Understanding Shared Freehold: A Comprehensive Guide for Property Owners

What exactly is a shared freehold? And more importantly, how does it fit into the broader picture of property ownership in the United Kingdom? In this comprehensive guide, we’ll delve into the nuances of shared freehold, while discussing its advantages and challenges.

What is share of freehold?

Share of Freehold refers to a property ownership arrangement, primarily with flats, where individuals hold a leasehold for their unit and jointly possess a portion of the freehold for the entire building and its underlying land, resulting in collective ownership of the full freehold.

Why does it exist?

A Shared freehold exists mainly to address the limitations of leasehold properties. Many flat owners, after enduring constraints under leasehold, seek more autonomy and long-term security. Sharing the freehold provides just that, enabling them to manage their building without external interference.

• Limited company share of freehold: More often than not, flat owners come together to form a limited company to own the freehold. This structure is quite popular as the company’s rules clearly define the roles, rights, and responsibilities of the leaseholders. It also simplifies matters such as property maintenance and decision-making. For a deeper dive into this, check out our detailed post on shared ownership and its future.
• Share of freehold in personal names: Alternatively, the freehold can be owned directly in the individual names of the flat owners. While this might seem straightforward, it can get complicated when people want to sell their flats or if disagreements arise. However, with the right legal advice, this can be a viable option. Our post on potential repair pitfalls offers insights into some challenges you might face.

How does share of freehold work?

Owning a share of freehold isn’t merely about having a stake in the land. It’s about collective management and decision-making. Typically, owners have a lease for their flat and a share in the freehold entity, whether it’s a limited company or a direct ownership model.

For the property to transition from leasehold to shared freehold, a majority of the flat owners usually come together and purchase the freehold either through a process known as collective enfranchisement or by mutual agreement with the existing freeholder. Discover how to ascertain if a property is freehold or leasehold in our guide.

Share of freehold vs leasehold

Both share of freehold and leasehold are common forms of property ownership in the UK, especially in London. But what distinguishes them?

• Control: One of the chief advantages of shared freehold is the degree of control it grants homeowners. They can actively participate in the management and decision-making processes of the property.
• Duration: Leasehold properties come with a finite duration. Over time, the lease term diminishes, which can affect the property’s value. In contrast, shared freehold doesn’t have such limitations. However, it’s essential to understand ground rents and the reforms on the way.
• Costs: With a leasehold, homeowners might face escalating ground rents and service charges, often without much say. Shared freehold offers a respite from such unpredictable costs, as the owners collectively decide on expenditures.

Do I need to extend the lease with a share of freehold?

A common misconception among property owners is the belief that once they acquire a share of freehold, the lease term becomes irrelevant. This isn’t always the case. While having a share of the freehold grants you more control over your property, the lease remains a critical document, dictating the relationship between the flat owners.

In essence, even if you own a share of the freehold, it’s essential to ensure that the lease’s term is sufficiently long. Short leases can deter potential buyers and affect mortgage eligibility. If the lease runs too low, extending it is prudent. The beauty of shared freehold is that such extensions are usually more straightforward and cost-effective than in standard leasehold settings. For more insights on this, explore our detailed guide on purchasing the freehold of a leasehold house.

The pros and cons of share of freehold

Owning a share of freehold can be quite enticing, but like any form of property ownership, it comes with its own set of benefits and challenges.

Share of freehold benefits:

• Control: As previously highlighted, shared freehold offers homeowners a significant degree of control over their property. From deciding on maintenance to setting service charges, owners are in the driver’s seat.
• No Ground Rent: One of the perks is the elimination of ground rent, a recurring expense in leasehold properties.
• Lease Extensions: Extending the lease is often more straightforward and less costly, which can be a significant relief for many homeowners.

