Is buying a share of freehold flat a good idea?

Last updated: July 2023 | 4 min read

What is a 'share of freehold'

A share of freehold denotes a circumstance where the leasehold flat owners in a building acquire the freehold together, usually through a limited company. This makes them collectively the freehold owners, each holding an equal stake.

An individual property owner with a share of freehold, thus, has dual ownership: a leasehold title to their home and a share in the freehold of the entire building.

Difference between freehold and share of freehold

While freehold property ownership gives the property owner the exclusive rights to the land and the building on it, a share of freehold grants the flat owners in the same building a joint ownership of the entire freehold.

The freehold is usually held by a limited company in which all the flat owners have shares. Hence, a share of freehold, unlike full freehold, entails collaboration and co-operation among the co freeholders.

You can read more about how leasehold differs to freehold.

Advantages and disadvantages of a share of freehold flat

Pros of owning a share of freehold flat

Greater control over property

Ownership of a share of freehold flat empowers an owner with increased control over their property, eclipsing that afforded to leasehold properties.

Freehold flat owners participate in decisions related to the building, such as maintenance, management, and policy formulation. Such control can prove advantageous in shaping a living environment that aligns with the all the owners' preferences.

Advantages with lease extension

Owning a share of freehold can simplify the process of extending the lease. As co-owners of the freehold, leaseholders can grant themselves a new lease or extend the existing lease at no premium, apart from professional costs.

This contrasts with the often costly and protracted negotiations with an independent landlord typical of lease extensions in leasehold flats.

Cons of owning a share of freehold flat

With the perks of a share of freehold come potential problems.

Potential share of freehold problems

One common issue is a disagreement among the co freeholders on matters like property maintenance and refurbishments.

Additionally, the potential for legal disputes increases as the legal right to the property is held jointly, often necessitating the intervention of a solicitor for resolution.

Challenges with joint owners and management

Shared ownership also implies shared responsibilities. Co-operating with fellow leaseholders in the management of the property can be challenging, especially when their opinions differ.

Managing service charges, addressing repairs, and ensuring compliance with safety regulations are tasks that require collective agreement. To ease this burden, some freeholders choose to engage a professional management company, a choice that comes with its own set of pros and cons.

Understanding the financial implications

Ground rent and service charges cast a long shadow on the finances of leaseholders. But what happens when you transition to a share of freehold? Let's look into the financial implications.

Is there a need to pay ground rent?

Ground rent stands as an enduring obligation. However, as joint owners of the freehold, flat owners can collectively decide to dispense with this cost, reducing it to almost zero. The effective elimination of ground rent can make a sizeable difference in the yearly expenditures, providing a financial relief to you as the new property owner.

This decision, however, requires a consensus among the co owners. It's usually managed through a formal deed of variation to the existing leases.

How much value does a share of freehold add?

The added value of a share of freehold isn't always tangible, but it can certainly influence the appeal of your property. A freehold share gives prospective buyers the assurance of control and the elimination of ground rent, potentially increasing the attractiveness of the property.

The value doesn't come from the freehold interest itself, but from the freedom it provides in extending leases to a longer term, which is a key selling point to many buyers.

Implications on service charges and building insurance

Service charges cover the costs of maintaining and insuring the building. As a freeholder, these costs will be divided among all the flat owners.

It's a common misconception that service charges disappear once the freehold is bought. They don't. They still need to be paid, but now you have a say in how much you're charged and what the funds are used for.

Insurance is also critical, and as a freehold owner, you'll have a vested interest in ensuring that the entire building is adequately covered.

Responsibilities as a freehold shareholder

Shared management and company accounts

In a share of freehold scenario, the co freeholders usually establish a limited company to manage the freehold. This management company acts as the legal entity that owns the freehold and is responsible for managing company accounts and ensuring compliance with Companies House regulations.

Whether you opt for self-management or appoint an external managing agent, it's crucial that all owners understand the ins and outs of managing the freehold.

Managing agents help in dealing with the daily tasks of running a building, from arranging repairs to handling company accounts. While you may be capable of carrying out these tasks yourself, enlisting the expertise of a professional can save time, reduce risk, and even save costs in the long run.

Repair costs and safety regulations

One of the fundamental aspects of owning a property is maintaining it in good repair. When you own a share of freehold, you're responsible not only for your individual flat but also for the entire building. This includes everything from the roof to the ground floor and everything in between.

A leaky roof or a faulty elevator isn't just a nuisance; it's your responsibility.

Tackling building defects is part and parcel of your responsibilities. Whether it's a damp issue creeping up on the ground floor or a major redevelopment of the property, a sound understanding of the building's structural integrity and a proactive approach to problem-solving can go a long way.

Understanding potential disputes and how to resolve them

Owning a share of freehold often comes with disputes and disagreements. Clarity in communication and resolution strategies can prevent these issues from escalating.

Common shared freehold disputes

A plethora of conflicts can surface among co freeholders. These can range from differences over service charges, to disagreements about property maintenance, to disputes about the nature of alterations and improvements to individual flats or the entire building.

Dealing with these disputes effectively is integral to the peaceable co-existence of the flat owners and the overall management of the property.

