What is the difference between leasehold and Freehold?
When we talk about ‘owning’ property in England and Wales we have
to consider the two main types of interest in land that exist, which are
freehold and leasehold.
The freehold interest in land (sometimes referred to in legal
terms as The Fee Simple Absolute in Possession) is the most complete interest
that can be held in England and Wales, as all land is technically held subject
to the Crown. In practice it means the outright ownership of land or
property for an unlimited period and applies to the majority of houses.
A leasehold interest is, on the other hand, a temporary right to
occupy land or property. A person who owns the freehold interest in a
property may grant a lease on it to another person. This creates a
relationship of Landlord and Tenant (or Lessor and Lessee). The lease
will be a lengthy, written, legal document based on property and contractual
law which sets out the rights and obligations of both the Landlord (Lessor) and
Tenant (Lessee). Most flats in England and Wales are held on leases.
A lease will be for a fixed term. Historically most flat
leases were typically for 99 years, although more recent leases are often for
125 years. Occasionally leases are granted for 999 years (often somewhat
misleadingly termed a ‘virtual freehold’).
Although the lease on any property will be a complex document, the
basic principle is that it will give the Tenant (Lessee) the right to occupy
the property for the period specified in the lease. The lease will
normally specify that the Landlord (Lessor) will have to allow the Tenant
(Lessee) ‘quiet enjoyment’ of the property provided that the Tenant (Lessee) in
turn observes their duties under the lease. The principal duty normally
being to pay the
rent specified in the lease to the Landlord (Lessor).
The rent payable under a long residential lease will normally be
quite modest (often between £50 and £250 a year) and reflects the fact that the
lessee will usually be responsible for paying all the costs in connection with
the maintenance and repair of the flat and will have also paid a considerable
sum to purchase the lease in the first place.
We have said that a leasehold interest is a temporary right to
occupy the property, albeit that this ‘temporary’ right may last for many
decades. It is this temporary nature that sets leasehold and freehold
interests apart, as a freehold interest is permanent.
What happens then when the period specified in the lease comes to
an end? Effectively, when a lease comes to an end the Tenant (Lessee) no
longer has a right to occupy the property and has to give back possession to
the Landlord (Lessor). The lease will usually include a clause which
states that the Tenant (Lessee) will ‘quietly yield up possession’ on the
termination of the lease. In reality a Lesee will start the
process of extending their lease well before it expires.
This means that we have to look at the value of freehold and
leasehold property slightly differently. A freehold property will always
maintain its value when the property market remains even and will increase in
value when house prices price. A leasehold interest is a diminishing
asset, however. At the beginning of a long lease there will be little
difference in value between a freehold and a leasehold property. As the
lease gets shorter, the leasehold property reduces in value. At first the
reduction is quite small, but as the lease gets shorter and shorter the value
begins to fall more rapidly. For example, a flat with a 50 year lease
will only be worth about 70-75% of what an identical flat with a 999 year lease
would be worth.
If you are considering acquiring the
Freehold of your building you can contact the author of
this article, Matthew Price BSc MRICS of Peter Barry
Surveyors for advice
If you have a question about Collective Enfranchisement you can put it to Matthew Price at the Lease Extension Advice website.