Problems with share of freehold:

• Decision-making: Collective ownership means collective decision-making. This can be a double-edged sword. While collaborative decisions can be empowering, disagreements among owners can lead to stalemates or conflicts.
• Management Responsibilities: According to the Landlord and Tenant Act 1987, shared freehold means the owners are responsible for managing the property, which can be time-consuming and sometimes challenging. In such cases, appointing a building manager can be beneficial. Discover how under the Landlord and Tenant Act 1987 here.

Share of freehold extension

So, you’ve got a share of freehold, but what about the underlying lease? It’s not uncommon for those with a share of the freehold to consider extending their leases. Why? A longer lease is generally more attractive in the property market.

The good news is, that with a share of freehold, extending the lease can be far more straightforward. There’s no external freeholder to negotiate with, eliminating potential challenges and costs. But remember, it’s essential to get the process right. If you’re uncertain about the procedure, or if your freeholder is missing, our expert guidance can help.

Service charges and ground rent

When talking about property ownership, these two terms frequently surface. But what do they imply when it comes to share of freehold properties?

• Service Charges: These are fees that flat owners pay for the general maintenance and upkeep of the communal parts of the building. With a share of freehold, the owners have the advantage of setting and controlling these charges. They decide on the services, the providers, and the costs, ensuring transparency and fairness.
• Ground Rent: Ground rent, a regular payment made by the leaseholder to the freeholder, is often a point of contention in leasehold arrangements. But here’s the good news: in a shared freehold scenario, ground rent typically becomes a thing of the past. Since the residents collectively own the freehold, there’s no external party to pay this rent to. This can be a considerable relief, especially given the unpredictable escalations in ground rent seen in some leasehold contracts. For a deeper understanding of ground rents and potential reforms, see here.

Transferring share of freehold

Ownership structures change. People move houses, life circumstances alter, and sometimes, you might need to transfer your share of the freehold. This process can be relatively straightforward, especially compared to selling a traditional leasehold flat.

However, the transfer should be done correctly to ensure all legal bases are covered. If someone in the building decides to sell, they can transfer their share in the freehold entity to the new owner.

It’s essential, though, to ensure that this transfer aligns with the company’s Articles of Association (if the freehold is owned by a company) or any existing agreements among co-owners. Our specialists offer guidance on such disposals and transfers.

Getting a mortgage on a share of freehold property

Now, if you’re looking for a shared freehold property, one of the foremost concerns might be securing a mortgage. Thankfully, having a share of freehold does not necessarily complicate mortgage applications. Most lenders are familiar with the concept and are open to financing such purchases.

However, a crucial element they’ll consider is the lease term. Even if you have a share in the freehold, a short lease can be a deterrent for many lenders. It’s always a wise move to ensure the lease is sufficiently extended before approaching lenders. Understanding the distinction between freehold and leasehold can be pivotal when discussing mortgage options.

Specialist share of freehold solicitors

While a shared freehold offers many advantages, navigating its intricacies requires specialist knowledge. From understanding the nuances of collective enfranchisement to handling potential disputes among co-owners, there’s a spectrum of issues that can emerge.

That’s where specialist solicitors come into the picture. At Anthony Gold Solicitors, our Leasehold Services department, led by Ian Mitchell, has garnered a reputation for expertly guiding clients through the complexities of shared freehold arrangements.

Why seek specialist advice?

• Clarity: A specialist can help you demystify the shared freehold arrangement, ensuring you’re well-acquainted with your rights and responsibilities.
• Smooth Transactions: Whether you’re looking to purchase a share of freehold property or transfer your share, having an expert by your side ensures seamless transactions.
• Dispute Resolution: Should disagreements arise among co-owners, specialists can offer mediation and legal solutions, protecting your interests.

Conclusion

A share of freehold arrangement can be a game-changer for property owners, providing more control, eliminating unpredictable costs, and offering long-term security. But, like any form of ownership, it’s not devoid of challenges.

At Anthony Gold Solicitors, we’re committed to ensuring that our clients are not just aware of the benefits but are also prepared for the potential complexities. Whether you’re looking to dive into shared freehold ownership or need guidance on an existing arrangement, we’re here to help.