As you peruse the property market you may come across leasehold flats that offer a ‘share of freehold’ during your search. This is a term that can cause a little confusion, so in typical Petty’s fashion we are going to lay it all out for you and explain exactly what having a share of freehold means, as well as the pros and cons of having one.
What is a share of freehold?
A share of freehold is pretty much what you would imagine it to be, but there are a couple of different ways in which it can be set up. The first is where the freehold is split jointly between a number of flat owners within the property and the freehold is held in their personal names. This can be done by up to four flat owners.
The second is when a company owns the freehold and each of the tenants holds a share (sometimes referred to as a membership) of said company. So, when you buy a flat with a share of freehold, you will either be given that share by way of having your name on the deeds of the property or you’ll be given a share in the company that is controlling the freehold. Whichever way it is set up the result is ultimately the same – you’ll have a share in the freehold of the property.
Why does share of freehold exist?
Many people wonder what the purpose of having a share of freehold is. Why not simply get rid of the lease altogether and have a completely freehold flat?
The reason is simple. Transference of obligations, such as property maintenance and service charge payments, are not easily passed between owners when held in a freehold context. Having a lease in place means that these obligations are passed seamlessly between the seller and the buyer, ensuring that all communal responsibilities are covered during the sale without any additional steps being required.
Without having a lease in place, individual flat owners could possibly remove themselves from their communal responsibilities and the upkeep of the property would be placed in jeopardy.
Are there any benefits to having a share of freehold?
In short, yes. Having a share of freehold gives you greater control over things such as maintenance obligations which removes the possibility of being taken for a ride by an unscrupulous landlord. Holding a share of freehold also means that everyone in your property will be invested in the block to a certain degree. This should mean that your property is kept to a higher standard than that which is owned by an individual landlord whose sole aim is to turn a profit from the building.
Another key benefit is the fact that you will be able to extend your lease at no extra cost. This can be huge, potentially saving you thousands of pounds in the future. As an example, a £300,000 flat with a £30 per month ground rent charge and a lease that runs out in 2087 could cost you anywhere between £16,000 and £20,000 to extend, before costs! Being able to extend your lease cheaply is a massive plus, as shortening leases become less valuable as time goes by thus diminishing your investment should you just have a leasehold property without a share of freehold.
So, what are the downsides?
Ad hoc maintenance can mean that some years will see larger costs than others should a major piece of work be required. However, it is worth bearing in mind that the service charge will generally be lower for self-owned blocks, so this should be somewhat offset, especially if you live in the property long term.
Another problem that some people find when holding a share of freehold is that they can have difficulty getting other owners to sign the transfer of the freehold if they want to sell their flat. It is also necessary to obtain identification from each of the owners during the sale for the Land Registry, and this can prove to be a problem if one of the other shareholders is unavailable at the time of sale.
In some instances, there may also be a requirement upon the tenants to undertake administrative tasks such as filing annual returns for the company that holds the freehold and any accounting that needs to be maintained. Failing to keep and file adequate records could mean a hefty fine and even result in the holding company being struck off, with additional reinstatement fees demanded. Property insurance will also have to be taken care of and collected from each of the tenants every year, too.
While this list of disadvantages main seem off-putting, the pros do far outweigh the cons. Many of the downsides listed above simply do not happen in the majority of instances, but it would be remiss of us not to inform you of them in this article.