What is the Difference between Freehold, Leasehold, Share of Freehold and Commonhold?
To put it simply, in the UK, a house tends to be freehold, while a building with multiple occupancy (e.g. flats) will fall within the leasehold or share of freehold categories. In the UK however, it is not always that straight forward. A house may still have a lease if there are some shared aspects and a flat within a building may own the entire freehold.
When purchasing a property, it’s important to understand how the ownership is structured before making the investment. The estate agent representing the sale will be able to provide all the necessary details for reassurance. Generally, purchasing a freehold property means the conveyancing process should be less complicated. However, for some, in the longer-term, leasehold and share of freehold properties, or those with commonhold interests, can be more attractive as a lower-maintenance investment.
In this blog, we will explore the key distinctions between the different types of tenure as well as looking at the emerging concept of commonhold.
What is a Freehold Property?
Owning a freehold property means the complete and indefinite ownership, with full control, of both the property and the land on which it is situated. There are no lease terms, ground rents, or freeholders to contend with and you can make changes to your property without seeking permission (subject to local planning regulations).
Key characteristics of freehold property:
- Complete ownership: Freehold homeowners have full ownership of both the property and the land without any time limitations
- No ground rent or service charges: There are no annual ground rent or service charges associated with freehold ownership
- Greater control: Freehold homeowners have the freedom to make alterations and decisions about their property without needing permission from a freeholder
- No time limitations: There is no expiry on the ownership as there is no lease
What is a Leasehold Property?
Leasehold ownership is essentially a long-term rental agreement where the homeowner has the right to live in the property for a specified period. This can range from 99 years (or lower) up to 999 years. New Homes tend to be sold with the latter.
While the leaseholder has certain rights and responsibilities, they do not own the land on which the property is built. Instead, they pay ground rent and may also incur service charges to the freeholder or the management company, who are responsible for maintaining the building and common areas. This can be a preferable option for homeowners wanting a more hands-off investment.
If leaseholders have concerns with the management they can collectively enforce a ‘Right to Manage’. They also have a legal right to buy the freehold from the landlord and create a ‘share of freehold’ should at least 50% of the leaseholders have a desire to do so.
Key characteristics of leasehold property:
- Limited ownership duration: Leasehold properties have a fixed lease term, which means the homeowner owns the property for a specific number of years
- Ground rent and service charges: Leaseholders are typically required to pay an annual ground rent and may also be responsible for service charges to maintain the building
- Limited control: Leaseholders have less control over the property and may need to seek permission from the freeholder for certain alterations or renovations, although this does the reduce coordination with other stakeholders, so can be favourable for some owners
- Less responsibility: The upkeep of the building and communal areas will be the responsibility of the freeholder
What is a Share of Freehold Property?
A share of freehold is when the leaseholders collectively own the freehold of their building. This means they jointly own both their individual units and the land on which the building stands. Share of freehold arrangements can provide many of the benefits associated with freehold ownership, such as greater control. Leaseholders will typically still pay into a sinking fund to cover the building-maintenance, which needs to be communally managed.
The owners will have two distinct titles to the property; the leasehold and freehold interests. The lease length may need to be extended at some point, and although this is usually straightforward, it is still an administrative consideration.
Key characteristics of share of freehold:
- Collective ownership: Leaseholders will collectively own the freehold of the building, becoming co-owners of both the land and common areas
- Control and autonomy: Share of freehold homeowners have a significant say in the management and upkeep of their building
- Elimination of ground rent: With a share of freehold, leaseholders typically eliminate the ground rent payments
What is a Commonhold Property?
Commonhold is a relatively new concept in property ownership that aims to combine the best features of both leasehold and freehold ownership. In a commonhold structure, individual homeowners own their properties outright while collectively owning and managing the common areas and shared facilities of the building or development. Commonhold is designed to eliminate many of the issues associated with leasehold properties, such as lease extensions and ground rent.
Key characteristics of commonhold:
- Collective ownership: Commonhold allows individual property owners to collectively manage shared spaces and amenities, making decisions through a commonhold association
- No lease terms: There are no lease terms or ground rents in commonhold ownership, providing homeowners with more security and control
- Self-management: Commonhold owners have a say in the management of the building, reducing the influence of third-parties
Understanding these differences is crucial when looking to purchase your next home. All buyers should carefully assess their priorities, financial capabilities, and long-term goals to determine which type of ownership is most suited. That said, the tenure should never be a reason not to buy your dream property. There are pros and cons to all options, but first and foremost, the home and its benefits should always be your top priority.