A 'share of the freehold' is a phrase which appears countless times in sales particulars up and down the country. What does this mean?
The usual leasehold relationship
Most flats and apartments are leasehold, which means that you will have a contract (called the lease) that entitles you to occupy the flat for the term specified within the lease. These commonly start at 99 or 999 years. Whilst you own the flat, you do not own the building or the ground on which the flat is built. The freeholder owns the ground and the building itself, and this is what they are leasing to you, the flat owner, for the term of 99 years (or the number of years specified in the lease).
A freeholder is often a company, although occasionally it is an individual.
Owning the freehold (or a share of it) and leasehold
A person who owns both a lease and a share in the freehold wears two different legal hats. It is important to recognise that the lease is not defunct. It is still the document which regulates the ownership of the flat and leaseholders should ensure they have a copy and understand it. As there is still a lease on the flat, the normal rules also still apply between the leaseholder and the freeholder. The Share of the Freehold element essentially gives the leaseholders the power to make collective decisions in regards to the freehold of the building (for example in regards to insurance, gardening, decorating or parking).
The freeholder, now being the group of Leaseholders, still has to maintain the building in accordance with the leases and raise service charge demands. The freeholder must also still comply with legislation, such as the duty to consult about major works. Owning a share in the freehold does not mean that these things can be avoided.
How does owning a share of freehold work?
The idea is that usually an association is set up to manage the communal areas of the building. Often this is by way of a company divided into shares, sometimes a collective of owners. Those leaseholders who own the freehold who do not want to get involved in the extra work this may involve can appoint a managing agent to deal with the maintenance etc if all leaseholders are in agreement.
Having a Leasehold property which is Share of freehold can work out cheaper, as owners will not likely be victim to over-charging of service charges or ground rent which is widely reported in the leasehold sector. They are able to negotiate their own service fees, find the best-value buildings insurance and get the best prices for building repairs.
However, do not forget that with ownership comes responsibility and it is important to understand and do what is expected of you.
Is the flat worth more if it comes with a share of the freehold?
The price of a leasehold flat with a share of the freehold may well be higher than a straight leasehold flat. However, any difference is likely to be relatively small.
So, why would I want to own a share of the freehold?
The obvious advantage of having a share in the freehold is that it gives the flat-owner a direct say in what happens on his block or estate.
In some (but not all) circumstances, owning a share in the freehold may include valuable additional rights such as the right to a lease extension for nominal consideration. Such rights may well appear in a participation agreement or deed, or the trustees or directors may have power to grant lease extensions under the trust deed or articles.
Frettens' Conveyancing Executive, Jennifer Smith, says “It is actually a very efficient way of managing a block of flats. This is because the leaseholders, who are usually all members of the company owning the freehold, are in control and have a say regarding the management of the building, for example in relation to service charges for maintenance repairs. This is both cost effective and more personal.”
Are there any drawbacks to owning a share of the freehold?
There can be real challenges. Having flat owners with shares in the freehold can at times lead to deadlock over crucial decisions such as to whether to incur large service charge bills on major works.
In effect, disputes which would have been between leaseholders and landlords become disputes between neighbours.
The leases will also continue in effect, hence leaseholders may still require permission from the other leaseholders to sub-let or carry out alterations. They also may still have to pay for lease extensions, since the right is not granted automatically.
What’s more, with some large developments the impact as a single ‘share of freehold’ may be more limited: having only one of 350 shares in a company is unlikely to provide a leaseholder with much control over his estate or block as opposed to being one of 5 or 10 flats which share the freehold.
So, is it an advantage after all to own a share of the freehold in a flat?
The phrase ‘with share of freehold’ does not necessarily give an advantage to the buyer of a flat. It is imperative to ensure that in selling a flat with a share of the freehold, the implications of owning the freehold and its challenges are understood.
Why do I have to pay leasehold fees when I own a share in the Freehold?
We are frequently asked about this when people wish to sell their property which is leasehold, with a share of freehold. We do have to charge the usual fees for examining the lease.
Jennifer, explains “In these cases, the property that you will own is a leasehold property and essential work is required to investigate the leasehold title. Whilst you will also have a share in the freehold, what you actually own is a share in the company that owns the freehold – this means that you own it together with all the other leasehold owners (usually). When you come to sell, your buyer will be buying your leasehold title from you and your share in the freehold. Their solicitor will therefore have questions to put to us to ensure that there are no pitfalls for their client, your buyer.”
The advantage of owning freehold property, or having a share in the freehold of a property, is that you are either totally in control, or have a vote in what happens with the building, and in the latter case any repairs or service charges.
Despite hearing stories of homeowners hit with big repair bills and high service charges which are a challenge, leasehold is not necessarily a bad way to own a property. It depends on whether you would rather have the control, or would prefer not to have the responsibility.
Our Conveyancing Team are happy to discuss any issues that this raises for you and we offer a free initial meeting or chat on the phone.
If you have any questions, you only have to ask us at Frettens. Please call 01202 499255 or 01425 610100 and Jennifer or a member of the team will be happy to chat about your situation and your particular requirements.
Published 15/11/18 by Jenny Williams, Marketing at Frettens