of lower interest rates and better terms, which can help them to save money over the life of the loan. Additionally, these cost services provide property owners with the flexibility they need. It’s required to manage their finances, making it easier for them to meet their financial obligations.
B. Banking Finance for a Leasehold Property
In the case of leasehold properties, getting finance from banks is challenging and involves many things to be kept in check. The foremost comes the lease period. It should not be less than 30 years if you have to opt for banking finance. Leasehold properties often require special financing from banks and other financial institutions.
These financial services come with specific fees and charges that must be paid by the property owner. These charges can include processing, appraisal, and loan origination fees. Leasehold property owners need to understand these charges and budget accordingly.
To avoid surprises and overspending, it’s best to review the terms and conditions of the financing agreement before signing. Banking finance costs and service charges are crucial aspects of leasing and renting a property. Also, banking finance and service charges are the fees charged by landlords. These cover the costs of maintaining and repairing the property.
These costs can include electricity, water, heating, and other utilities, as well as the maintenance and upkeep of the building and its grounds. Also, they are the costs associated with the maintenance and upkeep of the property, which is shared by the tenants or leaseholders. These charges are often misunderstood and can lead to confusion and disputes between the landlords and the tenants.
Avoiding Overpayment of Banking Finance Costs and Service Charges
To avoid overpaying banking finance costs and service charges, leaseholders should ensure that they understand the terms and conditions of their lease agreement. They should also check the charges regularly and compare them with similar properties. Moreover, if the charges seem too high, the leaseholders should talk to the landlords and ask for a breakdown of the costs.
3.8 Responsibilities for the Problem
A. Freehold Property
Being a freehold property holder, you have to take care of the following things:
- Keep a check on Building Structure: Generally, building structures belong to the freehold property owners. Thus, it is their responsibility to maintain the entire building structure. If it’s a building with an N number of flats, it needs to be wholly maintained and not the individual flats.
- Responsibility for Maintenance and cleanliness of shared spaces: Shared spaces, such as parks, stairways, building gates, etc., are used by all the residents of the building. Hence, the responsibility for all such structures belongs to the freehold property holder.
- Expenditure of Service charges and Ground rent: Freehold owners have the right and responsibility to use the collected rent for maintenance and construction. It’s required to fulfill the needs of the residents.
- Insurance of Building: Since the building belongs to the freehold property owners, it is their responsibility to get their building Insurance done as well.
B. Leasehold Property
If you are a leasehold property holder, keep an eye on the given list of responsibilities:
- Individual Flat Maintenance: The building as a whole belongs to the freehold party, but the individual flats within the building belong to the lease-holding party. Consequently, all the maintenance required within the flat such as painting, plumbing, ceiling, etc., belongs to the leasehold owners.
- Payment of Service charges: Leasehold party has the right to ask the freehold party for the details of the service charge. Also, if it is just for their profit, the leasehold parties can deny them and inform the respective department.
- Insurance of Building: Building insurance is the responsibility of freehold parties. However, if both parties agree in the contract that insurance of the building will be the responsibility of the leaseholder party. Now, they will have to abide by the contract.
A. Advantages of Buying Freehold Properties
1. Be the owner of both land/houses. When you invest in a freehold property, you are the owner of the land & house. In the case of apartments, a house owner can become a shareholder. So, an individual can live on the premises of a freehold as long as he/she wants. You can also hold the rights at the renovation time after getting permission from the authorities.
2. Get complete ownership. Individuals who desire to purchase properties often need clarification with the terms like Leasehold & Freehold. The significant difference between the properties is the ownership & control over land. When you invest in freehold property, you can completely own the land & property.
3. Freedom as an owner: When you own the freehold property, you can use it as your comfort. You can have your pets here or make any changes to this. But before that, you must comply with the guidelines of corporate bodies, residential associations, and the local council.
4. Zero Extra Cost
As the owner of a freehold property, you won’t have to pay the services charges, admin fee, and ground rent cost to the landlord. A freehold property will be a good fit for you if you want to own a property and the land it relies on! It means once you buy the property, it solely belongs to you. Freehold properties are more common in the US.
5. Zero leases: You don’t need to keep track of the condition of the lease, like when the lease runs out. You don’t need to worry about when you must pay to extend the period!
6. Capital gains: Regarding land value, some locations might increase over time. A freehold property owner can get the benefits. This is why people choose freehold over leasehold properties.
B. Advantages of Buying Leasehold Properties
1. You can live for a specific period.
When an individual is interested in buying a leasehold property, you receive all the rights to live on this for a specific period. In this case, the buyer is not the land owner or house owner. In this ownership, you have to pay the cost of ground rent to the owner or the leaseholder. Once you have completed the specific period of the lease, the owner will be reverted to the actual owner. Most leases are given approximately for 99 years (as discussed in the tenure section too). Now, this period of 99 years is good enough, considering the lease expiration is far.
2. Cheaper Properties
Do you have a tight budget? Are you seeking a property where you can invest a small amount? Leasehold properties are the best option for this. The leasehold properties tend to be cheaper than the freehold properties. It happens due to the risks involved in it.
3. Less Responsibility
Most people are there who love to invest in these types of properties because of the significant advantages. The freeholder owner of the property manages the building maintenance and the repairing of communal areas & building insurance.
