Share of Freehold Properties, Leasehold or Freehold?

Generally when buying a property the sales particulars will tell you whether it is leasehold or freehold. If the property is a flat or maisonette however, you will sometimes see it described as “share of freehold”. This can be confusing to many buyers. Does it mean they will be getting a freehold flat with no lease? Does it mean you will be your own landlord? In fact it is just a term invented by estate agents to try and make a leasehold property seem more attractive.

Properties which are described as “share of freehold” are in fact really leasehold properties. It is a good thing that they are subject to leases too, as a freehold flat, for reasons which are best left for another article, very difficult to mortgage and therefore very difficult to sell. The share of freehold bit just comes from the fact that as well as owning the lease, you will own an interest in the freehold title.

What is “Share of Freehold”?

Every piece of land has a freehold title. The vast majority of flats and maisonettes also have a leasehold title. This is created when the landlord, who owns the freehold of the building, grants a lease of an individual flat. So the landlord owns the freehold and this is subject to the leasehold titles of each flat which are owned by the tenants.

Sometimes the tenants will, between themselves, own the freehold of the building as well as owning their individual leases and if so they are said to own a share of the freehold. There are two basic ways in which the tenants can own the freehold.

Freehold Title Held in the Names of the Tenants

One method of owning a share of the freehold is for all of the tenants of the building to have the freehold title registered in their joint names. This is more common in smaller developments of two or three flats (in fact there can be no more that four names on the title at any one time). This method has the advantage of being easy to set up and when things run smoothly, easy to transfer the share when a flat is sold, however it does have some disadvantages.

First, whenever a flat is sold the share of freehold has to be transferred using Land Registry form TR1 which must be signed by all of the other flat owners as well as the owner who is selling. This can prove difficult since flats are often let to tenants and it is not always easy to contact the owner. Furthermore, the other flat owners will each either need to instruct a solicitor to represent them or at least take Land Registry form ID1 together with their ID to a solicitor so he can verify their identity. This is essential in order to be able to register the freehold transfer. The exception is where the freehold is worth less than £5000 and a certificate to that effect from a valuer or estate agent can be produced. As there is no obvious immediate benefit to the other flat owners it is often difficult to encourage them to comply.

Second, where a flat is mortgaged the lender cannot secure a charge over the freehold (because if it did, the charge would adversely affect the other flat owners’ shares) therefore if the lender has to repossess it can only sell the flat and not the share of freehold. Unsurprisingly, repossessed owners are often impossible to contact, and even if they can be contacted are often unwilling to assist so it becomes impossible to transfer their share of the freehold to the incoming owner. As well as being a problem for the incoming owner, this is a problem for the other flat owners too. When they come to sell their properties they may not be able to get the repossessed flat owner, who still owns a share of the freehold, to join in the transfer.

Freehold Title Held in the Name of a Management Company

Another option for giving the flat owners a share of freehold is for the freehold title to be held in the name of a limited company, called a management company, with the tenants each holding a share in the company. This works where there are more than four flats in a block since any number of shares can be issued.

A management company takes some work and knowledge to set up. It will need to be registered at Companies House and directors (which should be tenants) will need to be appointed. Also, like any other limited company it will subject to rules and will need to be maintained. For example, annual accounts will need to be submitted or exemptions sought and the directors can face serious penalties if they are not.

Once it is up and running however this method has the advantage of eliminating the problem of having to transfer the freehold title on the sale of every flat. Instead, the freehold remains in the name of the company and only the tenant’s share has to be transferred in the event of sale. This does not require the signatures of anyone other than the seller and in the event the seller fails to transfer his share, the company’s rules can (and should) contain a provision allowing the directors to sign a share transfer in place of an outgoing tenant.

Advantages of Share of Freehold

There are three main reasons why leasehold properties tend to be less attractive than freehold properties. The first and most obvious is that a lease lasts for a fixed number of years. Once the lease term is at an end possession of the property passes back to the freeholder, so as more of the term expires the property becomes less valuable. Every leaseholder, having owned the lease for more than two years (and subject to certain limited exceptions) has the right to purchase an extension to the lease term but the landlord is entitled to charge a premium which can be several thousand pounds.

The second reason is that there are various services, such as replies to pre-sale enquiries, providing consents for works or acknowledging a change of ownership for which a landlord is entitled to charge. The fees charged by many landlords are excessive but are difficult to challenge.

Where the tenants own the freehold, whether in their own names or in the name of a management company, these costs are eliminated. They could be charged but since over time each tenant would end up having to pay the same costs, the net result of charging would be that nobody would gain or lose. For example, if you charge flat A £10,000 for a lease extension then flat A is going to charge you the same when his lease needs extending.

The final reason is that it protects the tenants from “rogue” landlords, who are not prepared to carry out their functions such as doing repairs, enforcing covenants by other tenants etc.

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