The Difference Between Freehold and Leasehold Homes in Belgravia

If you’re looking to buy a flat in Belgravia, Mayfair, or Knightsbridge, it is most likely a leasehold property. Many of the stunning terraces that characterise the area belong to the Grosvenor Estate and other landowners and are only sold on a leasehold basis.

So, if you’re looking to purchase a property in this area, you must understand the differences between freehold and leasehold property. That way, you can understand the options available and accurately weigh the pros and cons.

Leasehold & Freehold Summarised

There are two main types of home ownership in England; freehold and leasehold. Most flats and apartments are sold on a leasehold basis, but some houses are, too. It’s essential to understand what each of these terms means before purchasing a property in Belgravia, or elsewhere in central London.

1 Freehold

When you buy freehold, you buy the property and the land on which it is built. Usually, there should be no additional service charges or ground rent to pay on the property, which you will own in perpetuity. Unless it is a listed building or in a conservation area, you can make any alterations to the property, subject to planning laws.

2 Leasehold

Unlike freehold homes, buying a leasehold gives the buyer the right to occupy their new abode for the time stated in the lease. However, when the leasehold ends, the freeholder regains control of the property. Leaseholders have ownership of the property’s interior but not the ground on which it is built, the exterior walls or the roof. Therefore, leaseholders commonly need permission from the freeholder to make alterations or structural changes to the property.

“Share of freehold” is one notable variation of leasehold ownership. Purchasing a “share of freehold” property means acquiring part of the company that owns the freehold, and offering collective management control to other owners. This can lead to more autonomy, lower maintenance costs, and potentially longer leases.

The Key Differences with Leasehold Property

So, what sets leasehold property apart from freehold properties? Here are the most important features to remember:

1 Specific leasehold terms

Leasehold agreements, especially in prestigious central London areas like Belgravia, Mayfair, and Kensington, often involve specific obligations for leaseholders. These are designed to maintain high property standards, aside from the essential terms of the lease.

• Maintenance & Decorum: Leaseholders are generally required to keep their property in excellent condition. This includes both the interior spaces and, in some cases, any associated external features like balconies or gardens.
• Behavioural Expectations: The lease may stipulate that leaseholders behave in a manner that does not disturb their neighbours or detract from the overall living experience in the development. This might include noise restrictions and guidelines for common area usage.
• Restrictive Clauses: It’s common for leases to include limitations on pet ownership, subletting, and alterations to property. For example, getting the landlord’s prior consent before renovating or having pets is usually necessary.
• Landlord’s Responsibilities: The lease will always clearly outline the landlord or freeholder’s obligations, which typically include managing, maintaining, and repairing the building’s structure, common areas (e.g., staircases, hallways, and lifts), and exterior grounds. This can also cover additional services like security, concierge, and leisure facilities in prime locations. And likewise, this often reflects the steeper service charge or ground rent.
• Compliance with Local Regulations: Given the historical and cultural significance of areas like Belgravia, leaseholders are likely subject to conservation area regulations or listed building constraints. Naturally, this can affect potential alterations, repairs, and maintenance responsibilities.

2 A leasehold length

A key thing you need to check before viewing a property is the lease length – as they are not all the same.

Initially, leases are long, typically around 125 years, but can extend up to 999 years occasionally. As time progresses and the property changes hands, the remaining lease duration decreases. If a lease ends, then ownership reverts to the freeholder. Properties with less than 79 years remaining on the lease can pose significant challenges, particularly in securing a mortgage. This is because most lenders require a minimum lease length. Additionally, selling such properties can be difficult, limiting potential buyers to those able to purchase outright.

3 Differences in Price

Leasehold property is generally cheaper than freehold property because it doesn’t involve permanent ownership of the property and the land it sits on. Nor does it include the greater autonomy over the property and land offered by freehold homes. Leaseholds, while initially more affordable, commonly include additional fees and restrictions, leading to potential long-term costs and limitations.

