A share of a freehold is exactly as it is described. The freehold is shared between multiple people. Nonetheless, the topic is certainly fairly complicated and there are a range of ways that a shared freehold can be set up.
So, if you are in the market for a new property, or considering purchasing a property with a shared freehold, While shared freehold arrangements can be a smart financial decision, they also come with their own set of challenges and complexities.
Understanding the different types of shared freehold and how charges and fees are calculated is crucial to making an informed decision. Fortunately, our article provides valuable information on these topics and more.
By the end, you’ll understand how to get a share of the freehold and the benefits of doing so, including greater control over maintenance and cost savings. Keep reading to learn how owning a portion of the freehold can be advantageous for you.
How does a share of a freehold work?
A share of a freehold is where multiple people own shares in the freehold title. Hence, they have to make decisions together and come up with rules that govern their title as a collective.
There are two main types of shared freeholds, where there are shared split jointly and where a company owns the freehold.
Split jointly
If the freeholds are jointly split, they will be split between all of the flat owners within a block. This does not mean that every flat owner has the same amount of shares in the freehold though as it could be done based on the size or value of their flat.
Up to four flat owners can be on a shared freehold agreement like this and this is typically after the flat owners got out of a leasehold agreement and bought the freehold title from a former freehold.
Membership shared freehold
In a membership shared freehold, a company will own the freehold and then every tenant will own a share in the freehold.
This means your name will be on the legal documents of the property as an owner. Also, depending on the agreement, you may have a say in how the decisions are made in the freehold too.
How are charges and fees calculated?
Charges are calculated very differently depending on who is in the property and how things are negotiated. You shouldn’t have ground rent charged under new legislation introduced in the Leasehold Reform (Ground Rent) Act 2022.
So, unless you have a short leasehold agreement (under 21 years) you will not need to pay ground rent if you are in a shared freehold as a leaseholder. You will be subject to service charges though.
This means you are able to be a leaseholder and a freeholder at the same time if you have a shared freehold, you own a share in the freehold but still contribute towards the development as a leaseholder with service charges.
How to get a share of the freehold?
There are a few ways that it is possible to get a share of freehold. For instance, you should be able to form an enfranchisement, buying a new property or you could potentially buy a freehold with another person.
Using a collective enfranchisement
Collective enfranchisement is where there is a leaseholder in a property and they want to extend their share of freehold by buying the freehold again after it expires.
This works in a similar way to an enfranchisement leasehold but instead of extending the leasehold, the freehold is extended.
Buying a new property
Buying a new property will come with its pros and cons but this is one of the ways that you can obtain a share of freehold. It is as simple as taking over the leasehold ownership from someone who had a share of their freehold.
For example, if there was a flat that was bought for £150,000 and the flat came along with a share of the freehold that is worth £20,000, the new owner will take ownership of the flat and the freehold.
Buying with another person
Buying a freehold with another person is where you are both leaseholders and then become shares of freeholders by buying the freehold with another person.
There are some rules around this and we recommend checking out our guide on if it is worth buying the freehold of your house as there are some consequences that may arise.
What is the difference between a share of a leasehold and share of a freehold?
There is no such thing as a share of leasehold, only a share of freehold. However, it is possible for there to be multiple owners of the leasehold if there is a leasehold that was bought in a joint mortgage for example like this.
In addition, it is also possible for there to be a house that has multiple people living within the leasehold section of the property if the property is being sublet.
Should you remove a lease and create a freehold instead?
There are a few reasons for there to be a share of freehold and it is certainly confusing why people don’t want to just own the freehold flat outright.
The reality is that a lot of people don’t want to take on the full responsibility for the flat when purchasing or selling a property so it is critical to have a lease in place, especially if the property is freehold.
However, certain responsibilities, such as property maintenance and service charge payments, can be difficult to transfer between owners and with a lease, these obligations can be easily transferred from seller to buyer.
This ensures that all communal responsibilities are met during the sale. It’s similar to a smooth transfer of authority.
