Freehold vs. Leasehold in London Blocks: Service Charges, Ground Rents for New Landlords

Freehold vs Leasehold: London Landlord Guide

Freehold is outright ownership of the land and building. Leasehold is a long, time-limited right to occupy and use a flat and to share costs for common parts. Service charges are variable recoveries from leaseholders for running and maintaining the block. Ground rent is a fixed or escalating payment for the land interest, separate from service charges.

Why that matters for a new London landlord is simple: control and cash flows come from different places. Service charges fund the building but sit in trust for leaseholders. Economic return comes from ground rent on older leases, a permitted management fee, occasional premiums, and careful use of ancillary rights. Get the structure wrong and you will own responsibility without revenue. Get it right and you will protect cash yield while maintaining a safe, compliant building.

Align the incentives to avoid costly friction

In most blocks, several actors push and pull on budgets and timing. When you understand what each party wants, you can set realistic expectations and reduce disputes that drain working capital.

Key actors: the freeholder, any headlessee, leaseholders, a resident management company or right-to-manage company, and a managing agent.
Incentives: leaseholders want predictable, reasonable costs and a safe, well-maintained asset. Investors want stable, enforceable cash flows. Managing agents want defensible budgets. Regulators want transparency and safety.
Implication: align these goals through clear scopes, timely consultation, strong records, and honest communication. If not, expect challenges and delays at the First-tier Tribunal.

Know what you actually own before you price it

Pure freehold: maximum control, constrained cash

Under a pure freehold, you hold the building title and grant leases directly to flats. You control the envelope and the core obligations. You do not own service charge monies; they are trust funds to pay recoverable costs in the leases. Return, if any, comes from ground rents on older leases, any permitted management fee, and premiums for enfranchisement or lease extensions.

Headlease: income spread, covenant burden

Under a headlease, you hold a lease from the freeholder and often receive ground rent from flats and management rights, but you also pay a headrent and carry the headlease covenants. Your value depends on the remaining term and the spread between ground rents received and headrent paid. Short terms and onerous repair covenants can erode value fast.

Individual flats: yield without control

Ownership of individual flats earns unit-level rent and capital appreciation. However, you do not control service charge budgets or the timing of major works, so value creation is mostly passive.

Legal framework in England and Wales you must respect

Several statutes define what you can recover, when you can recover it, and how you must operate. Failing to follow the rules turns recoverable spend into write-offs.

LTA 1985: sets reasonableness tests for service charges – only reasonable costs for works to a reasonable standard are recoverable.
LTA 1987: puts service charge funds on trust and prescribes demand formalities – demands must show the landlord’s name and an address in England or Wales or charges are not due until corrected.
CLRA 2002: creates right to manage, major works consultation rules (Section 20), and controls on administration charges.
Ground Rent Act 2022: restricts ground rent on most new long residential leases to a peppercorn.
Building Safety Act 2022: imposes duties for higher-risk buildings and limits recovery of historical defect costs from qualifying leaseholders.
Leasehold and Freehold Reform Act 2024: extends lease extensions to 990 years, changes enfranchisement valuation, tightens service charge transparency, and expands right-to-manage eligibility as secondary legislation commences.

Common structures and how they affect control

Understanding the lease structure clarifies who can set budgets, sign contracts, and earn fees.

Direct freehold: long leases with the freeholder managing services and collecting ground rents where they still exist.
Freehold plus headlease: a headlessee collects ground rents and may manage under lease powers, paying a headrent to the freeholder.
Tri-partite leases: leases that name a resident management company with defined management powers.
Right-to-Manage: leaseholders take over management functions without buying the freehold; the landlord’s fee income can drop to zero.
Commonhold: ownership without leases, still rare today; monitor policy but do not underwrite broad adoption yet.

Service charge mechanics: how money moves and where it leaks

Service charges keep the lights on, lifts running, and insurance in force. They are also the most common source of disputes. Treat them as fiduciary flows, not revenue.

Budgeting and demands: set an annual budget for permitted services and issue compliant demands. Missing the landlord’s name or an England or Wales address delays payment until fixed, creating timing risk.
Trust status: funds sit on statutory trust and must be segregated from the landlord’s money. Reserve funds for capital works are common but tightly governed.
Reasonableness and timing: the 18 month rule blocks recovery if you do not demand or notify within 18 months of incurring a cost. A slow billing cadence is costly.
Major works consultation: consult if any contribution exceeds £250 for works or £100 per year for long term agreements. Failure caps recovery unless you obtain Tribunal dispensation.
Disputes: weak scopes, procurement, or records invite First-tier Tribunal challenges that delay recovery and increase write-offs.
Insurance: building insurance is usually a service charge item. Since January 2024, brokers and insurers must disclose remuneration and treat leaseholders as customers. Expect lower net commissions and more paperwork.
Building safety costs: qualifying leaseholders are protected for many historical defect costs, with statutory caps in place. Model minimal recovery on legacy cladding and similar defects.

