A share of a freehold property can be imagined like a slice of delicious pie. There are lots of benefits to it, but it might take some work to get the right shape and structure in place.
Share of Freehold Meaning
Starting From The Beginning
Imagine a block of flats.
In this block there are many different residents. Leasehold agreements mean each person has ownership over a portion of the building (i.e. their individual flat) for a period of time. But this does not give any of the residents a right to the precious land that the building is built on. The default position is the original developer owns this land (but not always, as we explain further down).
If you bought a flat that didn’t have a share of freehold attached, you would likely just have the leasehold.
What Is A Share Of Freehold?
A share of freehold is an agreement where the leaseholders in a building hold a portion (or shares) of the freehold (i.e. the land that a building is on).
So in short, you will always need a lease if you are purchasing a flat. But if you buy a share of the freehold too, you’ll also get a share of the land.
Benefits Of Having a Share of Freehold
Control Over Costs
Buying a leasehold in a flat does have some benefits, but there are also some additional financial costs in doing so (we wrote a full post on the pros and cons of leaseholds here).
A common problem with leasehold flats is the mandatory costs that must be paid each year by the residents. For many the biggest bill is the service charge. As much as flat owners like to complain about service charge – it is a very important cost. Without it, there would be no funds available for maintaining key parts of a building.
Often leaseholders are suspicious about the level of service charges for a building. It’s common for a freeholder to employ the services of a management company to run the maintenance and operations of a building. However it can be difficult for leaseholders to dispute the charges that are billed to them (sometimes it can involve going to a tribunal for a decision).
Buying a share of freehold allows all residents of a building to make a collective decision on key spending decisions. The new freeholders can avoid paying expensive management fees to private companies running the building if they choose to.
So having a share of freehold can take back a lot of control from landlords.
Remove Worries Over Lease Periods
Another large benefit of having a share of freehold is the ability for all residents to grant themselves long leases of 999 years.
The logic is simple – because every resident owns ‘a share’ of the land, they are entitled to make decisions on the length of the lease. So why wouldn’t all the residents extend their leases?
Does a Share of Freehold mean I lose My Leasehold?
No. The leasehold gives you the right to occupy your flat for a period of time on the lease.
A share of the freehold is treated separately.
So all residents who hold a share of freehold to the land would also in all likelihood have their own individual leases for their individual flats.
No Ground Rent
In the same way as not having any short lease periods, the freeholders can together agree to set the ground rent at a peppercorn level (effectively meaning no ground rent needs to be paid).
There are a few reasons why owners of a share of freehold might choose to set their ground rent to peppercorn levels.
One of the big reasons is that flats with high ground rents can be much harder to sell. Buyers are put off by high fees each year and mortgage lends also take issue with high ground rents.
Another reason for setting a peppercorn ground rent is to reduce the ongoing costs for the residents of the building. Many residents would prefer to either pay nothing or contribute more to service charges to improve the building.
Easier to Get Permission
In some leasehold agreements you’ll up against restrictions that make it difficult for you to make alterations to your home. These are normally called restrictive covenants.
In these types of leases you sometimes have to get permission to do alterations from the owner of the land. So if the owner of the land is now made up of the people who live in the building you might find it much easier to get permission to do your renovations.
Because the other freeholders are aware that you could cause future problems for them when getting consent to do some works, they are likely to be more understanding than the original landlord would be, and potentially more flexible.
Challenges to Having a Share of Freehold
Availability of neighbours
If some freeholders are not available or on holiday it can be frustrating to have to wait for their return to get a response when permission is needed to do something (for example start building work).
Management Responsibility
Having a share of the freehold means there will need to be a high level of organisation kept to keep the running of the building in good order.
If responsibility is to be divided out, everyone involved must be responsive, organised and dependable. Having one person not performing their role can result in the entire operation becoming a disaster. Again, if a key person is unavailable for a period of time this can cause difficulty in addressing key issues.
Typical duties the freeholders will need to manage include all activities that are covered by the service charge, such as: running of the building, repairs, security and much more. For full details of service charge costs head over to this post.
It’s worth noting that the freeholders don’t necessarily have to manage everything. You can collectively decide to use a building management service to help with these duties. Whilst some will say that doing this defeats the point of share of freehold (as an expensive management company is usually one of the reasons for switching to a share of freehold model) it does allow the freeholders to have much more visibility and control over costs. If they felt charges were being excessive, contracts could be moved to a rival competitor.
Some Freeholders May Not Agree
In the same way as we mentioned previously that it is beneficial to keep all other freeholders “on your side”, for some they may have little interest in reciprocating good favours. This can make it challenging to get agreement from all parties.
Depending on how the share of freehold company is structured you may need unanimous consent from all freeholders to any proposal before it can be taken forward.
If this happens, there is little that can be done until the conflicting freeholders change their mind. Sometimes the articles for the company can allow a majority vote on certain topics.
May have to chase the neighbours
Although everyone holds a share of freehold, it still means all residents must pay their service charges to maintain the building.
If a resident does not pay their charges, it now becomes the problem for the freehold group instead of a management company. You may find yourself having to chase unpaid bills and getting more involved with residents who are in arrears. This is not for everyone and so thought should be given to this before pursuing with a share of freehold.
Share Of Freehold Summary
Purchasing a share of freehold can bring great benefits to a home owner.
There are the obvious financial gains with having a very long lease and minimal ground rent.
If residents are friendly towards one another issues can be managed in harmony with respect. It also gives more ‘activist’ residents a say on the governance of their property, which some feel strongly about.
But having these benefits brings the responsibility with it. Key decisions will have to be made between the freeholders once control has been handed over to them.
If the residents in a building are: unlikely to get along, too busy with their own lives or likely to cause a fuss on each and every individual issue/expense/proposal, it may be the simplest option to leave the management of the building to the original landlord and be satisfied with the lease.