However, if you do not have a lease in place, things may become complicated. Individual flat owners could potentially avoid their communal responsibilities, jeopardising the property’s upkeep. As a result, having a lease agreement in place is critical.
What are the pros of a share of freehold?
So, a lot of the time people wonder whether buying a share of a freehold is worth it, especially when there are complicated topics such as freehold reversions and flying freeholds that may cause legal problems down the line.
The reality is, there are a lot of advantages once you’re able to get around the legal pitfalls. To begin with, owning a share of the freehold gives you more control over things like maintenance obligations, which means you won’t be at the mercy of a shady landlord.
Furthermore, because everyone who owns a share of freehold is invested in the block to some extent, the building should be maintained to a higher standard than if it were owned by an individual landlord looking to make a profit.
But that isn’t all as another significant advantage of owning a portion of the freehold is the ability to extend your lease without incurring additional costs. In the long run, this could save you thousands of pounds.
As an example, extending the lease that is expiring in the future could cost between £16,000 and £20,000, not including other costs!
So, the ability to extend your lease at little or no cost is a huge benefit, especially since the value of a property with a shorter lease decreases over time. So, if you’re looking to invest in real estate, having a share of freehold is definitely something to think about.
What are the cons of a share of freehold?
It is important to note that while owning a share of a freehold property can present some challenges, the benefits generally outweigh the drawbacks. It is just that a lot of people have trouble understanding them.
It could be hard to even tell if a property is a freehold so it is no wonder a lot of people are sceptical about them and don’t want to avoid them altogether.
One disadvantage to ad hoc maintenance is that it may result in higher costs in certain years if major work is required. However, self-owned blocks typically have lower service charges, which can help offset these costs over time.
Another disadvantage of freeholds in the current day and age is that ground rents have been abolished if the lease is a longer lease. You can read more on this topic on ground rents here. So, freeholders may not be able to make as much money.
In addition, in a shared freehold, tenants may also be required to perform administrative tasks such as filing annual returns for the freehold holding company and maintaining accounting records.
It is critical to keep up with these tasks because failure to do so can result in fines or even the holding company being struck off the register.
Furthermore, if you don’t know where to find the right mortgage, it could be complex and time consuming finding the right flat freehold mortgage as lenders aren’t often tolerant of lending money in this sense.
Although there are some potential disadvantages to owning a portion of a freehold property, it is important to remember that these are rare occurrences and most of the time owning a share of freehold will prove quite beneficial.
Is it necessary to extend the lease in a share of freehold?
Whether it is necessary or not to extend the lease in a share of freehold is up to the individual. It may be worth letting the share of freehold expire in some cases because the fines that may be charged to continue the share may be too much.
However, there are a lot of variables in this case so it may be worth speaking to a solicitor about your financial goals for the future and weighing up options for quite a bit before you start to extend anything.
For example, extending a share of freehold if you are selling the leasehold may be a good idea because the leasehold may go up in value a lot if you are able to show that the freehold share has just been renewed.
On the other hand, if you are able to mask how long is left on the share of freehold and perhaps downplay the cost of extending the freehold and there is only a small amount of time left on the share of freehold this could be another option.
As you sell on the leasehold in this case, the buyer will think that they are getting a good deal as they are getting the share of freehold and the leasehold when really the share will expire soon. Hence, you will be able to sell the leasehold for more than it is worth.
In other cases, you may not even have the intention to sell your leasehold anytime soon but it may be worth it due to wanting to maintain the right to vote about decisions being made in your building.
As you can tell, there are a range of scenarios to weigh up and your needs as a buyer coupled with the agreement and finances in place for the deal should be how you come to a decision.
To conclude
To wrap up the topic of shared freeholds, the text discusses the concept and the two main types of shared freehold which are split jointly and membership shared freehold. It is important to differentiate between the two.
It also outlines how charges and fees are calculated in shared freehold arrangements and goes over the pros and cons of shared freeholds in general. Ultimately, owning a portion of the freehold can be advantageous in terms of control and cost savings.
Having said this, it is not for everyone and some people would be better off with the entire freehold or just owning the leasehold of the property.
0 Comments