4. Enjoy the Ownership for a Long Time
By purchasing the leasehold property, an individual can enjoy ownership for a long-lasting period. Else, the time of lease depends upon the terms & conditions.
5. Get a Chance to Extend the Period
Once you have completed the lease period, you have to return the property to the freeholder, or you can extend the period. As per this ownership, even if you own the property, you don’t have any right to share the ownership of the land on which it is built!
6. Get Benefits Over Freehold Property
There are several reasons why choosing a leasehold property is beneficial over freehold properties. The leasehold properties are mostly cheaper in comparison with freehold properties. These are mostly smaller than the freehold properties.
7. No Need to Pay the Additional Cost
Per the contract’s rules, the freeholder is responsible for any structural issues. Ultimately you don’t have to pay any additional cost. Simultaneously, you don’t have to pay to repair communal areas. The freeholder will also handle this and manage the insurance of the building. This is why you must understand the difference between leasehold and freehold property when looking for property.
8. Safeguarding Your Investment
As an owner of the leaseholder property, you have certain rights on the property. Before you invest in this, you should have ideas on the rights because it helps to protect your investment. Further, you should have an idea regarding the service charges from the landlord. You can ask the owner regarding the estimation method of the service cost. In addition, an individual should request the landlord for an invoice for the repair of that building.
A. Disadvantages of buying Freehold properties
1. Expensive Charges
The freehold properties mostly charge more during the purchase. This is because you are buying the land and the property. So, if you have a tight budget, it might annoy you.
2. Property Type
The flats are not coming under the freehold properties. The freehold properties are primarily houses, so if you are looking for a flat, it might minimize your option. Another property comes under freehold property, which is known as flying freehold. Flying freehold property is a property that is built over the land, but this isn’t a part of it.
3. Cost for Maintenance
You are responsible for the upkeep of the entire property & for charging building insurance.
4. A Lengthy Task
If you are a leaseholder, you can look to buy the property. If the property is flat, you can buy a share of it, but you can get complete freehold ownership if this is a house. The whole process can be lengthy & if you don’t understand the logic, get expert legal advice.
5. The Factors of Varying Cost
The cost you must pay for the freehold property varies for multiple reasons. The shorter you lease, the higher charges you have to pay for the property. Apart from the sales price, you have to cover some other charges, including realtor fee, stamp duty, legal fee, land registry fee, valuation fee & freeholder valuation, and legal cost.
6. Chances of Overspending
Buying a freehold property can take time, especially if multiple tenants are involved. So, before you purchase the freehold property, you need legal & financial advice. Otherwise, you may make expensive mistakes.
B. Disadvantages of buying Leasehold properties
1. Limited Ownership
The leaseholders mainly rent from the freeholder. He has no exclusive ownership over any property or the land that relies on this.
2. Rent & Cost
On top of the mortgage, the leaseholder has to pay the cost of the service charge and ground rent, which can be increased. The house can be repossessed if you cannot keep on these payments.
3. No Pets Allowed
Some leaseholder property owners don’t allow pets.
4. Can’t Access Any Business
You might not be allowed to run a business from home on this property.
5. Conveyancing Cost
This cost might be more expensive for leasehold properties.
6. Selling is Complex
It’s tough to sell a leasehold property on a shorter lease. It means you cannot grab the benefits of profit from price growth.
As an owner of the leasehold property, you need to write permission from the freeholder in case of any changes. In some cases, you might need to pay the additional cost.
8. Spend some time researching
Before you invest, check the period left on the lease. Check the length of the lease and evaluate whether it impacts the chances of receiving a mortgage. You should have an effective budgeting method per the service cost and additional charges. Moreover, it is advised to work out the length of the lease period; otherwise, it can affect the resale cost of the property.
4. Key differences between Freehold and leasehold property
|S. No||Particulars||Freehold Property||Leasehold Property|
|1.||Ownership Rights||When the ownership of the entire space within a bounded parameter belongs to land owners, it is called freehold Property.||The Leasehold property is rented. You hold the right to use land and have no authority on the land.|
|2.||Tenure||Once bought it remains with the land owners for eternity.||Lease tenure can be as per the landowner’s wish, with a maximum limit of 999 years.|
|3.||Approvals||Landowners of freehold Property need no approval to make any changes to the property.||Leasehold property holders must abide by the contract and take consent from the lessor to make any changes.|
|4.||Transfer rights||The rights to transfer a freehold property are with the property holder.||To acquire leasehold property, one has to take consent from the landowners and the state.|
|5.||Purpose of investment||The motive behind investing in freehold property can be constructing something, leasing, or selling to gain profit.||Leasehold Property is taken with the motive to use the land to do some business to gain profit. But it can’t be sold.|
|6.||Cost involved||Freehold properties are not easy to grab because they are very expensive.||Leasehold Property is cheaper when compared to freehold Property.|
|7.||Banking-finance||When you have a hold on freehold property, the banks will be more than happy to finance your project.||Leasehold Property doesn’t do good with bank financing. Usually, no bank finances leasehold properties.|
|8.||Responsibilities for the problem||The responsibility for any problem lies with the property holder.||If any problem occurs on the property, the leaseholder and the property holder are both responsible.|
|9.||Occupation||Freehold properties can be used for commercial, agricultural, and domestic purposes like constructing houses.||Leasehold Properties generally are leased to do business, agriculture, or for a temporary stay.|