During your property search when looking to buy a flat, you may come across leasehold units that offer a ‘share of freehold’. This is a concept that can be a little confusing, so we’ll lay it all out for you and explain precisely what owning a share of freehold entails, as well as the pros and cons of owning one.
What exactly is a freehold share?
A share of freehold is pretty much what you’d expect it to be, but there are a couple of ways it might be structured. The first is where the freehold is a shared ownership by a number of flat owners within the property and is held in their personal names. This can be done by a group of up to four flat owners.
The second is when a business is the freehold owner and each tenant in the block of flats obtain a share (also known as a membership) in that management company. When you become the new owner of a flat with a share of freehold, you will either be awarded that share by having your name on the property’s documents or you will be given a share in the freehold company. Whatever structure you choose, the end result will be the same: you will own a portion of the property’s freehold.
Why is there a share of freehold?
Many individuals wonder what the point of owning a freehold interest is. Why are you not better buying a freehold outright so you can 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 lease in place, these liabilities are effortlessly shared between the seller and the buyer, ensuring that all common responsibilities are handled throughout the transaction without any additional 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. If even one flat may abdicate these responsibilities the remaining parties would still have to pay the same total amount, meaning they would need to pay more each.
Are there any benefits to owning a portion of a freehold?
In a nutshell, yes there are advantages to owning a share. Holding a share of freehold provides you more control over things like maintenance duties, removing the danger of being taken advantage of by an unscrupulous landlord. Everyone in your property will be invested in the block to some extent if you own a share of the freehold. This should imply that your property is maintained to a better communal standard than that of an individual landlord whose primary goal is to profit from the building. Collective enfranchisement of being co-owners of the freehold, each with a percentage share of the freehold is one of the key benefits to having a share means that everyone of the share of freehold owners pays their share of freehold work.
Another significant advantage if you hold a share of the freehold title is that you will be able to extend your lease at no extra cost. This can be quite beneficial, perhaps saving you thousands of pounds in the future. A £300,000 flat with a £30 per month ground rent fee and a lease expiring in 2087, for example, might cost you anything between £16,000 and £20,000 for a lease extension even before costs! Being able to extend your lease on the cheap is a huge benefit to leaseholders required to pay ground rent and service charges. Shorter leases become less valuable over time, reducing your investment if you only have a leasehold property without share of freehold. So those who buy a share of freehold add value to their investment when extending the lease on a freehold basis.
What are the drawbacks for freeholders or the company that holds the freehold?
Ad hoc maintenance can result in higher expenditures in certain years than others if considerable work is necessary. There could also be issues regarding separate building insurance claims, so this makes freehold a good option when there is work on a scale that impacts the entire building and the land attached to it. However, it is worth noting that the service rate for self-owned blocks is often lower than in a freehold building, so this could be substantially compensated, especially if you reside in the property long enough.
Another issue that some people face while possessing a portion of freehold is obtaining other owners to sign the transfer of the freehold if they want to sell their flat. It is also required as part of the sale for the Land Registry to collect identification from each of the owners with a stake in the freehold, which can be difficult if one of the other shareholders is unavailable at the time of sale.
In other cases, freehold could mean that tenants may be required to perform administrative responsibilities such as filing annual returns for the company that owns the freehold and any accounting that must be kept. Failure to retain and file proper records may result in a large punishment and potentially the holding company controlling the freehold also being struck off the register, with additional reinstatement payments sought. Property insurance will also need to be handled and collected from each tenant on an annual basis.
While this list of downsides may appear to be depressing, the benefits vastly exceed the drawbacks. Many of the disadvantages described above simply do not occur in the majority of cases, but we would be derelict if we did not mention them in this post.
If you are considering a property where the flat is one where you would own a share of freehold and require further information about share of freehold properties or any other property issue, our team of experienced and professional estate agents is always delighted to assist.
