Apartment/flat buyers often get confused when they are interested in buying a flat which has a 'share of freehold'. The 'share of freehold' aspect is usually marketed heavily by the estate agents especially in London. The confusion sometimes comes from the fact that 'freehold flats' are generally not considered good security for lenders and, save in specific parts of the country, are unusual. The lease is easily legally enforceable against non-maintenance payers whereas a freehold agreement is not. Thus most lenders will not lend on a freehold flat making saleability harder and the value drop.
A 'share of freehold' is sold with the leasehold flat – the leasehold interest is retained and is still the most valuable part but you also acquire a separate shared title or ownership in the freehold.
What is a 'share of freehold'?
There are two basic set ups for the ownership of the freehold, the first is that the freehold is owned jointly by a number of the flat owners in their personal names and the second is where a company is the owner of the freehold and each of the tenants hold a share or membership in that company. Therefore when you obtain a share in the freehold your name will either be noted on the title deeds or you will be issued a share in the company that owns the freehold. In either case you will then own a share in the freehold.
Why not remove the lease and create a freehold flat?
Because of the legal differences between freehold and leasehold titles it is never a good idea to merge the lease into the freehold title. This is because basically positive obligations e.g. to pay service charges and maintain your property would not easily pass from owner to owner in a freehold context. It can be done but the mechanisms are more complex than holding a leasehold title where these obligations run naturally with the land – that is to say they pass from owner to owner without any special steps being take on sale. Essentially therefore the communal obligations would simply fall apart if everyone held a freehold flat.
What are the advantages?
As we said agents often push the “share of freehold” as a positive and generally it is. A lease alone is a wasting asset – it becomes less valuable as time goes on as it gets shorter. Eventually you will need to extend the lease and normally if you have a share of freehold you will not be required to pay for this. It is therefore cheap and easy to achieve (see our article onextending your lease with a share of freehold). This can be a significant saving for example to extend a lease of around 70 years you would pay £15,000 and upwards to an independent landlord (based on a flat worth around £250,000). This cost is massively lower if you have a share in the freehold – you only pay legal fees of a few hundred pounds rather than many thousands of pounds to a separate freeholder.
You will also have greater control over how the maintenance on the building it dealt with – you are not at the whim of an independent landlord who may attempt to overcharge for repair costs – the tenants will generally be interested in keeping the property in good repair at the most economic cost.
If you are buying you will still need to consider whether the flat owners' system, however basic, is in place for repair and that there are no problems or disputes between the tenants which could cause difficulties in maintaining or insuring the block in the future. Generally you would seek information from one of the other co-freeholders to verify any information provided by the seller on these points. The best advice is to speak to the other owners before you purchase to get a feel of how the block is run especially if it is a smaller block where you will need to interact with neighbours after you purchase.
Overall you generally find that self managed/owned blocks have a lower average service charge.
What are the disadvantages?
In smaller blocks there may be some obligations that one or more of the tenants need to keep on top of e.g. filing accounts and annual returns for the freehold company (there are fines if you file even dormant accounts late and if the company is struck off the cost of reinstatement can be expensive). You will need to ensure the block is insured and the premium is collected and paid each year. Many owners simply instruct a managing firm to deal with the running and share the cost of this.
Maintenance on an ad hoc basis can also cause spikes in the service charge if for example major works are required in any one year. This would be offset if there was a sinking or reserve fund set up which was paid into each year. Generally these arrangements are only put in place where there is a separate managing agent running the block – this is usual for larger blocks with a share of freehold but for smaller blocks the administration costs charged by a management company may be relatively expensive.
If the freehold is owned jointly in the personal names of the tenants it can also be difficult to get the other owners to sign the transfer of the freehold when the flat is sold. The Land Registry also require identification from each owner. This can be frustrating to arrange this when the flat is being sold and one of the co-owners is away!
However on balance the advantages generally far outweigh the disadvantages and the share of freehold will always help in the marketability of the flat in the future.
For more information or questions please do not hesitate to ask anyone at Cooper Adams.