The moment you decide to invest in real estate, it gets crucial to know which property is the right property or land to invest in. But getting to know the ownership type is equally important. Consequently, understanding the differences between a freehold and leasehold property prepares you to invest mindfully.
Among many dissimilarities, the ownership and time period of holding the property are two main aspects of distinction between these two. In the case of leasehold properties, the ownership of the land is not granted to the lessee, however, the ownership of the property is granted (for a specific time period) on lease.
In the case of freehold properties, the land and property both are granted to the new owner. Furthermore, this guide will assist you with more details about freehold and leasehold properties. You will get a clear idea of which would be ideal for you to invest in for the long duration.
1. What is freehold?
Possessing a freehold property implies having outright authority over the property. The owner is called the absolute freeholder, and freehold comes from the words “free from hold”. Consequently, an owner can make any amendments to the building and has authority over the share of land where the property has been built.
This also suggests that he has to maintain the building himself throughout and can put it to any legal use or sell/transfer/mortgage/rent it if he wishes. However, there are local regulations he must adhere to while opting for the same.
Further, he requires paying nothing at all once he becomes the freeholder of the property. It could be a fee for rentals or servicing or so. He has complete possession of the building in terms of renovating it, modifying it, or so. He requires no one’s allowance to do so from the state.
Although freehold properties have their positive aspects, leasehold properties have theirs too. To get more understanding of leasehold properties, below is a section you need to refer to.
2. What is a Leasehold property?
When a lessee, for a specific timeline, holds the property or an asset on a lease (i.e. based on a contract) then that property is termed as a leasehold property. A leasehold property usually is a flat, a retail store, an apartment, or similar. A lessee (basically) leases the property from a lessor/owner.
All in all, 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 as well. It all is listed in the clause section of the contract.
Now, if you think about how long the lease period is, it starts from 30 years and goes up to 999 years. This is not the case with freehold properties where an owner has to face no such issues as he owns the property throughout his life (or as suggested by town authorities) if he wishes to.
In addition, when it comes to using the leased property for years, a lessee can do as per the legal agreement made between him and the lessor. Moreover, this depends on the payment type, which could be ground rent, other services, etc. However, any property leased for less than 90 years can cause issues later on. This is because, in the long run, it will negatively impact the valuation of the property.
Else, if any property is not leased for at least 30 years, it is set to cause mortgage issues later on in the case of getting bank finance, Consequently, it’s important for a lessee to make certain that the tenure period is heightened. After all, the property which is leased is given back to its owner to the lessor when the period of the lease (decided as per the agreement or so) ends.
Additionally, for leasing commercial properties, a lessee may find the contract a bit complicated with slightly different clauses as compared to residential ones.
3. Freehold Vs Leasehold Property
Both freehold and leasehold properties possess many aspects to distinguish between them. Some important ones of these 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 finance-related risks. When it comes to ownership rights, freehold, and leasehold properties differ in 2 terms. The first is the controls the buyer has over the property and the second is the land ownership on which the property is standing.
Here’s a complete overview of ownership rights for both for better understanding:
A. Freehold property
In the case of freehold properties, the one who purchases the property is free to hold i.e. own it inclusive of the portion of land on which the building is constructed. He can do whatever he wants with the property till the time he is doing something legal. This way he has bought the land and the house for an ownership length, which is indefinite.
Additionally, he can put it on sale or renovate it, build it from scratch or gift it to someone, and so on. He will never need 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.
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 keeping it maintained and looked after. 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 as 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 solely remains with the owner. Over and above, his ownership rights do not involve making amendments to the property without asking and hence, involve restrictions.
This way he has bought the property for an ownership length, which is limited and has an end date. Once the lease period comes to an end, 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. Now, this point has been discussed in detail in the tenure section, which is right next.
Now, when we talk of places like Scottsdale (Arizona), one thing is very common. Here, leaseholds are referred to as a leased property type. Now, you can construct a building/house (hitched to the land), when investing in a leasehold, and even if the lease ends, it will belong to you.
Also, this type of agreement comes with a decided ending date (which could be 99 years). It tends to be different i.e. from a standard lease agreement and they even prevail for more duration. However, the land is not really bought by you and this is what makes it cheaper as compared to freehold ones.
Furthermore, you can opt for the selling and buying of the leasehold (knowing the land doesn’t belong to you). Thereupon, on the expiration of a lease, you must get it renewed.
Tenure, which means a decided time span for which you are holding a property, is different for both freehold and leasehold properties. Here are needful tenure aspects to keep in check:
- Freehold property
In the matter of the freehold property (including land), after buying it, it has no time span limit to be owned (or as per mentioned by authorities of town planning). Usually, the right to hold it is everlasting. Moreover, the one who bought is no longer subject to any questions to be asked later on.
- Leasehold property
In the matter of a leasehold property, which doesn’t include the land it’s constructed upon, there is a fixed time span. Now, how much time span is involved to hold property on lease depends on the agreement clauses both lessee and lessor have agreed upon.
