Freehold vs leasehold: what is the difference?

Freehold

Every piece of land has someone who owns the freehold. This person is known as the freeholder, and they own the freehold title to that land and the property situated upon it.

Freeholders have complete control over their property and are free to do what they wish to their freehold, provided they adhere to the law and any planning regulations that may affect them. For example, a freeholder who owns property situated within a conservation area may have to abide by specific regulations.

Most homeowners are also freeholders, as they will own the freehold title to their homes. Because they are the freeholder, they have control over the property; however, as the freeholder, they are also responsible for the property’s maintenance, any repairs it may require, and its insurance. 

As a property’s freeholder, the only regular outgoings you are expected to incur, are council tax, utility charges, and in many cases, mortgage payments.

Leasehold

Freeholders can grant a lease to another person or company, allowing them to use the freeholder’s property (or part of the property) for an agreed-upon period of time. A freeholder who leases their property to a leaseholder can also be called a landlord, whilst a leaseholder may also be referred to as a tenant. 

The lease itself is a legal document which specifies the following:

• How long the leaseholder may occupy the property for. This period is referred to as the term of the lease.
   
• How much rent (if any) will be paid by the leaseholder to the freeholder, and when.
   
• Exactly which parts of the property the leaseholder can use or occupy, and for what purpose.
   
• Who is responsible for the repair and upkeep of different parts of the property (the landlord may retain responsibility for the roof but require the leaseholder to maintain the property’s interior, for example).
   
• Any other costs, such as service charges or insurance contributions.
   
• Restrictions imposed upon the leaseholder, such as the prohibiting of pets or a more general nuisance clause.

A lease is a contract, meaning the terms of the lease must be complied with by the landlord and the leaseholder. If a leaseholder fails to comply with the terms of their lease, there are certain steps a landlord can take to enforce them. For example, they may take the leaseholder to court to force the leaseholder to carry out repairs or stop them from causing a nuisance. 

In more extreme cases, the landlord may be able to terminate the lease and prevent the leaseholder from continuing to occupy the property. In such cases, the leaseholder may be required to pay the landlord’s legal fees in addition to any owed monies (often payable with interest). Furthermore, failure to comply with a lease’s terms is likely to breach any mortgage agreement the leaseholder might have.

Types of residential leases

There are two common types of leases for residential properties:

• Long leases granted for a substantial period (often 99 years or more). These are bought and sold for an upfront amount, known as a premium or purchase price, often with a mortgage. Leaseholders under long leases typically still pay their landlord additional rent or service charges.
   
• Short-term leases or tenancies commonly in the form of assured shorthold tenancies (ASTs). These are usually granted for a short period of time (for example, one year). Shorthold leaseholders do not generally pay an upfront premium for the property. Instead, they will usually pay a monthly rent to the landlord. In addition, they will often be required to pay a deposit to the landlord as security in the event of a missed rent payment or damage to the property.

Whilst these are the most common types of leases for residential properties, more complex lease structures do exist. Larger properties are more likely to require one of the following complex lease structures:

• A freeholder owning a house might grant a lease of the whole house to a leaseholder. If permitted by their lease, that leaseholder might then grant another (shorter) lease of the whole, or just part, of the house to another leaseholder. This practice is known as sub-letting. 
   
• A freeholder might own a block of flats and grant a lease of each flat. Some, or all of, the leaseholders might then each sub-let their flats. The common parts of the property (such as the stairwells, lifts and gardens) would still be the freeholder’s responsibility. 
   
• A freeholder might own a mixed-use property, such as a block of flats with a row of shops underneath. To help manage the property, the freeholder might grant a lease of the whole of that property to a company. That company would, in turn, grant leases of each flat or shop to leaseholders. Some of those leaseholders might then sub-let their flat or shop. The responsibility of the common parts would belong to the company. 
   
• A developer might have a freehold interest in a plot of land and build a large estate of residential properties on it, made up of both flats and houses. The developer might then sell some of the houses to individual homeowners on a freehold or leasehold basis and lease the flats to leaseholders. Once the site has been built and all the properties sold, the developer will want to sell its freehold interest in the site and move on to its next development. So that the residents can run and manage their site, the developer might sell the freehold to a company that each resident has a share in. The residents might pay a routine charge to cover the cost of maintaining and repairing the common parts of the estate, such as any communal gardens. 

There is a plethora of other complex lease structures; what is essential to understand is that leases can be tailored to the specific needs of companies or individuals on a case-by-case basis and do not have to fall into one particular category.

In cases of leases with multiple levels, leaseholders are sometimes given alternative names, such as “head leaseholder” or “sub-tenant”, to help identify where they fall within the lease structure.

Leases can be granted for any period, but if a leaseholder is sub-letting, this must be for a shorter period than the lease they have on the property. 

Contact our residential property solicitors.

Our residential team have a wealth of experience drafting and negotiating a huge variety of common and complex leases. Their priority is always to find the lease structure best suited to your circumstances. So, whether you are a landlord or a leaseholder, we can help.

We have offices in Brighton, Eastbourne, Hastings, London, Uckfield, and Ulverston, and serve clients up and down the country.