For many property owners, owning a home outright provides a sense of security and long-term financial stability. However, in the UK property market, especially in urban areas, many flats and apartments are sold on a leasehold basis. This means that while the buyer owns the property, they do not own the land it stands on. One alternative is to acquire a share of freehold, which can offer additional control and financial benefits. But what does share of freehold mean, and how does it work?
What Does Freehold Mean?
To understand what ‘share of freehold’ means, it’s first important to clarify the meaning of freehold. A freehold property means the owner has outright ownership of both the property and the land it stands on, without any time limit. In contrast, a leasehold property is owned for a fixed period, typically decades or even centuries, under a lease agreement with the freeholder (landowner), often requiring ground rent and service charge payments. Learn more about the difference between freehold and leasehold ownership.
What Does Share of Freehold Mean?
A share of freehold means that instead of a single freeholder, multiple leaseholders collectively own the freehold.
This arrangement is typically known as a “collective enfranchisement,” which is a legal process that allows qualifying leaseholders to jointly purchase the freehold of their building. However, there are a number of eligibility criteria to meet in order to qualify for this – we’ve provided more information on this in the FAQs below.
Successfully completing a collective enfranchisement gives the leaseholders ownership of the property rather than just their individual flats. This can be done either in their own names or through a formal company structure.
By forming a Freehold Company, leaseholders gain direct control over the management and upkeep of the building, including setting service charges, organising repairs, and making key decisions about the property. This structure also allows them to elect a professional property manager or agent to handle day-to-day administration, ensuring the building is properly maintained without the burden falling entirely on the leaseholders themselves.
How Does Share of Freehold Work?
There are two common ways in which a share of freehold is structured:
- Direct Ownership: Each leaseholder is named on the property title, making them a co-owner of the freehold.
- Company Ownership: A management company holds the freehold, and each leaseholder owns a share in this company.
In both cases, the leaseholders take responsibility for decisions relating to building maintenance, service charges, and property management.
Share of Freehold vs Leasehold
If you already own a leasehold property, you may be wondering about the advantages of purchasing a share of freehold. Lease extension is often a less expensive option than buying the freehold, but this depends on factors such as the remaining lease term, ground rent costs, and the relationship with other leaseholders or freeholders.
Owning a share of freehold means having more control over building management, avoiding costly lease extensions, and potentially reducing maintenance fees. However, leasehold properties can still be a practical option, particularly if they are well-managed by a reputable property management company.
The key differences between share of freehold and leasehold ownership include:
- Control Over Management: With a share of freehold, leaseholders have a direct say in how the property is managed, unlike leasehold arrangements where a third-party freeholder typically makes decisions.
- Lease Length: Leaseholders who own a share of freehold can often extend their lease at little or no additional cost, whereas lease extensions under a leasehold arrangement can be more expensive.
- Service Charges and Maintenance Costs: Freehold shareholders can oversee service charges and maintenance directly, potentially keeping costs lower than those imposed by an external freeholder.
Pros and Cons of Share of Freehold
While purchasing a share of the freehold comes with many advantages, it is essential to consider both the benefits and potential challenges before making a decision. By understanding the pros and cons, property owners can determine whether this ownership structure is right for them.
Share of Freehold Benefits
One of the main reasons leaseholders seek to buy a share of freehold is the added control it provides. Without an external freeholder, property owners can make decisions about maintenance and service charges collectively. Additionally, there are financial benefits that can make share of freehold properties more attractive in the long term.
- Greater Control: Leaseholders have a say in decisions regarding maintenance, service charges, and property management.
- No Ground Rent: Unlike leasehold properties, share of freehold properties do not require ground rent payments.
- Easier Lease Extensions: Leaseholders can typically extend their lease to 999 years at little or no cost.
- Increased Property Value: Longer leases and well-maintained buildings can make properties more attractive to buyers.
Share of Freehold Problems
Despite the benefits, there are several potential problems that can occur when you own a share of your property’s freehold.
Managing a building collectively requires cooperation, clear agreements, and organisation. Without proper planning, disputes can arise, leading to delays in maintenance and decision-making.
