Recent updates in the UK's freehold and leasehold reforms, particularly through the Leasehold and Freehold Reform Act 2024, signal significant changes in property ownership rights. The government aims to simplify the process of extending leases and purchasing freeholds, with an eye on reducing the financial burden on leaseholders.

When purchasing property in the UK, whether for domestic or commercial use, one of the key distinctions to understand is the difference between freehold and leasehold ownership. These two types of property ownership affect not only the rights of the buyer but also the value, maintenance responsibilities, and the process of buying and selling. Knowing the benefits and limitations of freehold and leasehold properties is crucial for making informed decisions, whether you are a first-time homebuyer, a business owner, or an investor.

Freehold Properties

Freehold means that the owner has complete and indefinite ownership of both the building and the land on which it stands. The buyer owns the property outright, without any time limit on ownership. The main features of freehold ownership are:

Ownership of the land and building: Freehold means that you own both the structure and the land it sits on. You are free to do what you like with the property, provided it complies with local planning regulations and building codes.
No ongoing charges: Freehold owners are not subject to ground rent, service charges, or other lease-related fees. However, they are fully responsible for the maintenance of both the property and the land.
Permanent ownership: There is no expiration date on freehold ownership. The property remains yours indefinitely, and you can pass it on to future generations or sell it whenever you wish.

Leasehold Properties

Leasehold ownership, by contrast, means that the buyer has the right to occupy and use the property for a specific period of time, as set out in a lease agreement. However, the ownership of the land on which the property stands remains with the freeholder (or landlord). The main features of a leasehold ownership include:

Fixed-term ownership: Leasehold ownership typically lasts for a set period, which can range from a few decades to 999 years. Most residential leases in the UK are granted for 99 to 125 years, though shorter leases also exist.
Ground rent and service charges: Leaseholders usually have to pay annual ground rent to the freeholder, as well as service charges for the upkeep of communal areas (such as gardens, lifts, or hallways) in the case of flats or apartments.
Limited control: Leaseholders have limited control over the property. For example, they may need the freeholder's permission for significant changes to the property or even for minor alterations like installing satellite dishes.
Lease extensions and renewals: When the lease runs out, the property ownership reverts to the freeholder unless the lease is extended or renewed. Extending a lease can be costly, especially when the remaining term of the lease is below 80 years.

For businesses, leasehold properties are often more accessible than freehold due to the lower initial cost. Many commercial properties, such as office spaces or retail units in shopping centres, are sold on a leasehold basis. Lease agreements in commercial properties can be complex, with terms governing rent reviews, repair obligations, and break clauses. Leasehold allows businesses to rent prime commercial spaces without the financial commitment of buying a freehold, although they face rent increases over time and may have fewer options for modifying the property to suit their needs.

Leasehold and Freehold Reform Act 2024

Key reforms under the new Act include:

Immediate lease extension and freehold purchase: Leaseholders now have the right to extend their lease or buy their freehold immediately after purchasing the property, eliminating the previous requirement to own it for two years.
Lease extensions: All leasehold extensions will now be for 990 years for both flats and houses, significantly extending the prior limits of 90 years for flats and 50 years for houses.
Ban on leasehold houses: A crucial reform is the ban on new leasehold houses, meaning that future house sales must be freehold, barring exceptional circumstances.
Service charge and management: Service charges are now standardised to allow leaseholders greater transparency. Leaseholders can also more easily appoint their own managing agents.
Marriage value abolition: One of the biggest cost-saving measures for leaseholders is the abolition of marriage value, which previously increased the cost of lease extensions when leases dropped below 80 years.

These reforms also expand rights for leaseholders in mixed-use buildings by raising the floor space limit for non-residential areas from 25% to 50%, enabling more buildings to qualify for leasehold enfranchisement and the right to manage.

However, while the Act has been passed, many provisions are not yet in force. Some parts, like those amending the Building Safety Act, came into effect this year, while the rest could take years to fully implement, with some experts predicting full enactment by 2025-2026. Leaseholders may therefore need to wait before realising the full benefits of these reforms.

Key Milestones in the Freehold Reform Timeline:

July 2024: Some changes related to the Building Safety Act came into effect. This included initial provisions to make it easier and cheaper for leaseholders to extend leases or purchase their freehold, and reducing costs by abolishing "marriage value" for short leases.
Late 2025 or 2026: According to government estimates, the full implementation of the reforms, including changes to lease extension processes and the introduction of commonhold as the default ownership model for flats, is expected to take more time. Draft legislation for commonhold reform is still being developed, with anticipated consultations and secondary legislation required to finalise these laws (Joelson,
HomeOwners Alliance).
Further consultations: The government is planning further consultations in 2025 on how to address the problems associated with fleecehold (private estates with excessive maintenance fees) and unfair management costs on private estates, with legislative changes expected thereafter (HomeOwners Alliance).

Long-Term Reform Goals are for the government to establish commonhold - where homeowners own their flats outright, along with a share of the building; the default ownership for new flats. However, this transition will take time, as the framework for commonhold is complex and will require additional legal provisions (HomeOwners Alliance).

The Act does leave out certain anticipated measures, such as capping ground rents at £250, which were expected by some stakeholders. In addition, leaseholders may find that the cost of extending leases or purchasing freeholds could still vary, as the government has yet to define critical valuation rates for these transactions.

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