Resolving conflicts among co freeholders

Resolving conflicts among co freeholders requires a proactive and systematic approach. Firstly, open and transparent communication is vital. Regular meetings can help iron out misunderstandings and facilitate decision-making.

If disagreements persist, it may be prudent to engage an independent mediator or seek legal advice. In certain circumstances, you might even need to resort to the tribunal system.

To avoid such scenarios, it's beneficial to establish clear roles and responsibilities from the onset and have a comprehensive agreement that all co freeholders adhere to.

What happens when one flat owner wishes to sell?

When one flat owner decides to sell, it can stir the tranquillity in a shared freehold. The new owner will need to be introduced to the management structure and responsibilities. They also need to be added to the company at Companies House and become a party to any existing agreement among the co freeholders.

Often, the outgoing owner will transfer their share in the freehold to the incoming owner as part of the sale process. All these tasks require coordination and can lead to delays if not managed efficiently.

Disagreements on maintenance work and alterations

Maintenance work and alterations can be a hotbed for disagreements among freehold owners. Some might be in favour of an upgrade, while others may prefer the status quo to keep costs low.

A sensible way forward is to have a clear process for decision-making about such matters, detailed in the legal agreement between the freeholders. Decisions should be based on maintaining the value and livability of the entire building rather than catering to individual preferences.

Getting a mortgage and dealing with lease extensions

Can you secure a mortgage on a freehold flat?

Securing a mortgage on a freehold flat isn't a straightforward affair. While some mortgage lenders will readily provide loans for freehold flats, others may show reluctance. The reason? Some lenders view the complexity of shared freehold arrangements as an increased risk.

The Council of Mortgage Lenders provides a comprehensive guide to their members’ lending criteria, which can help in identifying lenders who are more likely to provide a mortgage on a share of freehold flat.

How to manage lease extensions in a shared freehold

Managing lease extensions can become a quagmire without a clear understanding and an agreed-upon process. When all the leases in a building are owned by the freeholders, lease extensions can be granted more easily and often without any premium, depending on the agreement among the freeholders.

Typically, lease extensions in a shared freehold do not require a premium. But this depends entirely on the agreement among the freeholders.

It's beneficial to have a clause in your agreement stating that lease extensions can be granted without a premium to avoid future disputes. Be aware, though, this isn’t a hard and fast rule and specific circumstances may dictate a different approach.

Transferring a share of freehold

Transferring a share of freehold usually happens when a flat owner sells their property. The outgoing owner generally transfers their share in the freehold to the incoming owner.

This involves updating the records at Companies House and possibly amending the title deeds at the Land Registry. While you can do this yourself, engaging a solicitor can ensure a smooth, accurate process and minimise risks.

How to ensure smooth operation of a freehold company

Engaging a management company

While it is possible for flat owners to self-manage the building, employing a professional team may save time, reduce risk, and alleviate the strain of day-to-day management.

With a professional management company, freehold owners can comfortably tackle the nitty-gritty of service charges, lease length, building insurance and more, while ensuring legal obligations are fulfilled to the letter.

Moreover, they often prove invaluable in troubleshooting potential disputes, providing a buffer between co-owners.

Shared ownership and co-operation among apartment leaseholders

Property disputes are rarely straightforward. In a shared freehold scenario, disputes can occur over anything from service charges to building maintenance.

An ideal starting point to resolve these disputes is open communication. Establish a common ground where everyone can voice their concerns. More often than not, a reasonable and fair resolution can be reached by the co-owners themselves.

In cases where resolutions cannot be reached, consider seeking independent advice or even mediation services. As joint owners, it's crucial to remember that you're all on the same team, working towards the common goal of maintaining a well-run and profitable building.

Is a share of freehold flat a wise investment?

Every investment decision deserves a thorough examination of its advantages and possible setbacks. In this section, we'll tie all the threads together and provide some final thoughts on whether buying a share of freehold flat is a wise investment.

Evaluating all aspects of a freehold flat purchase

When considering a share of freehold flat, it's prudent to examine all angles of the investment. Delve into the potential benefits such as the elimination of ground rent and increased control over the property.

On the flip side, also ponder on the additional responsibilities that come with becoming a freehold owner, including potential disputes with fellow leaseholders and the need for active management of the building.

Review the terms of the existing lease, the structure of the management company, and any service charges you may incur. It's also worth consulting Companies House and the Land Registry to understand the legal perspective of your property.

Seeking advice from legal professionals and estate agents

Freehold purchases can be complex. Solicitors and estate agents are adept at the ins and outs of property law and can guide you through the intricate process of freehold acquisition.

By seeking their expertise, you can reduce risks, save time and potentially dodge costly pitfalls.

Though it is feasible to handle the transaction independently, professional advice often helps secure a smooth transition. They can assist in navigating lease extensions, managing the land registry, and understanding title deeds.

A legal professional's input becomes particularly handy when you're dealing with only certain lenders who approve mortgages on a freehold flat.

Remember, the decision to buy a share of freehold flat is not one to be taken lightly. Weigh all factors carefully and consider seeking professional advice before taking the plunge.

© 2000 - 2024 Net Lawman Limited.
All rights reserved