What’s the difference between leasehold and freehold?
If you’re looking to buy a property, you’re likely to come across the terms ‘freehold’ and ‘leasehold’ used in their descriptions. More often than not it’s assumed you know what these mean, but that’s not always the case (especially if you’re a first-time buyer). Here, we explore exactly what these terms mean and how it affects your property ownership.
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- What is a freehold?
- What is a leasehold?
- Can leaseholders extend the lease?
- Can leaseholders buy the freehold?
- What does leasehold mean for insurance?
- What are my responsibilities as a landlord if I rent out a leasehold property?
- What landlord insurance do I need to rent out a leasehold property?
- Leasehold buildings insurance quote
What is a freehold?
If you buy a freehold property, you become the ‘freeholder’ and will own the property, as well as the land it sits on. However, if you have a mortgage on a freehold property your lender will own part of your home until you have paid off the mortgage in full.
In theory, you’ll also ‘own’ some of the airspace above your property which extends to around 500 feet. In reality, this means you have the right to enjoy that space without interference (for example, from people flying drones) but this can be open to interpretation.
If you’re a freeholder you’re able to live in your property in any way you please (not forgetting any covenants you have to follow or planning permissions you might need).
What is a leasehold?
A leasehold is when you own the property, but you don’t own the land it’s built on. Instead, the land is owned by the freeholder – this could be an individual or a building firm. Typical examples of leasehold properties are flats or maisonettes.
If you own a leasehold property, your home is only leased to you for a set period of time. This can vary from 99 years to 999 years. The longer the lease, the better resale value the property has.
You’ll also usually have to pay ground rent and maintenance fees for a leasehold property. The costs vary considerably and are often at the discretion of the freeholder. The funds raised should be used to maintain communal grounds and areas – for example, courtyards, green space, stairwells, hallways and lifts.
Unlike freeholders, if you’re a leaseholder there could be restrictions associated with the property. For example, you might not be allowed pets (or the number could be limited). Also, you may not be able to make alterations without the freeholder’s consent.
Another important limitation is that you might not be able to rent out your leasehold property. If you can, it could be subject to certain rules, including:
What parts you can and can’t let
Some contracts stipulate that you must rent the property as a whole. This means you won’t be able to rent out a garage or barn separately as this would be considered a breach of your lease agreement.
Residential use only
If you’re allowed to rent out the property, it’ll usually only be for residential purposes. If you leased the property to someone who then ran a business from there, this would also be considered a breach of your contract. Renting out the property as a holiday let could also be breaking your agreement.
Use by a single family
Some leases specify tenants must be a single family and use the property as their main residence. This could rule out renting rooms to individuals or as a HMO.
Can leaseholders extend the lease?
Yes, if you’re the leaseholder and you’ve lived in the property for two or more years you have the right to request an extension to your lease. If you’re purchasing a property that has a short lease, it would be wise to request that the seller extend the lease as part of the purchase agreement.
Properties with less than 80 years are considerably less attractive to buyers as many mortgage companies will not provide a loan on a property with a short lease. So, extending the leasehold can help maintain (and increase) the value of your property. If you decide to do this, it’s best done with the help of a professional as they’ll be able to guide you through the process.
The cost to extend the lease will really depend on the property, its value and the number of years that are left. Generally speaking, the fewer years left on the lease, the more you can expect to pay to extend it. This is why leaseholders are advised to consider lease extensions early on – ideally when there are at least 80 years left.
If you decide to extend the lease, you’ll also need to factor in legal fees and the cost to update Land Registry records into your calculations.
Can leaseholders buy the freehold?
As a leaseholder, you’re also entitled to buy the freehold if you’ve lived in the property for two or more years. Again, if this is something you’d like to do it’s important to seek professional advice as the process can be complicated. A solicitor will be able to help you weigh up your options and take you through all the costs involved.
What does leasehold mean for insurance?
If you own a leasehold property, buildings insurance is often arranged by the freeholder. This protects the structure of the building and its permanent fixtures and fittings, providing cover against damage, vandalism, subsidence, fire and flood.
However, while this is usually the case for the majority of leasehold properties, always check the terms of your own lease agreement. There may be instances where you (the leaseholder) are responsible for buildings cover.
It’s also up to you to insure your own belongings with appropriate contents insurance. This will cover the items you own, including furniture, electricals and kitchen utensils. You don’t have to purchase contents insurance, but it is strongly recommended. If you’re not covered, you’ll be responsible for paying to replace your own items if they’re damaged or stolen.
If you own a freehold property – home insurance (buildings and contents) is your responsibility. If you have a mortgage, your lender will normally insist you have buildings cover as a condition of your loan, and this would need to be in place when you exchange.
What are my responsibilities as a landlord if I rent out a leasehold property?
If you’re able to rent out your leasehold property, you’ll be obliged to carry out all the usual landlord responsibilities. This includes gas safety, fire safety and ensuring repairs are carried out when needed.
This can create a confusing situation where your responsibilities overlap with the freeholder’s. In these circumstances you’ll need to coordinate with the freeholder to ensure that any building work or maintenance is carried out when needed.
Read more: Landlord’s guide to rent to rent
What landlord insurance do I need to rent out a leasehold property?
The freeholder is typically responsible for buildings insurance. If you rent out a leasehold property, the freeholder should already have this. If they do, double check exactly what’s covered – for example, if you rent out a leasehold flat, check whether fixtures and fittings like a bathroom suite are covered.
If you find you do need buildings cover, you can arrange this as part of a landlord insurance policy which can also be tailored to include a range of other features, for example:
If you’re also supplying furniture as part of the rental agreement, it’s a good idea to arrange landlord contents insurance too. Your tenants are responsible for all their own belongings which can be covered with their own tenant contents insurance.
Get a leasehold buildings insurance quote
Leasehold buildings insurance is a type of insurance that covers the buildings of a leasehold property, such as the structure, fixtures, and fittings. It is designed to protect the landlord and the tenant from any damage or loss caused by events such as fire, flooding, and subsidence. You can talk to a staff member who can obtain a quote for you or you can fill in your details below.
Insurance to suit you.
At Alan Boswell Group, we offer property insurance to suit you. Our flexible approach takes into account different homeowner needs – whether you’re a freeholder or a leaseholder.
To find out more, take a look at our home insurance hub or check what you should consider as a landlord. Alternatively, you can contact a member of the team on 01603 649650.
Read more: What is index-linked buildings insurance?
