What does owning a share of the freehold mean?
Owning a share of the freehold is when individual flat owners collectively purchase the freehold of the building. This gives them a vested interest in the entire property. It can be a welcome change from the traditional leasehold system, as it bestows each flat owner a voice in the freehold company.
Flat owners with a share of the freehold can control property maintenance, extensions to lease terms, and service charges. They also escape from paying ground rent, a mandatory expense associated with leasehold properties.
We run through some of the reasons why buying a share of the freehold might be for you.
Leasehold versus freehold: key differences
A leasehold basis confers the legal right to occupy a flat for a set number of years, known as the 'lease term'. On the other hand, a freehold context means outright ownership of the property and the land on which it stands.
In leasehold flats, obligations such as ground rent and service charge payments often fall to the tenant. However, when owning a share of freehold, flat owners hold a stake in the freehold company. This situation brings more control over decision-making but may introduce the extra cost and responsibility of property upkeep.
You can read more about leasehold and freehold ownership.
Advantages of share of freehold ownership
Benefiting from greater control over property decisions
One appealing facet of owning a share of freehold is that it provides individual flat owners more control over property decisions. In leasehold properties, a third-party landlord or management company typically handles decisions. This scenario often leads to disputes over service charges or lease term extensions.
When flat owners hold shares in the freehold-owning company, they participate directly in the decision-making process. This involvement provides a remedy for such issues.
Potential reduction of service charges
Service charges can be a considerable expense for leasehold flat owners. However, having a share of the freehold may help alleviate these costs. As freehold owners, owners of flats can select their preferred providers for services such as cleaning, maintenance, and insurance. They can potentially negotiate lower rates.
In the absence of an unscrupulous landlord, such savings can translate into reduced service charges for the flat owners.
Ability to grant lease extensions: a significant advantage
As a leaseholder, you might face a dwindling remaining lease length that can depreciate the property's value. This situation often necessitates costly extensions to leases. However, as a freehold owner, you have the ability to grant yourself and other owners extensions to your leases.
This power not only mitigates the devaluation of the property but also eliminates potential tension between landlords and leaseholders over extension fees.
Does a share of the freehold add to the property's value?
Ownership of a share of the freehold may not guarantee a significant increase in the property's value, but it offers perceived value to potential buyers. A property with a share of freehold often appears more attractive. It suggests the owners have more control and are less likely to encounter issues with the lease or service charges.
Such perceived benefits can make the property more appealing in the market, indirectly boosting its value.
Disadvantages of ownership of a share of the freehold property
Understanding the financial implications: purchase price, legal fees, and more
Acquiring a share of the freehold often requires a monetary commitment that extends beyond the cost of the property itself. Initial outlay includes not only the purchase price but also legal fees, which can be substantial.
While some may consider the use of an own solicitor an extra cost, it's often a move that results in significant savings in the long run. The expert advice can minimise the risk of legal pitfalls that could incur further costs down the line.
Maintenance obligations and building insurance: the other side of the coin
As a freehold owner, you take on the responsibility of maintenance for the entire building, not just your individual flat. Any major repairs or renovations needed for the building are your responsibility, shared with the other owners.
For instance, should the roof start to leak, or the communal areas need refurbishing, these costs will fall to you and the other freehold owners. This is quite different from a leasehold basis, where often the management company is responsible for such matters.
Additionally, as freehold owners, you will need to ensure that the building is appropriately insured. This might seem straightforward, but it can be a complex and time-consuming task. You will need to ensure the insurance covers all the necessary elements and potential liabilities related to the property.
Navigating disagreements among other owners
When you own a share of the freehold with other flat owners, decisions about property maintenance, service charges, and lease extensions require agreement among all the owners. Disputes can arise, which could complicate the decision-making process.
To mitigate this, many freehold companies create a formal deed or participation agreement. This outlines procedures for decision making and dispute resolution. Although this might sound somewhat formal and daunting, setting clear expectations and processes can help prevent disputes before they happen.
Service charges and ground rent: a necessary expense
Even with a share of the freehold, service charges remain a reality for most flat owners. These charges cover expenses such as general maintenance, cleaning of communal areas, and contributions to a reserve fund for major works.
The main difference for share of freehold owners is that they have greater control over how these charges are allocated and spent. On a positive note, being an owner of a share of the freehold means you will typically no longer need to pay ground rent, a cost often associated with leasehold properties.
However, it's essential to remember that whilst you gain more control, this freedom also comes with the responsibility of ensuring the building's upkeep is maintained.
Unexpected costs: legal fees, property maintenance, and insurance
Owning a share of the freehold can bring about unexpected costs that need to be taken into account. Legal fees are one such expense; if you decide to extend leases or change the terms, you may need legal assistance, especially when dealing with the Land Registry and Companies House.
Property maintenance costs can also be higher than expected, especially for older buildings where regular upkeep is necessary to preserve the property's condition. A leaking roof, damp problems, or outdated communal areas could all lead to significant outlays.
Insurance is another factor to consider, as buildings insurance for a freehold property can be higher than for a leasehold flat. This is due to the greater liability that comes with owning the freehold. Balancing these costs can be a challenging aspect of owning a share of the freehold. By understanding these potential extra costs from the outset, you can better prepare for this commitment and plan your finances accordingly.
