Leaseholder vs Freeholder: Definitions & Responsibilities Explained
Most people assume the difference between a leaseholder and a freeholder is simply a matter of terminology. It is not. Consider a situation where a buyer purchases a top-floor flat on a 125-year lease, believing the building is as much theirs as anyone else’s, then paints the exterior walls during a renovation. The lease prohibits external alterations without freeholder consent. The freeholder issues a formal breach notice and demands reinstatement to the original colour.
The cost to fix it: over £3,000 in labour, materials, and solicitor correspondence. One misunderstood clause turned a weekend project into a quarter of service charge. That gap in understanding is what this article addresses.
For property investors and property managers it is fundamental to understand the difference between a Leaseholder and a Freeholder. A Freeholder is the full owner of the land and property for whom there is no limited period of ownership. A Leaseholder has the right to occupy a property for a fixed term or under a covenant to pay a rent.
Both types of ownership have their own roles, responsibilities, costs and degree of flexibility to make alterations to the property. In this article we will examine the main characteristics of a Leaseholder and a Freeholder and the differences between them.
Understanding Freeholder and Leaseholder Roles
For ease of understanding, we use the terms freeholder and leaseholder to refer to the owners of freehold and leasehold properties respectively. As a freeholder, you will be responsible for sending demands for ground rent and service charges to the leaseholders who live in your property.
For leaseholders, the responsibility for pushing the owner of the freehold for maintenance and repairs ultimately rests with them. In this post we examine the details of this in terms of lease agreements, and look at the responsibilities of Leaseholders and Freeholders.
Freeholder Definition
A freehold is a permanent and absolute interest in land or property. It is a freeholder’s ultimate freedom to do what they like with a property, and they can potentially sell the freehold at any time. A freeholder owns the building and the plot of land that the building sits on. In leasehold vs freehold debates, it is often a private company or individual who holds the freehold. They may be the original developer or builders of the property, or the original conversion, or indeed a property investor who has bought the freehold at some point.
The freeholder does not have to be an individual owner freeholder. Freeholders can be a group of leaseholders who have collectively purchased the freehold to a building under the procedures of collective enfranchisement. As freeholder, the individual or group of individuals would be able to decide issues such as service charges, ground rent and terms and conditions of residential occupancy of the property as well as larger building works.
Leaseholder Definition
In agreements these people are called ‘leaseholders’ and the term they hold is called ‘the lease’. Leasehold refers to the leasing of part of a building, such as a house, a flat or apartment. Leaseholders do not own the building or the land the building sits on but they have a long-term rental agreement for the property. This rental agreement can be for anything from 20 years upwards and will be for the maximum 999 years. The lease is agreed with the freeholder of the property.
In addition to the rent payable under a lease agreement, the leaseholder will also normally be required to pay ground rent and/or service charges under the terms and conditions of the lease. Upon expiration of the term, the whole property will return to the freeholder. However, the lease can be extended for a further term, either by agreement with the freeholder (whether formal or informal).
The practical distinction that catches people out most often: a leaseholder needs written permission from the freeholder before making any structural or external alteration, subletting (in many cases), keeping pets, or making changes that fall outside the permitted use described in the lease. The freeholder does not need permission from anyone to manage, alter, or sell the freehold title.
Freeholder Responsibilities
Building Maintenance and Repair
The Freeholders are responsible for the structure of the building (including repairs) and any external repairs required to the building such as roof and external walls, foundation and any structural work. They are also responsible for any works to the lobbies, stairs, entry system, plant rooms, lift and the communal garden. These works will be carried out by the Freeholders and the cost recovered from the leaseholders through the building’s service charge. The Freeholders will be responsible for the repairs and maintenance of any central heating and utilities systems.
Cleaning and Maintenance of Communal Areas
Freehold property can include a block of flats. The freeholder will be responsible for all areas of the property that are shared by all the leaseholders. This can include internal communal areas (such as entrance halls and staircases) and external communal areas (such as lifts, entrance doors, balconies and other shared structures). The freeholder will recover the cost of the works and maintenance from the leaseholders within the building through the service charge.
Calculating Ground Rents and Service Charges
There has been recent criticism of some freeholders imposing high ground rent charges on the sale of their long leases. For those selling a property on a long lease, there are two payments made by the leaseholder to the freeholder for the right to use the land. The ground rent is an annual payment for the right to use the freeholder’s land. In addition to the ground rent, freeholders also charge a service charge which must be clearly outlined by the freeholder as to what it includes. The service charge is usually an annual payment, however it can be bi-annual or monthly as specified in the terms of the lease.
Arranging Buildings Insurance
Freeholders require full building cover in order to be able to carry out any necessary repairs in the event of a tragedy occurring.
Management Reports
Freeholders must produce management reports for leaseholders showing how the money taken from ground rent and service charges has been spent.
Leaseholder Responsibilities
Maintenance of the Property
The leaseholder is responsible for internal fixtures and fittings such as bathrooms, kitchen units, wall and floor coverings, internal painting and decoration. They are also responsible for keeping the house and all parts of the property that they have use of, clean and in good repair.
Paying Ground Rent and Service Charges
Leaseholders pay ground rent and service charges as set out in their lease. Leaseholders who believe maintenance charges are unfair can apply to the First Tier Tribunal to challenge any proposed increases in those charges.
Obtaining Permission for Significant Property Changes
Depending on the terms of the lease some significant changes to a property will require the freeholder’s consent as the lessee only has a lease to the property.
To Be Respectful to Other Leaseholders
Leaseholders in a communal property must be considerate of neighbors and maintain communal areas.
Summary and Key Takeaways
When a property has been owned by a Freeholder and subsequently leased to a Leaseholder, there are two key individuals and their roles that the property owner or potential buyer needs to understand. In this short guide we explain the Leaseholder and Freeholder roles.
- Ownership: Freeholders have indefinite ownership of both land and property; leaseholders possess rights to occupy a property temporarily.
- Financial Obligations: Leaseholders must pay ground rent and service charges, while freeholders manage these charges and require comprehensive building insurance.
- Property Management: Freeholders handle maintenance for structural and communal areas; leaseholders maintain their property’s interior.
- Control Over Changes: Freeholders have greater autonomy to alter properties; leaseholders need permission for significant changes.
- Lease Expiry: Leaseholders must negotiate extensions; otherwise, property reverts to freeholders.
Knowledge of these elements will enable the property owner to manage their property whether they choose to remain as a leaseholder or take the opportunity to purchase the freehold.
For those interested in transitioning from leasehold to freehold, The Freehold Collective offers freehold purchase services to facilitate this process, potentially reducing service charges and eliminating ground rents. Having helped over 1,000 leaseholders nationwide through TFC’s Freehold Purchasing Process, the team understands the gaps in knowledge that cost leaseholders money and the steps that convert those gaps into ownership and control.