When browsing through an online property portal, a share of a freehold flat or lease is one type of property to keep an eye out for. They are, after all, quite rare in comparison to standard leasehold and share of freehold properties. If you don’t reside in London, look for one in your neighbourhood to see what we mean. In this share of the freehold guide, we’ll go over the ins and outs of owning a share of the freehold for the building in which you own a property.
What is a Share of Freehold?
A share of freehold gives the holder a percentage of the freehold interest in a building. A leaseholder of one of the flats in this building typically holds a share of the freehold, while the remaining shares are held by all or a few of the other leaseholders in the same building. The leaseholders have the option of holding the shares in their individual names or purchasing shares in a company they founded that holds the entire freehold.
What is a Freehold?
A freehold gives the owner complete ownership of a plot of land and any buildings on it for an indefinite period of time. As a result, the freeholder possesses the absolute title. Land, residential residences, bars, and commercial offices are just a few examples of freehold property. Buildings with many leasehold units, such as apartment towers, can also be freehold. However, in addition to owning the land and the building, the freeholder will be legally compelled to follow the conditions of each lease as well as a number of other legal requirements.
Why is there a Share of Freehold?
Many individuals ask what the point of owning a freehold share is. Why not just get rid of the lease and have a wholly freehold flat? The reason is straightforward. Obligations, such as property upkeep and service charge payments, are difficult to transfer between owners in a freehold situation.
With a share of freehold leases in place, these liabilities are effortlessly shared between the seller and the buyer, ensuring that all communal responsibilities are handled throughout the transaction without the need for any further processes. Individual flat owners may be able to abdicate their collective responsibilities if a lease is not in place, putting the property’s upkeep in peril.
What is a Freeholder in charge of?
Although the responsibilities of a freeholder vary based on the conditions of the lease, they often include:
- Organising building repairs and maintenance, as well as adhering to the Section 20 Consultation procedure as needed
- Organising cleaning, painting, and decorating on the inside and outside of the house
- Managing shared utility supplies, plumbing, and heating
- Organising shared garden upkeep and pest control
- Obtaining sufficient building insurance
- Communication with contractors and payment arrangements
- supervising maintenance and repair projects
- Collecting leaseholders’ ground rent, service costs, and insurance premiums
- Budget and management account preparation
- Ensuring that the building complies with tight health and safety rules
What is the Distinction Between Share of Freehold and Leasehold Property?
While a freehold gives you outright ownership of the property and the land for an indefinite period of time, a leasehold only gives you possession for a set period of time. As a result, leaseholders with expiring leases will almost certainly have to pay to extend their lease term in order to continue living in their house.
Leasehold residences are often flats and apartments in purpose-built complexes or renovated buildings with multiple leasehold units. While the owners of such properties have rights to their demised properties, they do not own the building or the land, which belongs to the freeholder.
As a result, the freeholder has the right to charge the leaseholder fee for residing in his building, which is known as ‘ground rent.’ Furthermore, leaseholders will be responsible for paying for the building’s repairs, upkeep, and insurance in accordance with the conditions of their lease.
How can you get a Share of Freehold?
There are three ways to obtain a share of a freehold:
#1. Enfranchisement as a group
Collective enfranchisement is the process by which leaseholders in a building band together to obtain the freehold. The Leasehold Reform, Housing, and Urban Development Act of 1993 established this legal privilege. The 1993 Act requires that both the building and the leaseholders meet severe qualification standards in order to collectively enfranchise:
- The building must have at least two units.
- Qualifying leaseholders must possess at least two-thirds of the flats.
- Collectively, enfranchisement requires the agreement of at least 50% of qualifying leaseholders.
- Non-residential use of more than 50% of the building is prohibited.
- Leaseholders must have a long lease with a period of at least 21 years.
- Leaseholders are not permitted to own more than two units in the building.
If these qualification criteria are met and leaseholders choose to proceed with Collective Enfranchisement, they must notify the freeholder via a Section 13 Notice.
#3. Purchasing a new home that includes a freehold share
When the owner of a leasehold property with a share of freehold decides to sell the property, they have the option of selling the share of freehold as well. The new owner would receive the share of freehold upon completion of the acquisition, as well as the current rights and duties outlined in the lease conditions.
It can be difficult to convince the other shareholders to sign the share of freehold transfer documentation where the freehold is owned jointly in the personal names of the leaseholders. This is typically done to protect their assets and keep complete control without bringing in a new shareholder. The leaseholder, on the other hand, may simply want to keep their share of the freehold rather than sell it along with their house.
#3. Privately purchasing a freehold with another individual
Freeholds become available for purchase on the open market or at auctions from time to time. This is frequently due to the leaseholders in the building declining their Right of First Refusal offer to purchase the freehold as a group. Investors can band together to buy a freehold, distributing the shares any way they see fit.
The Benefits of Owning a Share of Freehold
#1. Ground rent and lease extensions
One of the most significant advantages of owning a share of freehold is the flexibility to renew the lease on a leasehold property without paying a premium. In general, freeholders have the right to levy a premium in exchange for granting a lease extension in order to compensate for the reduction in the value of their stake. This premium rises year after year and can be fairly considerable on cheap leases with less than 80 years remaining.
Furthermore, while a freeholder is likely to grant a lease extension of 99 to 125 years, the owner of a share of freehold may grant an extension of up to 999 years. Similarly, a freeholder is likely to need you to continue paying ground rent in accordance with the conditions of your lease, but as the owner of a share of freehold, you may be able to eliminate the necessity to pay ground rent entirely from your lease. Both of these good measures, however, are contingent on all shareholders agreeing to the revised terms.
