Understanding the differences between leasehold and freehold ownership

Recent changes in leasehold legislation are set to impact property ownership in England and Wales. These reforms, aimed at simplifying processes and reducing costs for leaseholders, could have significant implications for both homeowners and property investors.

Understanding the differences between leasehold and freehold ownership is key for anyone involved in the property market. This article will explain these distinctions and examine the latest legal developments. Understanding these changes is important for anyone who owns a property or is considering an investment to make informed decisions.

Differences: Leaseholds and Freeholds

When purchasing property in England and Wales, understanding the differences between a leasehold and freehold ownership is essential. It affects rights, responsibilities, and financial obligations.

Freehold Ownership
Freehold ownership means the owner owns both the property and the land it stands on outright, without time limits. Freeholders have full control over their property, with no need to pay ground rent or service charges. However, they are responsible for maintenance, repairs, and compliance with local regulations. This ownership type offers more security and long-term investment potential, as there are no lease-related complications to consider.

Leasehold Ownership
Leasehold ownership grants the right to occupy and use a property for a fixed term, as specified in the lease agreement, while the freeholder retains ownership of the land it is built on. Leaseholders are often required to pay ground rent, service charges, and contributions towards building maintenance and repairs. These costs can vary widely and significantly impact the long-term affordability of the property.

Leases typically include restrictions, such as limits on making structural alterations, running a business from the property, or subletting. Furthermore, the value of a leasehold property decreases as the lease term shortens, particularly when it drops below 80 years, making it harder to sell or remortgage. Extending a lease involves a legal process and can be costly, often requiring both a premium payment to the freeholder and additional legal fees.

Legal and Financial Considerations
Choosing between a leasehold and freehold has significant implications. Leaseholds may initially cost less but come with ongoing financial obligations and the limitations previously discussed. Freehold properties, while more expensive upfront, typically offer greater freedom and stability. For investors and homeowners, understanding these differences is crucial to making decisions that align with financial goals and lifestyle preferences.

The Leasehold and Freehold Reform Act 2024

The Leasehold and Freehold Reform Act 2024, following the October 2024 budget, has introduced a series of changes aimed at addressing inequalities in leasehold arrangements. These measures simplify processes, reduce financial burdens, and provide greater transparency for leaseholders.

Extended Lease Terms and Ground Rent Abolition
Leaseholders now have the right to extend their leases by up to 990 years for both flats and houses, far surpassing the previous 90-year extensions. This significantly reduces long-term uncertainties around lease expirations, particularly for properties with shorter leases, which often face declining market value. Additionally, ground rent for the extended term is abolished, replaced with a ‘peppercorn rent’. A ‘peppercorn rent’ is a token amount, often nothing, used to meet legal requirements without any real cost to the leaseholder. This reform removes a recurring financial obligation that has often been criticised as unfair.

Removal of Marriage Value
‘Marriage value,’ previously payable when extending a lease with fewer than 80 years remaining, is no longer applicable. This fee was often a major cost because it reflected the increase in the property’s value after the lease was extended. When a leaseholder extended their lease, the property became more valuable because it had a longer lease term. The “marriage value” was a fee charged to the leaseholder to reflect this increase in value, which was shared with the freeholder. This could make lease extensions very costly, especially for properties with short leases. By abolishing this, the Act ensures that lease extension costs are more predictable and equitable.

Immediate Eligibility for Lease Extensions and Freehold Purchase
The previous two-year ownership requirement for lease extensions and freehold purchases has been removed. Leaseholders can now act immediately after acquiring a property, eliminating delays that previously disadvantaged new owners and restricted their ability to secure long-term property rights.

Ban on New Leasehold Houses
The Act effectively prohibits developers from creating new leasehold houses, ensuring that future houses are sold as freehold except in exceptional circumstances. This measure is intended to phase out leasehold houses, which have often been criticised as exploitative and unnecessary in modern property markets.

Improved Service Charge Transparency
Service charge demands must now be issued in a clear, standardised format. This means that landlords or property managers must use a template for service charge bills, showing exactly what the charges are for, so leaseholders can easily see where their money is going and question anything that seems unfair. It also reduces the likelihood of disputes arising from vague or poorly itemised bills, which have been a frequent issue in leasehold arrangements.

Right to Appoint a Managing Agent
Leaseholders are now entitled to appoint their own managing agent, empowering them to take control of the management of their building. This change promotes accountability and cost-effectiveness by enabling leaseholders to select agents who align with their needs and expectations, rather than relying on those appointed by the freeholder. By allowing the leaseholder to choose agents who offer better service or lower fees, they can avoid being stuck with expensive or unresponsive agents.

What’s left to address?

While Leasehold and Freehold Reform Act 2024 is a step in the right direction, some important issues remain unresolved. One major concern is that ground rents on existing leases are not capped or abolished, meaning many leaseholders are still paying fees that new leaseholders no longer face, creating a divide.

Another issue is that many changes won’t come into effect until later in 2025 or 2026, as they rely on additional rules, known as secondary legislation, to explain how they will work. This delay leaves questions about how certain reforms, like clearer service charge rules or choosing managing agents, will be implemented.

The reforms also focus heavily on helping new leaseholders, while leaving those with older agreements, particularly those with short leases or high ground rents, at a disadvantage. For freeholders, the loss of income from abolished ground rents and marriage value adds financial challenges, with little guidance in the Act to help them adjust.

Finally, while the Act simplifies some processes, it doesn’t address wider issues with the leasehold system itself or suggest a shift towards a freehold-first approach for all properties. This leaves questions about whether further reforms will be needed in the future.

It’s clear that the Act is a step in the right direction, but more work may be required to create a fair system for everyone.