Freehold and Leasehold are the two forms of legal ownership when buying property in the UK.
With a freehold you own the building and the land the property is built on forever. In legal jargon, you own the ‘Title absolute’
With a Leasehold there is someone else who owns the freehold and you are leasing the property from them for an agreed term. Leases are normally quite long (90-999 years) but can be as short as 1 year.
You don’t have to pay a ground rent to anyone else. You don’t have a freeholder charging you to maintain the property, or worse – failing to maintain it. However, you will have full responsibility for maintaining the building yourself.
These are typically houses built around 100 years ago and often have a 999-year lease from the date they were built. You may be required to pay a ‘peppercorn’ ground rent to the freeholder of around £5 per year. Often there is the option to buy the refurb quite cheaply, but given that you could be waiting another 15 generations into you family line before the asset returns to the freeholder, most people simply don’t bother.
These are typically apartments built in the past 50 years, with a lease term remaining ranging from 90-250 years. You will typically need to pay a ground rent to the freeholder of £100-£400 per year and a service charge of between £1000-£3000 per year which pays for the upkeep of the grounds and facilities shared by the other freeholders in the block.
These are properties with less than 90 years remaining. When the lease drops to below 90 years, the value of the leasehold will begin to reduce more quickly as the point at which ownership reverts to the freehold draws closer. It is possible to pay a solicitor to extend the lease. This can be an expensive and complicated process, but if done right can add much more to the value of the property than the cost of extending the lease. Indeed, deliberately buying short lease and extending to add value, is a specialist strategy followed by some property investors.
Should I avoid leasehold altogether?
Ultimately, everything has its price. So, I wouldn’t rule out leasehold altogether. I certainly wouldn’t rule out very long lease houses. The important thing is to do your due diligence carefully from the outset and ensure you know exactly what terms you are signing up to. Sometimes a little extra complexity in a deal can put other buyers off and allow you to make Smarter Property decisions and grab a bargain.