Two minute health check you can run today

Arrears ratio: arrears divided by annual budget. Over 10 percent signals process or affordability issues.
Consultation readiness: percentage of major works with completed Section 20 packs. Under 75 percent risks caps.
Reserve adequacy: reserve balance divided by 5-year planned capex. Below 0.5x means future spikes in demands or financing stress.

Ground rents: what remains and where policy is heading

Ground rent economics are shrinking as new leases carry a peppercorn rent and policy leans against legacy increases.

Direct freehold: leaseholders pay ground rent to the freeholder on older leases only. New long leases granted on or after 30 June 2022 are peppercorn.
Headlease chain: leaseholders pay ground rent to the headlessee, who pays headrent to the freeholder. The margin is the spread, net of costs.
Policy path: government consulted in December 2023 on restricting ground rents in existing leases, and 2024 reforms cut enfranchisement values. Price rent streams conservatively.

What to read before you bid on a block

Rigorous due diligence helps you avoid non-recoverable costs and overpayments. Build your checklist and verify every assumption.

Title: freehold and any headleases, plans, easements, support rights, roof and airspace rights, and adoption of estate roads.
Leases: specimen long lease, variations, ground rent clauses, apportionments, insurance obligations, repair covenants, reserve fund terms, and unusual landlord covenants.
Corporate: resident management company or right-to-manage constitutions, registers, minutes, agent appointments, broker terms, supplier contracts, and Companies House compliance.
Financial: three years of budgets and actuals, accountant’s reports, reserve statements with bank confirmations, arrears aging, recovery status, major works pipeline, insurable values, and premium and commission disclosures.
Statutory process: Section 20 packs, dispensation orders, Section 47 and 48 notices, Section 20B notifications, Tribunal decisions, and any Section 24 appointment of a manager activity.
Building safety: fire risk assessment, external wall system evidence, higher risk building registration, identity of the Principal Accountable Person, safety case, and resident engagement plan.
Litigation and regulatory: Tribunal cases, cladding or insurance disputes, and any Competition and Markets Authority or Trading Standards correspondence.
Enfranchisement: live Section 13 or 42 notices, valuations, past deals, and expected impact of 2024 reforms.

For transaction context, review definitive terms alongside a clear heads-of-terms or sale contract. If you want a refresher on key elements of a property sale contract, see this overview of a sale and purchase agreement in real estate here. When you reach valuation, the cost approach can be a useful cross-check on replacement cost less depreciation, especially for unusual buildings. A quick primer is available here.

Economics and the fee stack: what survives to your P&L

Most cash in the system is not yours. Underwrite conservatively and assume scrutiny on every fee line.

Service charges: not revenue, but fiduciary flows with tight constraints.
Ground rent: survives only on older leases; stress for arrears, policy caps, and enfranchisement attrition.
Management fee: bill only if leases allow a separate fee, and keep it reasonable and defensible. Without express wording, internal overhead is typically not recoverable.
Insurance commissions: expect lower capture under new conduct rules and higher documentation requirements.
Premiums: enfranchisement and lease extension receipts will shrink as reforms commence; adjust today’s pricing.
Ancillary rights: roofspace, airspace, and telecoms can add value where permitted by title and lease covenants.

Worked example: a quick model for a 100 unit block

Take a 100 unit block. Average ground rent £300 per unit under pre 2022 leases. Service budget £700,000 with a 5 percent management fee permitted.

Ground rent: £30,000 gross before arrears and enforcement costs; policy risk may cap or flatten future increases.
Service charge: £700,000 received into trust, spent on operations, utilities, cleaning, insurance, compliance, and reserves; a 5 percent fee yields £35,000 for manager or landlord on performance delivered.
Insurance: say £200,000 premium; net commissions now minimal unless fully disclosed and supported by a fair value assessment.
Indicative net: roughly £65,000 to a freehold investor before overhead, excluding one off premiums and after allowing for admin spend. Reality will vary with arrears, disputes, and safety costs.

Accounting, reporting, and tax: get the basics right

Transparent records speed up recovery and reduce Tribunal risk. Tax and VAT treatment often surprise first time landlords.

Service charge accounting: separate trust records with annual statements and an independent accountant’s report to leaseholders.
Revenue presentation: most landlords present service charges on an agent basis, recognizing only fees as revenue, with clear disclosures on cash balances and obligations.
Consolidation: if the landlord controls a resident management company, assess IFRS 10 – most are resident controlled, but exceptions exist.
VAT: residential rents and most related service charges are exempt; managing agents charge VAT on their fees; input VAT recovery is limited for exempt outputs.
Tax: corporation tax applies to ground rent, management fees, and commissions; stamp duty land tax applies on acquisition; non UK investors should assess UK property business rules and withholding on debt.

