Under UK law, property can be acquired as either freehold or leasehold and there are important differences to note between the two.
Houses are usually sold freehold, although leasehold houses are becoming more common in new build developments. Flats and office space are sold leasehold, as portions of a larger building. Commercial property is typically sold leasehold, unless you purchase an entire building. Purchasers intending to use a residential property for a commercial use may need to apply for change of use. It is important to note that leases running seven years or more need to be registered by the purchaser at the Land Registry and SDLT is payable.
The terms of a freehold property are contained in a conveyance, whereas the terms of a leasehold property are set out in a lease. Provided the property is registered, these documents should be available at the Land Registry, together with title documents, in exchange for a small fee. Some property and land in the UK remains unregistered, but it must be registered upon purchase. When purchasing leasehold property, it is wise to review the conveyance and any related head lease, as these documents preside over the terms of the lease.
A purchaser pays a purchase price and stamp duty (if applicable) for the property, whether it is freehold or leasehold. Freehold properties are not usually subject to further charges, other than monthly mortgage repayments. Conversely, the purchaser of a leasehold property can expect to pay a regular service charge for maintenance works and even a nominal rent called ground rent or peppercorn rent. These fees apply for the duration of the lease, unless stated otherwise in the lease.
Rights & Obligations
Freehold property is purchased with a right to outright ownership. Leasehold property is purchased with a right to possession, the duration of which is agreed between the landlord and tenant. Maintenance of a freehold property is the freeholder’s responsibility, whereas a leaseholder pays a service charge to cover routine maintenance arranged by the landlord. The landlord may conduct the maintenance directly or through a management company.
If the leaseholder wishes to make material changes to the property (i.e. structural changes, change of use etc.), the landlord’s consent is normally required which can be expensive and time consuming. Subject to restrictions in the conveyance, building regulations and planning permission, freeholders can decide to make changes to their property as they please.
It is important to understand that the leaseholder does not technically own the property, but rather enjoys a right to use the property as a tenant. There are some limited circumstances in which the freeholder or landlord can repossess the property. If the tenant is found to be in breach of the lease, the landlord may be able to enforce certain rights and repossess the property before the lease has run its term.
Lease-Holding & Renting
This being said, a leaseholder has more freedom to use and dispose of their property than a rental tenant. A leasehold property is considered an asset and the leaseholder can usually sell the lease without restriction and borrow money against the value of the lease; however, the landlord’s consent may sometimes be required.
Commercial Freehold Restrictions
Owners of freehold property still need to be aware of restrictions over their property. These can usually be found on the conveyance document and registered title (if the property is registered). Restrictions to be aware of in a freehold property are covenants, easements and charges, which may restrict commercial use.
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