Now, the duration of a property lease can be 30 years, 60 years, 99 years, or even 999 years. This time span gets decided once the agreement is signed between the lessee and the property owner. In most scenarios, a lease of about 30 to 99 years is finalized. However, a lease of at least 99 years is preferred over lesser ones as already discussed above.
Now, when investing in leasehold properties, one thing that has been checked and ensured is how much the lease period is over and left. Moreover, this lease time span can be elongated if the tenant wants to stay in the property or use it for a longer duration.
Well, a lessee can pay for the same to elongate the lease. He/she can do so by asking the lessor to extend the lease period. However, opting for legal guidance is crucial before taking the leap. Also, a tenant can opt for the lease extension only if the expiration date of the original lease is yet to arrive.
All in all, by extending the least period, you are in a way increasing the overall property value. In consequence, getting capital from a bank gets easier too when the valuation of a property is heightened.
In order to not get into disagreements and debates later on, it’s crucial that you know (before investing in property) what conditions need to be fulfilled. Also, one must know before signing an agreement about the approvals he would require before jumping into making property amends or executing 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. He can do it and has complete command over the property and the land. Hence, he can even construct something new on the same land without bothering about a state/authorities questioning him.
Now, furthermore, if you feel like having a pet at home, or inviting people over to partying, or so, you won’t need to ask for permission. However, in the end, 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, a tenant has not permanently bought/owned the property. Like if he wishes to change a building part into something new, he can’t do it. So if he/she wishes to amend the property, he has to request consent for the same from the actual owner/lessor. Now, the original property owner can either be the local authority or the government.
Also, 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 are set by the owner or discuss with him the same. Now, in this case, if you feel like having a pet at home, or inviting people over to 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 in nature, Transfer rights of freehold property belong to the property owner. It remains from the duration he bought the property till he sells the property and transfers it to someone.
Moreover, the paperwork involved in this case is lesser as compared to the leasehold one as there is no consent involved. If you are an owner of a freehold property then you also have the right to create a will to transfer the property after you are dead.
B. Leasehold property
A leasehold property owner or lessee has no transfer rights on the property leased for permanent cases. They have no rights to sell it to a third party without the consent and signature of the property holder. However, they have the transfer rights for a fixed time that too with consent from the owner.
Hence, the rights to transfer the property remain with the actual owner or the local authority/government. Furthermore, in the case of leasehold properties, the process of transferring is rather complex and difficult as compared to freehold ones. This is because there is the involvement of attorney power as well.
3.5 Purpose of investment
A. Freehold Property
It is advisable to get yourself a freehold property since it is good from an investment point of view. This is because a freehold property gets counted as a fixed asset. Now, when we think in terms of filing income tax and so on, they require claiming fixed assets. Also, freehold properties are good investment options because of the security and growth in the capital they provide.
Over and above, a freehold property can be used in several ways to earn profit. One can use it for commercial purposes and can also sell it at a higher price when the price of the property increases. Moreover, if you are looking for a property with an intention of investment then look for freehold properties.
B. Leasehold property
It is never advisable from the commercial point of view as one has to abide by the contract and this process is complex. You cannot make any changes to the property without the willingness and consent of the property owner.
Mostly leasehold properties are good for residential purposes such as flats. However, without the property owner’s permission, one cannot execute any commercial purpose.
3.6 Cost involved
A. Freehold properties & the costs involved
Some of you might look for properties to buy, but before that, you have to grab legal ideas. There are lots of formalities you have to complete to own a property. If you are a beginner here, we will help you with the freehold & leasehold property costs involved. When you purchase the 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. You can stay at these properties for uncountable years. Also, you are all set 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, if the property is a house, you can buy the complete freehold. 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 some other additional charges that include 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 complete 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 time 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 major 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 mostly 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 properly 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 it’s important to budget your income. 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 offered by banks/financial institutions 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 that are imposed by banks/financial institutions.
It’s for the provision of financial services to Freehold property owners. Now, these charges are usually assessed based on the type of services rendered, such as loans, mortgages, and other financial products.
- Mortgage Loan: This is a loan that is secured by the freehold property and is 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 creditworthiness of the borrower.
- 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: In addition to 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 offered by banks/financial institutions for freehold property are important. 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 tough 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 fees, appraisal fees, and loan origination fees. It is important for leasehold property owners 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 costs and service charges are the fees that are 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 are 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 in the area.
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 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 the sake of their profit then 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.
Advantages of buying Freehold properties
1. Be the owner of both land/house
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 full ownership
Individuals who desire to purchase properties often need clarification with the terms like Leasehold & Freehold. The major difference between the properties is the ownership & control over land. When you invest in freehold property, you can get complete ownership of the land & property.
3. Freedom as an owner
When you are the owner of 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 have to pay to extend the period!
6. Capital gains
In terms of 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.
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 real owner. Most of the 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
As 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.
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 mostly 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 upkeep the complete property & for charging building insurance.
- 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 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 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.
Disadvantages of buying Leasehold properties
1. Limited ownership
The leaseholders mostly rent from the freeholder. He doesn’t have any exclusive ownership over any property or the land which 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 a rented property. 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 need to 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 both are 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.|