4 Paying ‘ground rent’

Many owners of leasehold properties will need to pay ground rent to the landlord annually or half-yearly. Traditionally, this is a nominal amount, known as a ‘peppercorn rent’ and sometimes for less than £1 a year – or no more than £300.

However, the landscape of ground rent has evolved considerably. Today, leaseholders may pay significantly more, with amounts varying up to £300 a year or beyond, depending on the lease agreement. For example, some modern leases include clauses allowing the ground rent to increase over time, potentially doubling every 10 or 25 years.

It is a small comfort that since the 30th of June 2022, The Leasehold Reform (Ground Rent) Act 2022 banned ground rents for anyone buying new homes on a long lease. That said, those rules do not apply to leases already agreed upon before this law came into force.

5 Obligatory Service Charges & Sinking Funds

To keep the development’s communal areas intact and presentable, it is common for leaseholders to pay regular monthly or quarterly service charges. These can include a one-off payment to a ‘sinking fund’ in the case of a costly bill – such as a roof repair or structural reinforcement. Service charges vary according to the development’s size, amenities, and management efficiency.

Should a landlord plan to undertake works resulting in costs exceeding £250 for any individual leaseholder, they must engage in a consultation process as mandated by section 20 of the Landlord and Tenant Act 1985.

The pros and cons of leasehold property

Leasehold Pros

• Initially Affordable – Leasehold properties are often less expensive upfront than freehold properties. This makes them accessible to more buyers, particularly in expensive urban areas where few could dream of buying a freehold home outright.
• Less responsible for Maintenance & Repairs – The responsibility for maintaining the building’s exterior and common areas usually falls on the landlord or management company, reducing costs for the individual leaseholder.

Leasehold Cons

• Ground Rent & Service Charges – Leaseholders are typically required to pay ground rent and service charges, which can increase over time and add a significant cost to the ownership (even if cheaper initially).
• Decreasing Lease Duration – A leasehold property is owned for a fixed term. As the lease shortens, the property can depreciate in value and may be challenging to sell or mortgage. This is likely to be a growing anxiety for leaseholders.
• Restrictions & Permissions – Leaseholders commonly face restrictions on property modifications and need permission for certain changes, limiting personalisation and control. This differs from freehold property, where there is a lot of freedom to change the home as you see fit.

The pros and cons of freehold property

Freehold Pros

• Complete Ownership – Freehold means owning the property and the land it stands on indefinitely, offering complete control over the property.
• No Ground Rent or Service Charges – Freeholders are not subject to ground rent, and rarely to service charges. This saves the freeholder a lot of money in the long run.
• No Lease Duration Worries – With no lease to expire, freehold properties do not suffer from the depreciation associated with diminishing lease terms, providing long-term security for their property purchase.

Freehold Cons

• Maintenance Responsibility – Freeholders are responsible for all maintenance and repair work, which can be costly and time-consuming.
• Higher Purchase Price – Freehold properties typically have a higher initial purchase price than leaseholds, reflecting the superior value and autonomy they offer.

Critical Leasehold Reforms in 2024

There are some very significant leasehold reforms underway in 2024, with the Leasehold Reform Bill rapidly moving through Parliament. Whatever the final details, this bill will likely make leasehold property a much more attractive choice for buyers.

These reforms aim to enhance leaseholders’ rights, with the Law Commission proposing measures to simplify the property purchase process and reduce costs. Key reforms include extending leases to 990 years without ground rent, introducing an online calculator for lease or buy the freehold purchases, standardising valuation methods, removing ‘marriage value’, and expanding tenant rights in property development. These changes, though not yet law, promise to offer leaseholders more control, lower costs, and offer increased stability. Leaseholders in England and Wales should stay informed and seek legal advice on these evolving reforms.

Can You Extend The Lease On A Leasehold Property?

Under the Leasehold Reform, Housing & Urban Development Act 1993, flat owners are entitled to extend their lease by 90 years at a fair market price, provided they have owned the property for at least two years. This process can also be initiated by the seller at the buyer’s request as a condition of sale.