Regulatory touchpoints that move outcomes

Compliance is now part of the business model, not a side task. Missing a step can block recovery or invite penalties.

Building safety: higher risk buildings, generally 18 meters or seven storeys, must be registered with a safety case and resident engagement. Non compliance limits recovery pathways.
Insurance transparency: brokers disclose remuneration and fair value; landlords should document value delivered if any commission is retained.
Consumer protection: regulators have challenged unfair ground rent terms; expect scrutiny of doubling clauses and tied management.
Corporate transparency: identity verification and stronger Companies House controls are rolling out; ensure resident companies and SPVs are compliant.
Data and AML: handle resident personal data under UK GDPR, and be ready for anti money laundering checks during conveyancing and any regulated activities.

Risks and fast edge cases a buyer should price

Non recoverable spend: missed consultation or late notifications cause leakage. Fix cadence and evidence now.
Building safety: ongoing costs for higher risk buildings are only partly recoverable. Budget explicitly.
Arrears: slow Tribunal routes and strict evidential standards drag cash. Tighten demand compliance and collections.
Loss of control: appointment of a manager or right to manage strips powers and fees. Elevate service levels and transparency.
Headlease fragility: short terms and heavy repairing obligations decay value. Avoid short or onerous headleases.
Mixed use thresholds: commercial area over 25 percent alters consultation and right to manage eligibility. Verify measurements.
Procurement conflicts: related party appointments without disclosure invite challenge. Obtain competitive quotes and disclose relationships.

Implementation cadence: what to do and when

A disciplined plan improves outcomes in weeks, not years. Use this staged approach to stabilize finances and trust.

Weeks 0 to 2: pull titles and leases; request budgets, actuals, arrears, Section 20 files, insurance schedules, safety status, and Tribunal history. Triage Building Safety Act exposure and developer support.
Weeks 2 to 6: abstract leases for rents, apportionments, reserves, and challenge rights. Build a service charge waterfall and arrears model. Stress test consultation and demand compliance.
Weeks 6 to 8: price ground rent policy risk and reform impacts. Negotiate warranties or indemnities for consultation gaps or safety exposures. Consider retention or escrow for insurance remuneration questions.
Weeks 8 to 12: line up agent and broker terms compliant with conduct rules; open designated trust bank accounts; prepare Section 48 notices; set a compliance calendar for budgets, consultations, and reporting.
First 90 days: explain budget rationale, insurance disclosures, and planned works to residents. Confirm the Accountable Person and safety milestones. Start pre consultation early for major works. Clean up arrears with a reasoned plan before litigation.

Pricing and underwriting: how to avoid optimism bias

Underwrite recoverability like a credit analyst, not a landlord. The building will teach the lesson if you do not.

Recoverability: build lease level apportionments, test historic actuals, check reserve adequacy, and benchmark procurement for utilities, cleaning, lifts, and insurance.
Ground rent: stress for arrears and policy intervention. Do not import pre 2022 yields into post 2024 pricing.
Safety costs: model as ongoing and only partly recoverable. Keep contingency.
Insurance: re-broker early and retain evidence of fair value.
Enfranchisement: exposure grows as leases shorten. Negotiate price protection or sharing on premium receipts while secondary legislation is pending.

Operating model that actually works

Repeatable processes and transparent communication reduce disputes and increase recoveries. Treat this like a professional service business.

Governance: central technical and compliance review for budgets above thresholds, Section 20 packs, and insurance placements.
Cash controls: dual signature trust accounts for service charges and reserves, monthly reconciliations, and separate client money accounts at managing agents.
Procurement: at least three quotes for major services; framework agreements for lifts, fire systems, and M&E to lock SLAs and pricing.
Resident engagement: publish budget rationale, insurance summaries, and long term maintenance plans. Early clarity lowers disputes.
Dispute playbook: standard procedures for compliant demands, timely Section 20B notifications, and robust Tribunal preparation. Track outcomes and update templates.

Closing Thoughts

In London blocks, the freehold versus leasehold choice is really a question about control and recoverability. Service charges keep the building alive but sit in trust with strict rules. Ground rent matters only where it still exists, and policy is leaning against it. Building safety duties add durable costs in taller buildings. The 2024 reforms will trim enfranchisement-linked upside. Price these facts in, run a tight process on consultation and insurance, and document value for money. Do that, and you protect cash yield and avoid Tribunal leakage. Ignore it, and the building will teach the lesson for you.