Definition
Leasehold and Freehold refer to different types of property ownership. A Freehold property is where the owner has complete and absolute ownership of the land and property, without time constraints. In comparison, a Leasehold property is where the owner has a lease from the Freeholder to use the property for a specific number of years, but the land ultimately belongs to the Freeholder.
Key Takeaways
- Freehold denotes full ownership of a property and the land it stands on permanently. The owner has the right to sell, lease, or alter the property however they wish, subject to local laws and regulations.
- Leasehold implies that a property can be used and occupied for a specific period as detailed in a lease contract. While owning the physical property, the individual does not own the land it is built on. After the term of the lease expires, control of the property reverts back to the freeholder (the landowner).
- Leasehold properties may come with additional financial obligations including ground rent, service charges, and lease extension fees, which the freeholder does not shoulder. Ownership of these properties can also be more complex, subject to the terms of the leasehold agreement, and its transfer or alteration can be restricted.
Importance
The finance terms “Leasehold” and “Freehold” are important because they define the ownership status of a property. In a freehold arrangement, the buyer owns both the property and the land it sits on indefinitely, leaving them free to alter the property as they see fit and ensuring the property can be passed down to their heirs.
On the other hand, a leasehold arrangement means that the buyer owns the property for a fixed term but not the land it stands on. When the lease expires, ownership returns to the freeholder unless the lease is extended.
This crucial distinction affects your rights and responsibilities as a property owner, impacting your long-term costs, the potential for property value appreciation or depreciation, and your ability to make changes to the property. Understanding this concept is crucial for making informed real estate investment decisions.
Explanation
Leasehold and freehold describe the two main ways to own property, particularly in the real estate sector, and are geared towards providing different levels of control over the asset in question. Essentially, freehold means you own the property and the land it sits on outright, for an unlimited amount of time.
The purpose of freehold ownership is to give the owners complete control over their property, including the land. Freeholders have the freedom to modify their building without needing to seek permission from any other party, beyond necessary planning permissions, and legal obligations.
Leasehold, on the other hand, means that you only own the property and not the land it sits on, and this ownership is for a specified period of time- as set out in a lease agreement. Leasehold exists as a vehicle for property owners to grant possession of their property to another party (the leaseholder) for a certain period, during which, the leaseholder pays ground rent to the property owner (the landlord) but can use the property however they want subject to the lease’s conditions.
When the lease expires, the ownership of the property reverts back to the landlord unless the lease is extended. Therefore, the purpose of a leasehold agreement is to define the limited ownership rights between the landlord and the tenant, which includes specific terms and conditions that need to be adhered to.
Examples of Leasehold vs Freehold
Residential Properties: One common example of leasehold vs freehold is the purchase of a flat or apartment. Generally, apartments are leasehold properties as the owner owns the property, usually a flat within a building, but not the land it sits on. The land is typically owned by the freeholder, who could be an individual, a housing association or a local authority, and they charge a ground rent to the leaseholder. A house, however, is generally sold as freehold because when you buy it, you own both the property and the land it sits on.
Commercial Properties: Businesses often encounter the leasehold vs freehold decision when selecting premises. With a freehold property, the business owns the building and land outright, giving them more control, but also higher upfront costs and responsibility for maintenance. A leasehold property might be attractive for the lower initial cost and because the landlord is responsible for any structural issues, but the business could face annual charges and restrictions on what they can do with the property.
Land for Development: If a developer purchases a freehold plot of land, they have total ownership and permission to construct property as they wish, within local building laws. However, if the land was a leasehold, the developer would be subject to ground rent, and further permissions and possible restrictions on what could be built from the freehold owner.
FAQ: Leasehold vs Freehold
What is Leasehold?
A leasehold property is one where the person has the right to occupy a property for a set amount of time, which is specified in the lease. The land on which the property is built is still owned by the freeholder and at the end of the lease, ownership of the property reverts back to the freeholder.
What is Freehold?
A freehold property is one where the person owns the property and the land it is built on outright. This means there are no time limitations on the property ownership.
What is the main difference between Leasehold and Freehold?
The main difference between leasehold and freehold property involves ownership. With a leasehold property, the individual has a lease from the freeholder to use the property for a certain number of years, while with a freehold property, the individual owns the property and the land it is on permanently.
What are the advantages of a Freehold property?
The advantages of a freehold property are complete control over the property, no ground rent, no service charges, no lease to worry about running out, and typically easier to sell than leasehold properties.
What are the disadvantages of a Leasehold property?
The disadvantages of a leasehold property include paying ground rent, having to deal with service charges and management fees, increase in charges over time and difficulty in selling or getting a mortgage on short leases.
Related Entrepreneurship Terms
- Tenure
- Ground Rent
- Lease Extension
- Real Property
- Lease Agreement
Sources for More Information
- Investopedia: This is a leading source of financial information on the internet. It covers a wide range of topics including Leasehold vs Freehold.
- Financial Express: This site offers comprehensive coverage of finance topics and market updates. You might find their coverage on Leasehold vs Freehold very insightful.
- Money Advice Service: This free and impartial money advice service covers a wide range of financial topics including advice on property ownership types.
- Which?: This is a well-known source of unbiased advice and information on a host of consumer issues, including detailed guides to financial matters like Leasehold vs Freehold.