5 Steps to Extend Your Lease:

1 Legal Representation & Valuation:

Obtain legal representation and professionally value your property to determine the premium, or the ‘realistic cost’ of the lease extension. Factors influencing the premium include the property’s value, the remaining term of the lease, and any applicable ground rent. A lease extension calculator, like the one on the Lease Advice website, can offer a preliminary estimate.

2 Serve a Section 42 Notice:

Serve a Section 42 notice to the freeholder, proposing the premium you’re willing to pay for the lease extension. The notice must also specify a response deadline, not less than 60 days from serving.

3 Deposit Payment:

A deposit of £250 or 10% of the proposed premium (whichever is higher) may be required. The freeholder is entitled to conduct their valuation of the property. You’re responsible for covering both your own and the freeholder’s legal and valuation fees.

4 Landlord’s Counter-Notice:

The freeholder should respond with a counter-notice, accepting your terms or proposing alternative ones. This initiates negotiations to agree on the final terms.

5 Court Action (If Necessary):

Suppose the freeholder does not respond within the specified timeframe. In that case, you can apply to the county court for a lease extension within the next 182 days. Although court action is a last resort, it’s an option if negotiations fail.

Can you buy the freehold on a leasehold property?

In considering the complexities of leasehold and freehold properties, it’s also valuable to understand the concept of “buying the freehold” of a property, known as leasehold enfranchisement.

This process allows leaseholders to collectively purchase the freehold of their building, converting their leases into freehold ownership. However, enfranchisement is often a complicated and expensive journey, involving legal procedures and costs that can vary widely depending on the specifics of the property and the number of tenants involved.

These considerations underscore the importance of seeking independent legal and financial advice in advance, whether you’re extending a lease, buying the freehold, or dealing with properties that have unusual quirks like ‘flying freeholds’.

Frequently Asked Questions About Leaseholds

1 Should I buy a leasehold property with a short lease?

Buying a leasehold property with a short lease can be risky. A shorter lease (typically less than 80 years) can significantly affect the property’s value, making it harder to sell or mortgage. Consider the potential for a lease extension, but be aware of the costs involved.

2 Can you change the lease terms?

In theory, yes. However, changing the lease terms usually involves negotiating with the freeholder and other parties. Significant changes often require a formal process such as a lease variation and, in some cases, specific legal procedures via collective enfranchisement or the right to manage.

3 Can a leaseholder buy the freehold of the property?

Yes, leaseholders can buy the freehold of their property through collective leasehold enfranchisement. This requires at least half of the leaseholders in the building to agree. It allows the leaseholders to have greater control over the property, including the possibility of extending leases without significant costs.

4 Is ‘share of freehold’ better than leasehold?

A share of freehold often offers more benefits than a leasehold. It typically means lower ongoing costs (no ground rent), more control over your property, and potentially longer lease terms. It can also enhance the property’s value and make it more attractive to buyers for the same reasons.

5 Who resolves disputes between freeholders and leaseholders?

Disputes between freeholders and leaseholders can be resolved through independent mediation or arbitration – and litigation as a last resort. These are often taken to the First Tier Tribunal. This is an independent adjudication panel which can make an order. However, the order can be appealed and taken to an Upper Tribunal. Following the second tribunal decision, an enforcement order can then be made.

Specific bodies like the Leasehold Advisory Service (LAS) can help you address issues about service charges, management practices, or lease terms.

6 What is ‘Right to Manage’?

The right to manage is a statutory right that allows leaseholders to take over the management of their property from the landlord, without having to buy the freehold. This is done by forming a right to manage company as per the Commonhold and Leasehold Reform Act 2002. It enables leaseholders to have direct control over the maintenance and management of their property, including major works and the upkeep of communal areas.

Learn More

Best Gapp is a Belgravia estate agent, chartered surveyor and property valuer who specialises in leasehold enfranchisement. For further information about leasehold property for sale in Belgravia and other parts of prime central London, contact Best Gapp’s property specialists today.