Leasehold vs freehold

Depending on whether you buy a freehold or a leasehold property, there may be limits on what you can do to your own home.

In this guide, we explain everything you need to know about leasehold and freehold ownership, plus the changes the government is making to the leasehold system.

What is leasehold?

If you buy a leasehold property, you'll have the right to live in the home for a set amount of years (specified on the lease), but you won't own the land it stands on. In this arrangement, you're known as a 'leaseholder'.

In England, Northern Ireland and Wales, flats are most commonly owned on a leasehold basis, while houses are normally sold as freehold properties. In Scotland, very few properties are sold as leaseholds.

With leasehold properties, the land is owned by the landlord, who is called the 'freeholder'. Once the lease runs out, ownership of the entire property will revert back to them.

Leaseholders have to get permission from the freeholder to make certain alterations to the property. They will also have to pay rent each year - known as 'ground rent' - and will often have to pay an annual fee to a managing agent.

Ready to get a mortgage?

Find the right mortgage using the fee-free service provided by L&C Mortgages

Compare mortgages

What is freehold?

When you buy a freehold property, you become the sole owner of both the building and the land it stands on.

As a freeholder, you won't need to pay ground rent, service charges or permission fees, but you will be responsible for the maintenance of the building.

What is share of freehold?

Some properties, typically flats, can be purchased with a share of freehold. This means you own the property leasehold plus a share of the freehold for the building. 

This type of ownership can give you greater control over the property and the costs of service charges but there can also be downsides, such as more admin for the management of the building (i.e. getting buildings insurance).

Video: leasehold and freehold explained

How long should a lease be when buying a flat?

Your lease is a legal document, which will tell you how long you're allowed to live in the building as well as what you need to pay towards insurance and upkeep.

When first drawn up, residential leases usually last for up to 125 years, although it's possible to have a lease for up to 999 years.

As a general rule, the longer left on your lease the better, as properties with short leases can be difficult to sell.

A lease with fewer than 80 years remaining can seriously affect both the value of your property and the amount it will cost you to extend the lease. Many mortgage providers will also refuse to lend on a property with fewer than 80 years left.

When buying a leasehold property, check how many years are currently left on the lease and how many will likely remain by the time you come to sell.

Should you extend the lease when you buy the property?

You only gain the legal right to extend your lease after living in the property for two years, so if you're buying somewhere with a short time remaining on the lease and you want to get it extended, you have two options.

The first, and safest, option is to ask the seller to extend the lease before you actually buy the property. Provided they've owned the property for at least two years, they will have the legal right to extend the lease - although it could take time.

Extending a lease when buying a flat is fairly common, so a specialist property solicitor or conveyancer should be able to deal with much of this process on your behalf.

The second option is to buy the property and then see whether the freeholder is willing to extend the lease, despite you not yet having earned the legal right to request this. This is of course a riskier option as it's dependent on the goodwill of the freeholder - if they say no, you'll need to wait two years.

You'll only be able to take this path if there's enough time remaining on the lease to meet your mortgage lender's requirements.

• Find out more: lease extension advice guide

Service charges and sinking funds

Your monthly mortgage repayments won't be the only ongoing cost you'll need to factor in if you're purchasing a leasehold property - you'll also need to pay service charges, and these can can add a significant sum to your monthly bills.

When you own a leasehold flat, you'll usually pay a service charge to your landlord or management company to maintain any common areas of the building.

This charge generally covers the cost of supplying important services to the building, or for employing a managing agent to do so on the freeholder's behalf.

While some older leases have fixed service charges that must be paid every year, most newer agreements instead include 'variable service charges', which allow the freeholder to estimate the cost for each year. This allows freeholders to raise fees to finance major one-off expenses, for example refurbishing a lift or updating a fire alarm system.

• Find out more: your rights if you live with cladding and other building safety defects 

What is ground rent and does it still exist?

In England and Wales, ground rent is traditionally a token fee paid annually to the freeholder in exchange for renting the land the property sits on. Ground rent can either be fixed or escalate over time.

Good news for leaseholders, the highly controversial charge is now banned on all new residential leases.

This means buyers will never have to pay ground rent on either a brand-new leasehold property, or an existing one where a new lease is taking effect.

The government introduced legislation to abolish the charges in June last year as part of a series of planned reforms to the leasehold system.

It said ground rents 'provide no clear service and can be set to escalate regularly, with a significant financial burden for leaseholders'.

What about ground rent for existing leaseholders?

While ground rent has been removed for new leases, existing holders are still having to fork out on fees and there continues to be concerns surrounding exploitative ground rent systems where costs can multiply over time.

In 2021, Aviva and Persimmon agreed to offer concessions to leaseholders stuck in properties with escalating ground rents, but a change in law for existing ground rent for existing leaseholders is not yet on the cards.

However, if you extend your lease, your ground rent is reduced to zero, or what is known as a 'peppercorn rent'. While you could, in theory, pay your freeholder a peppercorn, the term is generally used figuratively. In the past, the terms of a lease couldn't be enforced unless there was a set ground rent, however tiny.

Leasehold 'scandal' and the future of leasehold

In recent years various leasehold issues with leasehold and new-build homes have emerged, leading many people to talk about a leasehold scandal.

In June 2018, Which? published a comprehensive investigation into issues surrounding leasehold homes, including ground rent doubling clauses, punitive permission fees, freehold purchasing problems and issues buying and selling leasehold homes.

Our full investigation can be read here: To have or to leasehold? Inside the scandal rocking the new homes industry

The government has been investigating the leasehold sector since 2017 and has made plans to overhaul the system to make the sector fairer.

What has changed in the leasehold sector?

Ground rent has been outlawed on all new leases under the Leasehold Reform (Ground Rent) Act, which came into force in June 2022.

New-build houses can also no longer be sold as leasehold (except in exceptional circumstances).

What has the government got planned for leasehold reform?

While some progress has been made for leaseholders, there remains a long list of things the government plans to do to improve the sector, including:

• Plans for leaseholders to be able to extend their leases by 990 years. Currently, it can only be extended 90 years. 
• A new calculator will be introduced to set the price leaseholders will pay to extend their lease or buy the freehold. Discounts will be given for improvements made to the property by the leaseholder.
• A 'Commonhold Council' will be set up, which will include leasehold groups and industry representatives. The aim will be to prepare the market for the introduction of a commonhold system for flats. Under commonhold, each homeowner in a block owns the freehold of their own flat and sets up a management company to deal with communal costs.
• From April 2023, ground rents will be set to zero on new retirement properties.

We'll update this guide as further information becomes available about when these proposals will come into force.