Freehold vs Leasehold: Understanding property in England

If you are a considering buying a property in England it is important that you understand the differences between freehold and leasehold property under English law.

Leaving aside Commonhold (which has had very little uptake since its introduction in 2004), there are two different forms of legal ownership of property under English Law – either freehold or leasehold.

Freehold property and leasehold property are, by their nature, immoveable real estate.

Fundamentally, the owner of a freehold property owns that property and the land on which it stands completely and in perpetuity, whereas the owner of a leasehold property only owns the premises that are specifically demised by the lease and, then, only for a specified period of time.

Owning property through a lease is a convenient arrangement, particularly for buildings that are divided into separate units, with common parts, and which are occupied, or capable of being occupied, by different individuals. By granting leases of units, a landlord is able to create a manageable regime which ensures that the common requirements of a building and its occupiers are adequately catered for (e.g. by imposing rules and responsibilities relating to: building insurance, repair and maintenance of structural parts, decoration and maintenance of common parts, provision of services and peaceful enjoyment).

Estates in Land

The law relating to property in England is extremely complex and has evolved over hundreds of years of developments in the common law (i.e. evolved through the courts) and statutory law (i.e. legislation). This article is intended to provide a simplified summary of the modern-day position.

Excluding Commonhold, there are only two estates in land which are capable of subsisting or of being conveyed or created at law:

• a freehold estate (formally known as a fee simple absolute in possession); and

• a leasehold estate (formally known as a term of years absolute).

Freehold

A freehold estate is the most substantial estate in land.

There is an ancient maxim: “cujus est solum, ejus est usque ad coelom et ad inferos”, which means that the owner of a freehold estate is presumed to own everything “up to the sky and down to the centre of the earth”.

However, there are of course necessary modern limitations to this maxim and now a freehold estate owner’s rights in the airspace above and ground below a property extend only to such height and depth as is reasonably necessary for the ordinary use and enjoyment of that property.

A freehold estate owner continues to own that estate absolutely and indefinitely; at least, that is, until they die, or until they dispose of it during their lifetime. Even on death, the ownership of the freehold estate does not extinguish, but instead passes to the deceased’s beneficiaries as identified in their Will, or to their heirs in accordance with the rules of intestacy. In the event of there being are no identifiable beneficiaries, only then will the freehold estate revert to the Crown.

The rights of a freehold owner

A freehold estate owner has power and freedom to enjoy, use and deal in the estate, almost entirely as he sees fit; for example, he can sell, lease, mortgage or grant rights in or over it. There are, however, limitations to these powers and rights, including:

1. covenants which burden a freehold estate and which bind successive owners of that freehold estate (e.g. a covenant not to use a property for business purposes, or a covenant not to build on a property without the express consent of a third party, which can be enforced by neighbours);

2. contractual, personal obligations which are entered into by a freehold estate owner with a third party (e.g. a contractual obligation not to sell or lease a property without first giving a third party a right of first refusal);

3. interests of mortgage lenders which restrict dealings without consent;

4. various common laws which, for example, prevent acts of nuisance and negligence;

5. various statutory laws which, for example, prevent sexual, racial and disability discrimination; and

6. planning laws
    

Leasehold

Originally, leases were seen as mere personal contracts (rights in personam) but are now firmly established as rights of property (rights in rem) and are in the category of "estates". By their nature, a leasehold estate is inferior to a freehold estate but, as a practical matter, depending on its characteristics, may be just as secure and as valuable as any freehold estate.

A lease is the grant by a person (the landlord) of a right to another person (the tenant) to the exclusive possession of property for a determinate term.

“Exclusive possession” and a “determinate (i.e. identifiable) term” are two essential characteristics of a lease:

1. Exclusive possession
   
   Exclusive possession is the right of a tenant to use a property to the exclusion of all others, including the landlord.
   
   Indeed, "A tenant possessing exclusive possession is able to exercise the rights of an owner of land, which is in the real sense his land albeit temporarily and subject to certain restrictions. A tenant armed with exclusive possession can keep out strangers and keep out the landlord."
   
   While exclusive possession gives a tenant a right to exclude everyone else from the property, including the landlord, the lease may reserve rights for the landlord to enter the property on certain occasions, for example to inspect the state of repair of the property.
    
2. Determinate term:

Once a lease has been created, all rights, benefits, and obligations created by or arising from it will pass to successive owners of that lease.

The rights of a leasehold owner

Subject to restrictions or impositions imposed by the lease itself, or by common law or by statute (in the same way they apply to freehold), a landlord and a tenant each have the freedom and discretion to enjoy, use or deal in their respective estates, entirely as they see fit.

Unless prohibited by the lease, a leasehold estate can be dealt with by the lessee just like a freehold estate: i.e. it may be transferred, underlet or mortgaged, or interests can be granted out of it.

Typically, residential leases contain provisions which:

1. oblige the tenant to pay an annual rent to the landlord (known as a “ground rent”);

2. oblige the landlord to repair and maintain the building in which the leased premises are located, and all common parts and common services, subject to the tenant paying a proportion of the cost of doing so (known as a “service charge”);

3. oblige the tenant to keep the premises demised by the lease in good and substantial repair and decoration;

4. prevent the tenant from carrying out alterations to the premises without the consent of the landlord (which may or may not be forthcoming);