Regardless of whether you’re investing in commercial premises or a new home, you’ll notice that the property is offered as either freehold or leasehold. It’s important to understand what these terms mean, as they’ll make a big difference in terms of your ownership of the building in the eyes of the law.
If you’re not sure what the difference is, this handy guide will help.
Freehold – a basic definition
Most residential house sales are freehold (and some commercial property sales too). Having the freehold means that you own the building and the land that it comes with, until you choose to sell it on. Sometimes, it’s referred to as possessing the ‘title absolute’.
Freehold ownership is the more straightforward option, as you won’t have to pay any annual rent charges (e.g. ground rent). However, you’ll be responsible for all maintenance and improvements; and any repairs will have to be paid for out of your own pocket.
Leasehold – a basic definition
Leasehold ownership is significantly different to freehold. It means that you won’t own the building or land outright; instead, you’ll be buying the right to use the property for an agreed period of time. Most leases run for a long time (often over a hundred years), but be warned, some can be shorter.
In this instance, you’ll enter into a contract with the person who is the freehold owner. This contract will outline what your responsibilities are (and what you can and can’t do with the property), and their responsibilities too.
Leasehold ownership usually means you’ll have to pay fees to the freeholder (ground rent and maintenance fees, plus a share of the buildings insurance cost). But the good news is, the freeholder typically has to pay to fix any issues with the property, such as a leaking roof or a broken lift.
What are the advantages and disadvantages?
- Total ownership – this offers longer-term security
- Commercial mortgage interest payments are tax deductible
- The property is likely to increase in value, which makes it more profitable when you decide to sell
- You can sub-let or rent the property out if you choose to do so (check the terms of your commercial mortgage first)
- You can make alterations to the property, with the right planning permissions in place
- You’ll have to take care of all repairs and ongoing maintenance
- The property value may go down (it’s unlikely, but it does happen)
- A long term lease or “virtual freehold” for owner occupiers can offer the security of a freehold without having responsibility for building repairs
- A short-term lease means you can relocate far more quickly and easily
- The freehold owner is usually responsible for the building’s repairs, and maintenance of the exterior and communal areas
- Some restrictions will be in place, limiting what changes you can make to the building. Some residential leasehold buildings may even prevent you from owning pets, or hanging washing on your balcony
- It’s possible that the commercial freehold owner will want you to return the premises to their original state when you leave
- Leasehold contracts can be complex, and require extra scrutiny before signing
- Leaseholds decrease in value as the term reduces. This is because, if the term reaches zero years, the property reverts to the freehold owner.
Understanding the key types of leasehold
An AST (assured shorthold tenancy) is the most common form of tenancy if you rent from a letting agent or private landlord. The key difference to other tenancies is that your landlord has the right to evict you without providing a reason but has to adhere to the correct legal process. There is likely to be a change in the law on this matter which will end no fault evictions. You must be given two months’ notice before having to leave the property. You also have the right to rent the property for the duration of the term, as long as you abide by the terms.
With an AST, your landlord must provide the following:
- Gas safety and energy performance certificates
- Written records relating to your AST start date, when the rent is payable, and how long the term of the lease is
- Protection of your deposit (in a government-approved scheme)
Most ASTs last for six to 12 months.
A long lease is defined as being 21 years or more. Usually, residential leases are 99 years upwards (with some being as long as 999 years). While a long leasehold offers extra security for the future, it isn’t problem-free. For example, some long lease contracts feature provisions, stipulating that the freeholder can increase ground rent at a set point in time. This means extra costs, which you’re legally obliged to pay while you’re still tied to your leasehold contract.
Commercial leases are a popular choice with businesses. While you don’t own your premises outright, you’ll be able to invest in a ‘bricks and mortar’ front for your company, at a far lower price. Usually, commercial leases require little or no capital investment, and a short-term lease gives businesses the freedom to relocate in the future, if they’re ready to expand.
The government now offers some protection for residential leaseholders, giving them the right to extend the lease or even buy the property outright. However, this can be costly. If you’ve got a leasehold flat, you usually have the right to extend the lease by 90 years, if you’ve held it for over two years already. If it’s a leasehold house, you can extend the lease by 50 years, but again, the leasehold sale must have been completed over two years ago.
What’s right for you?
This entirely depends on your circumstances. Here are a few things to consider when you’re deciding:
- Do you want to be free to make changes to your home?
- Do you mind certain restrictions being in place?
- Are you happy to take responsibility for the maintenance and repairs?
- Are you happy to pay annual fees, in return for not having to worry about certain aspects of the maintenance?
- How long do you think you’ll want to be in the premises?
- Do you want to customise the building to suit your needs?
- How much capital can you invest upfront?
- Do you want to develop the property, to increase its value in the future?