#2. Maintenance and repairs
As a leaseholder, you are expected to pay for building repairs and maintenance, but you have little to no say in how, when, or how much those repairs cost. Owning a freehold share gives you more control over such works, which can be handled collaboratively with the other owners or through the use of a management company. And, while each shareholder has a vested interest in the building’s general upkeep, it’s more probable that associated chores will be completed inexpensively and efficiently to the benefit of the leaseholders.
In summary, the share of freehold advantages
- Extend the lease period to 999 years.
- No ground rent is required.
- Control over repair and maintenance duties as well as associated expenses
Disadvantages of Holding a Share of Freehold
#1. Management obligations
The tasks of a freeholder can be both onerous and time-consuming, and while this responsibility will be shared, the difficulties may persist. Furthermore, freeholders must comply with a slew of legal responsibilities, such as filing management accounts and annual returns for the freehold corporation. Freeholders may be penalised if they fail to meet such requirements.
Naturally, if the freehold shareholders have no prior experience operating such a building, there will be difficulties and perhaps financial loss. In that situation, hiring a professional property management business would be advantageous, but this would come at a cost.
When one of the leasehold properties is sold and a new leaseholder acquires possession of a share of the freehold, problems can develop. While the original shareholders may have successfully managed the building together, the new shareholder may hold completely different views or be unwilling to cooperate.
#2. Obtaining a Mortgage
Although estate agents pitch flats with a share of freehold as advantageous for prospective buyers, some mortgage lenders see these sorts of homes as risky investments. This is because shareholders may find it difficult to enforce positive requirements, such as those to repair, maintain, and insure the building. As a result, there may be a risk of the building falling into disrepair or not having enough money to repair any damage from theft, fire, storms, etc. As a result, some lenders will be reluctant to offer mortgages on a flat with a share of the freehold.
In summary, the drawbacks of freehold share are as follows:
- The duties of a freeholder are difficult and time-consuming.
- If freeholders fail to meet their legal obligations, they may be penalised.
- Existing shareholders and arrangements may be jeopardised by the addition of new shareholders.
- A mortgage on a share of a freehold flat may be difficult to obtain.
How does having a Share of Freehold Work?
The idea is that an association be formed to handle the building’s shared amenities. This is frequently accomplished by the formation of a corporation divided into shares, or by the formation of a group of owners. If all leaseholders agree, those who own the freehold but do not want to get involved in the extra work can select a managing agent to deal with maintenance and other issues.
Share of freehold service fees and costs
Having a leasehold property that is a share of a freehold can be less expensive since owners are less likely to be subjected to overcharging of service costs or ground rent, which is common in the leasehold sector. They can negotiate their own service rates, discover the best-value building insurance, and acquire the best building repair pricing. However, keep in mind that with ownership comes responsibility, and it is critical to understand and carry out your responsibilities.
Is the value of the flat increased if it comes with a share of the freehold?
A leasehold flat with a share of the freehold may be more expensive than a straight leasehold flat. Any difference, however, is likely to be minor.
How Does a Limited Company for a Share of Freehold Work?
Limited businesses comprised of freeholder shares are intended to allow all participating members to select how their buildings will be maintained, updated, and operated. Members meet to decide whether or not to carry out particular improvements, leasehold extension difficulties, and other small issues that arise.
In this case, the fundamental objective of a limited company is to provide all of the freeholders with a stake in the management of their building. It allows people to share their priorities, preferences, and concerns with their fellow freeholders while working together.
Share of Freehold Buildings Insurance
In some cases, a property’s freehold is shared. In those circumstances, obtaining a joint freeholder building insurance policy is not difficult. It’s similar to acquiring a combined mortgage, where both parties are legally bound and liable. A joint freeholder building insurance policy is typically used when there are only two owners in a building, both of whom own the freehold of their separate residences.
One of the benefits of a joint policy is that resolving claims can be a nightmare if there are separate policies, with the two insurers arguing about who is accountable for what. Assume the roof and chimney pots have been damaged. You would assume that the upstairs flat owner’s insurance would cover this. No, it is not required. Roof maintenance may be stated in the share of freehold lease as a mutual duty.
This exemplifies one of the biggest issues with shared freehold properties: when freeholders take out separate insurance policies, gaps in coverage for the building can occur, leading to long claims fights. If your property is broken into as a joint freeholder and you both have separate home insurance policies, both policies will payout, but there will be a disagreement about communal sections. Claims should be easier to process with a single policy that names the freeholders individually, and any duplication of insurance should be avoided.
Conclusion
If you’re thinking about buying a house or flat with a share of freehold, it’s a good idea to check out how well the building is managed before making the purchase. While having a share of freehold might provide financial benefits as well as improved security and control, management issues can develop. Having said that, when a single freeholder is in charge of managing the building, management issues can occur.
What you must remember is that even if you own a share of the freehold, you must still follow the terms of the lease for your flat or apartment. The leaseholder will not be allowed to ignore these responsibilities simply because they possess a share of the freehold. Of course, with a share of freehold comes a slew of responsibilities and legal obligations. As a result, it is prudent to take some time to assess whether you are comfortable taking on these responsibilities.
Share of Freehold FAQs
Is share of freehold worth more than leasehold?
A leasehold flat with a share of the freehold may be more expensive than a straight leasehold flat. Any difference, however, is likely to be minor.
Can you sell share of freehold?
When the owner of a leasehold property with a share of freehold decides to sell the property, they have the option of selling the share of freehold as well.
Who owns the loft in a share of freehold?
Alternatively, and more typically, the loft area is not demised and is instead shared by the freehold owners as part of the freehold. This means that no single freehold owner has sole custody or use of the loft space.
