Difference between Leasehold and Freehold
There are 2 types of ownership of the property in Europe: Freehold and Leasehold.
Freehold - timeless ownership (you'll own the property forever).
Leasehold - fixed length of time ownership (you'll own the property for a fixed, extendable length of time - usually for 12-120 years, in some countries, like United Kingdom, even up to 999 years, when Leasehold being called 'Virtual Freehold').
Not 'leasing'! In some countries, like USA and Canada, the term 'Leasehold' ownership is often mistaken for 'Leasing' (which simply means 'rental'). These are two totally different things.
Not 'Timeshare'! Leasehold is also sometimes compared to Timeshare or Fractional ownership, which is also a totally different thing. Timeshare owners can't do anything to the property, such as change furniture or paint walls etc, and can use it only for fixed periods each year (usually 1-4 weeks our of the year). They basically don't own the property, they only own the right to be there during weeks they have bought rights for.
In Europe, 'Leasehold' means ownership of a property for a fixed and extendable length of time (12-999 years). You can live in the property 365 day a year, own pets, change furniture, do house refurbishments (change kitchen, re-tile bathroom, paint walls etc.), rent it out, extend the Leasehold contract or sell remainder of it before or after extension. Basically, it's 100% your property for the next 12-999 years (in Italy the longest residential leasehold contract is 30 years, extendable for next 30 years and so forth).
Freehold and Leasehold types of ownership have pros and cons. Please find a comparison below.
1. Purchase price
The purchase price of a freehold property tends to be more expensive. As a current example, a 2-bed apartment with a leasehold listing price of 12,000 EUR is available for freehold purchase at 78,000 EUR. Even after some possible negotiation, the freehold purchase demands over 6x higher upfront cost. Leasehold properties, therefore, open opportunities for people to own a holiday flat, rental property or residence in Italy much sooner with less capital. For buyers with a slightly higher budget, it may mean being able to afford a larger property than if they were buying a freehold.
2. Purchasing fees
A leasehold purchase price includes all purchasing fees (lawyer's and agency), there are no additional costs there. In the example above, a freehold purchase would incur an additional 5,000 EUR in signing fees, on top of the negotiated purchase price. Leasehold purchase fees are only 1,000 EUR and most of the time included in price as paid by the seller.
3. Ongoing costs
Freehold owners are obliged to pay contributions to the building's maintenance every 5-6 years. This covers the repair and redecoration of the building's masonry, structure, and wear and tear of internal and external communal areas. The bill per apartment ranges between 3,500-6,000 EUR and can sometimes be higher if the residents vote to have an elevator installed or if larger works are required e.g. tree root damage to building, car park layout or roof repairs.As a leaseholder, you do not pay this charge, your freeholder does.
The only charges you pay are ground rent and services charge (about 1,400 EUR per year, depending on apartment size). The service charge and ground rent are fixed for the whole duration of your lease, so they cannot go up. Also, lots of property owners choose to rent out their property in the peak summer season to generate enough income to cover the cost of the service charge and ground rent, usually renting out
only in August covers all year's charges. For these customers, we offer remote property management. Those who do not want to find tenants
themselves, use our Zero Service Charge offer or do not rent their property at all as maintenance (including all bills) of the largest Leasehold apartment rarely goes above of 250 EUR per month - almost anyone can afford it.
Ongoing utility bills (tax, water, sewage, rubbish, condominium) are equal for freeholders and leaseholders. The only difference is that the freeholder pays bills as they come and leaseholder pays upfront (except electricity and gas). Leaseholder's way is more convenient as some bills must be paid in person at local Post Office during special months (such as Tax) and you have to be in Italy at that time, or have someone to do it for a fee. There is no such a problem for Leaseholder as most bills are paid upfront through your freeholder.
4. Length of ownership
A freehold property is a forever property. You will own it for your entire lifetime, unless you choose to sell it and it can be inherited by your family, subject to inheritance tax.
A leasehold property is owned by you for a fixed number of years with the same rights of use and resale as a freehold. In case of a new leasehold contract, you will have a legal agreement with the freeholder called a 'leasehold contract'. At the expiry of the contract, you can choose to give it back to the freeholder or extend your ownership for the next 30 years at a fee that's usually half of the original leasehold purchase price. Your right for extension is written into the leasehold contract. Leasehold property can also be inherited and there is no inheritance tax for it in Italy. In case of purchasing a resale leasehold contract, you will have original lease and purchase agreement from previous leaseholder.
5. Resale of your property
You can choose to sell your freehold or leasehold property at any time. When selling a leasehold, you sign a 'forfeiting lease agreement' and your buyer signs 'taking over lease agreement'. The buyer will have the lease for the number of years remaining in your lease. The new owner will have the right to extend the lease when it expires at the same reduced cost that you would have had.
Lawyer's and agency fees for resale of a lease are 1,000 EUR, much smaller than that of a freehold sale, which are between 3-6% of the sales price (depending on your agreement with the agent).
In addition to this, to sell a freehold, a vendor must obtain an "ACE certificate" for their property, which costs 150-450 EUR. There is also a significant difference in capitals gains tax. Selling your freehold property within 5 years of purchase requires you to pay a 20% capital gains tax in Italy as well as the capital gains tax in your country of residence. A leasehold sale does not incur capital gains tax in Italy.
From our experience, Leasehold is preferred for apartments and Freehold for houses.
If you have further questions about the difference in two types of purchases please contact us.
If you have decided that Leasehold property suits you, please see our listings.
If you have decided that Freehold property suits you, please visit our separate site.