Transfer of ownership: the legal procedure
A share of freehold transition typically begins with a majority vote amongst existing freehold flat co-owners. Under UK law, at least half of the qualifying tenants must be willing to participate.
Following a successful vote, the legal work kicks off, which may involve a company setup to hold the freehold title. With a new limited company in place, leasehold titles transform into shares, and the freehold is transferred to the company's name.
This process can feel like a symphony of solicitors, signatures, and seemingly endless paperwork.
Lease extensions and shortening leases: what you should know
Just as the hands of a clock never run backward, a lease's life inevitably dwindles with each passing day. The right to extend the lease comes as part of the freehold package. This right acts as a lifeline for long lease owners who wish to prevent their property from reverting back to the freeholder.
For a lease extension, the tenant's solicitor prepares the documentation. This documentation includes a new lease and a deed of variation.
Simultaneously, it’s important to understand that extending one lease may result in others shortening. This process is a delicate dance within the walls of self-owned blocks and may require careful negotiation and communication amongst all parties.
Getting ready to buy: key considerations before purchasing a share of freehold flat
Validating the freehold status at the Land Registry
Just as a gardener checks the soil before planting, so must a potential freehold purchaser verify the property's status.
A simple online visit to the Land Registry website and a small fee will provide you with the needed details. The freehold status is confirmed through a search on the property's address. A registration document will show if the freehold exists and name the current freeholder.
This document is your starting point, the first brick in your freehold buying adventure.
Contacting the management company and other registered owners
Purchasing a share of a freehold flat can be likened to joining a rowing team, with all members aiming for a common destination. But before you pick up the oar, you’ll want to have a chat with your future team members.
Engage the management company and current freehold co-owners to understand their perspectives and gauge the health of the building's freehold. Are the ad hoc maintenance tasks being addressed? What about ground rent collection?
Take this chance to ask questions, get clarifications, and establish relationships.
Enlisting your solicitor's support for a smooth process
Every ship needs a captain, and when it comes to the choppy waters of property transactions, a solicitor plays that role.
While it's entirely possible to handle the transaction yourself, having a solicitor by your side can be a saving grace. They bring expertise in property law and can help ensure the transfer ownership goes smoothly. They can also advise on lease extensions, and more.
Transferring a share of freehold: the process and legal implications
Laying the groundwork for a shift in ownership, transferring a share of freehold is a multi-step procedure punctuated by legal and financial interactions.
Collaborating with the estate agent and other co-owners
When it comes to the transfer of a share of freehold, mutual collaboration is the fulcrum on which success pivots. Engaging estate agents and fellow co-owners in the process is not just procedural, but also crucial for seamless execution.
Selling a freehold flat is not significantly different from selling a leasehold one. However, the co-owners' involvement is where the divergence arises.
Consent of the other co-owners is often required to ensure the new owner's entry into the freehold title. Discussions surrounding the transfer of management responsibilities and distribution of costs add to the intricacies of this process.
Communicating with mortgage lenders and managing legal aspects
While communicating with mortgage lenders may seem like a step removed from the heart of the process, it forms the financial backbone of any freehold property transfer. Lenders often have strict criteria for the properties they mortgage. It's important to remember that some mortgage lenders are cautious about lending on leasehold flats where the tenants hold a share of the freehold.
The legal process of transferring a share of freehold can be a bit more complex than a typical leasehold property. It involves not just transferring the leasehold title but also a share in the freehold building. This double transfer is typically achieved by using two separate contracts.
Moreover, the buyer's name will need to be registered with the Land Registry and, if the freehold is owned by a limited company, their name should be added to the company's membership certificate.
For more insights on this topic, the UK government's Land Registry guide offers a wealth of information.
The pathway to full ownership: converting share of freehold to full freehold
A leap from shared to singular, converting a share of freehold to a full freehold charts a pathway from collective ownership to exclusive control.
Legal procedures for full ownership
Delving deeper into freehold means understanding the nuances of collective ownership. A key legal requirement is that the leaseholders - who should constitute at least two-thirds of the total - need to agree to buy the whole freehold. This is known as collective enfranchisement.
The procedure typically involves serving a Section 13 Notice on the current freeholder stating the proposed purchase price for the freehold interest. Negotiations on the purchase price usually follow and if an agreement can't be reached, the matter can be referred to the Leasehold Valuation Tribunal.
Overcoming challenges and costs in the transition
While the prospect of converting a share of freehold to a full freehold is enticing, it is also accompanied by challenges. These range from securing agreement from the majority of leaseholders, through the cost of buying the building's freehold, to legal fees.
Another potential obstacle is if the freehold is owned by a company, in which case at least half of the flats in the building must be owned by leaseholders who are also members of the company.
On the financial front, besides the purchase cost, there could be valuation and tribunal fees if price agreement proves elusive. Also, not to be overlooked are the potential service charge disputes, ad hoc maintenance costs and the complexities around shortening leases.
That said, despite these challenges, full ownership can be rewarding, especially when it comes to control over the property.
While it is possible to manage these transitions yourself, it can be beneficial to bring in professional solicitors experienced in property law. They can help streamline the process and minimise risks.