Leasehold is one of three forms of tenure (property/land ownership) available in the UK; the alternatives, Freehold and Commonhold, offer a stronger form of tenure, giving you ownership of the land in perpetuity (forever). With leasehold, your ownership is time-limited which is a potential problem area; but in fairness, you have the legal right to extend your lease and leasehold ownership does work well for millions of people, most of the time.
What is Leasehold / What does Leasehold mean?
The vast majority of flats in England and Wales are leasehold, this includes everything from new-build properties, converted houses, 1960's tower blocks and Victorian apartments. When you purchase a leasehold property, what you are buying is a legal right (a lease) which gives you effective ownership of the property for a given period of time, i.e. the duration of the lease.
A lease is a contract between the leaseholder and the landlord, it defines the responsibilities and obligations of both sides and states what you can expect from the landlord in terms of services. No two leases are the same, so it's essential that you, or a solicitor on your behalf, read and understand the contents of your lease.
With a leasehold property, it's important to understand what you do & don’t own; you don’t own the plot of land the flat sits on, you don’t own the ‘fabric’ of the building, e.g. roof, external walls etc. You own the internal space, fittings, floor and walls. The Landlord/Freeholder owns and maintains the outer building & grounds on your behalf - a service you pay for via your periodic service charges.
The downside of owning a leasehold property is that your lease (i.e. your ownership) of the property is finite, it has an expiry date, and as such is a ‘Wasting Asset’, meaning that the value of your leased property will go down, year-on-year, as you get closer to the expiration date of the lease (although this Wasting effect is usually offset by increases due to property inflation) and if you’re foolish enough to allow your lease to expire, you’ll lose your property altogether.
The lease on your property may have been granted (to the original owner of the flat) for a period of 99 or 125 years. But the key question for the current leaseholder and crucially for anyone considering purchasing leasehold is, how much remains on the lease, as of right now? Surprisingly the wasting effect described above comes into play very early, typically on leases with a remaining term of 95 years or less, there are also further, more serious implications when a lease has fewer that 80 years to run, see the Marriage fee section, How to Extend your Lease.
What is Freehold
The vast majority of houses in the UK are owned on a freehold basis. If you own a house, you are the freeholder which means you own both the property and the land on which the property stands. Freehold is the strongest form of land/property ownership available. The owner of a freehold property has complete and absolute ownership of the land, and all buildings thereon. There is no limited time of ownership as in the case of leasehold property. The owner of a freehold property is therefore in a position to do whatever they wish to with the property, as long as they adhere to local planning regulations!
In the eyes of the law, a ‘freehold’ is effectively your ownership of a plot of land, the law isn't overly concerned about the buildings you have on it. (The Government department is called HM Land Registry, not HM Property Registry) and as such, your freehold (or 'Title') paperwork contains a large scale map, with the boundary of your freehold land marked in red ink.
Given a choice we would all opt for freehold ownership of our property, however individual flats cannot be held on a freehold basis (the equivalent for flats is Commonhold - see below), a freehold denotes ownership of a plot of land. However as a flat owner, you share the plot of land your flat occupies with the guy living above you, and all the other residents in your block.
In a development (block) of flats, there will be one freeholder who grants (sells) leases to individual flats in the block. Those leases are then sold-on (assigned) as required when new residents take ownership of the properties.
What is Commonhold
Commonhold is a new type of property/land ownership introduced in 2002 as an alternative to the long leasehold system. Commonhold is an attempt to bring flat ownership into the 21st century; it's the equivalent of the US-style Condo (Condominium) system.
With commonhold, the individual flat owners (i.e. residents) own everything. There is no landlord, freeholder or lease to worry about. In commonhold, you have absolute ownership of your flat forever. The land the building sits on is registered as commonhold land (as opposed to freehold land), each flat owner, known as a Unit Owner, has 2 interests; firstly in his own individual flat, and secondly a collective interest as a member of a Commonhold Association (effectively a residents association), which owns and manages the shared parts of the property on behalf of the residents.
Commonhold is broadly equivalent to freehold ownership of individual flats, it's not limited to a number of years as with leasehold and is therefore (much) preferable to leasehold from a flat ownership point of view. Unfortunately commonhold hasn’t really taken off, possibly because there is little incentive for property developers to choose commonhold over leasehold when constructing new-build flats; they won't retain ownership of the land after construction and therefore will have no future income form Lease extensions.