- Responsibility for Management: Freehold shareholders must collectively manage the property, requiring cooperation and organisation.
- Potential for Disputes: Without a formal agreement, differences in opinion among leaseholders can lead to conflicts over budgets and maintenance.
- Legal and Administrative Costs: Setting up a freehold company, maintaining records, and ensuring compliance with legal obligations requires effort and expertise.
Challenges and Responsibilities of Share of Freehold Ownership
An important factor to consider is that those who own a share of a freehold property are not exempt from communal maintenance costs. They simply have a greater degree of control over who carries out this maintenance.
When an equal number of leaseholders own a share of the freehold (such as in a converted property with three flats, each occupied by an owner), a lack of formal agreements regarding maintenance can cause major issues. Without clear contractual arrangements, disputes may arise about responsibilities and cost-sharing.
With this in mind, it is absolutely vital for those who own a share of a property’s freehold to properly draft a contract setting out the rules and restrictions for matters such as the obligations of freeholders and what happens in the event of a dispute or conflict of interest.
This ensures that everyone’s rights are protected and prevents freeholders from encountering any unpleasant surprises.
Transferring Share of Freehold
If you decide to sell your flat, your share of the freehold must also be transferred to the new owner. The process is typically straightforward but must be handled correctly to prevent legal complications. Depending on the ownership structure, the transfer can be completed by updating the property title (if directly owned) or by transferring shares in the management company (if held via a company). Seeking legal advice can help ensure a smooth transition.
Share of Freehold FAQs
Do I need to extend the lease with a share of freehold?
A common misconception is that once you own a share of freehold, the lease no longer matters. However, the lease remains a legally binding document that defines ownership rights and responsibilities.
Even with a share of freehold, maintaining a long lease is important. Mortgage lenders and future buyers often require a lease of at least 80–90 years, as shorter leases can reduce property value and limit financing options. Fortunately, leaseholders with a share of freehold can usually extend their lease easily and at minimal cost, avoiding the lengthy legal processes involved with an external freeholder.
Can I buy the freehold of my leasehold property?
Yes, leaseholders have the legal right to collectively purchase the freehold of their building under the Leasehold Reform Act. This process, known as collective enfranchisement, allows leaseholders to take control of property management – subject to successfully meeting the extensive eligibility criteria.
To be eligible, at least half of the building’s leaseholders must participate, and the building itself must meet certain criteria. For example, the building must contain at least two flats, and no more than 25% of the floor area can be used for non-residential purposes.
Certain situations may disqualify a property from collective enfranchisement. For example, the landlord cannot be a charitable housing trust providing the flat as part of its functions.
Furthermore, a tenant who owns more than two flats in the building cannot qualify, and business or commercial leases are not eligible under this process.
There are also exemptions for smaller buildings. Collective enfranchisement rights do not apply if the property is a conversion containing four or fewer flats, is not a purpose-built block, and the same person has owned the freehold since before the conversion. Additionally, if the freeholder or an adult member of their family has lived in one of the flats as their main residence for the past 12 months, the building is exempt from enfranchisement rights.
Please seek The Leasehold Advisory Service for further information.
Is it worth buying a share of freehold property?
For many leaseholders, purchasing a share of freehold is a worthwhile investment, offering long-term financial benefits, control over property decisions, and the ability to extend the lease inexpensively.
Is it difficult to get a mortgage on a share of freehold property?
Not usually, but mortgage lenders often require the lease to be extended to at least 80–90 years to approve financing. Checking lender criteria is always recommended when purchasing a share of freehold property.
Are share of freehold properties difficult to sell?
Generally, no. In fact, share of freehold properties are often more attractive to buyers due to the absence of ground rent and the ease of lease extension. However, disputes between freeholders or poor management can deter potential buyers.
Conclusion
Owning a share of freehold offers many advantages, including greater control over property management and the ability to extend leases at little cost. However, it also requires cooperation among freehold shareholders and careful management to avoid disputes. For property owners looking for long-term security and financial benefits, share of freehold can be an excellent option.
