Leasehold and freehold interest: Knowing the difference

8th March 2015 by

 

When talking about the idea of “owning” residential property in England and Wales, one must consider both primary types of land interest: freehold and leasehold. There are considerable differences between these two forms of interest in the London real estate market.

Freehold interest
Legally referred to as “The Fee Simple Absolute in Possession,” freehold interest in London real estate represents the most complete interest possible.

In most applications, a freehold interest describes an outright ownership of a piece of land or property. This ownership is not limited by a time period. Most residential property sales result in a freehold interest.

Leasehold interest
A leasehold interest differs greatly from a freehold interest in that it represents only a temporary right to occupy a property or land. The individual who owns the freehold interest typically exchanges a leasehold interest in return for an agreement to pay nominal rental fees.

This agreement between a freehold interest owner, or landlord, and a tenant involves the creation of a lease. This formal legal document is based on contractual and property laws and lays out the obligations and rights of both parties (landlord and tenant). Many flats and apartments in London and across England are occupied through lease agreements.

Residential property leases

A lease is always based on a fixed period of time. Historically, the typical flat lease was based on a 99-year term. In today’s marketplace, 125-year leases are more common; however, some leases hold for up to 999 years.

While the basic idea of any lease is to give the right of occupancy to the tenant for the specified term, residential property leases can be very complex and lengthy. Another common obligation of the landlord in leases deals with the right of the tenant to have “quiet enjoyment” of the property as long as the tenant meets all his obligations under the lease agreement.

Out of all the tenant’s obligations, the primary duty is typically the payment of a ground rent. Under a long-term residential property lease, the rent payable is typically quite modest. The low amount reflects the responsibility of the tenant to pay all maintenance and repair costs. The tenant usually pays a large lump sum to purchase the lease as well.

Temporary versus permanent

Although “temporary” may refer to many decades when it comes to leasehold property ownership, it does set leasehold interests apart from permanent freehold interests. When the term of a residential property lease comes to an end, the tenant loses the right of occupancy and must return it to the landlord, or freehold interest owner.

Most leases include a statement that helps to ensure that this process goes smoothly. In many cases, the tenant begins the process of renegotiating and extending the lease before the end of the term.

The real estate solicitors at Healys can help you with your freehold and leasehold interests. Please give us a call today on 0207 822 4148