During your search of the property market, you may encounter leasehold flats that offer something called ‘share of freehold’. This term is notorious for causing confusion, so Think Plutus has composed the following guide to explain exactly what it means to have a share of freehold and lay out the pros and cons of having one.
What is a share of freehold?
You probably have a guess at what a share of freehold is, and it is probably fairly accurate. However, there are different ways it can be set up. The first arrangement involves splitting the freehold jointly between multiple owners of flats within the property, meaning the freehold is held in the names of the occupants. This can be done by splitting between 2-4 flat owners. The second arrangement is where a company owns the freehold and the occupants of the flats own a share of that company.
This share in the company is often referred to as a membership. When you purchase a flat with a share of freehold, you will wither have your name added to the deeds of the property or you’ll be allocated a share of the company that controls the freehold. Whichever setup is used, the result is essentially the same – you own a share of the freehold of the property.
What is the purpose of share of freehold?
People often question the purpose of having a share of freehold arrangement. Would it not be better to simply remove the lease altogether and offer a freehold flat instead?
The answer is that transference of obligations, such as service charge payments and property maintenance, are difficult to pass between owners in a freehold setup. By having a lease in place, those obligations can be seamlessly passed from the seller to the buyer, ensuring the full range of communal responsibilities are accounted for in the sale and no additional steps are needed to arrange them.
Without having a lease in place, individual flat owners may be able to alleviate themselves of their communal responsibilities, thus placing the upkeep of the property in doubt.
What are the benefits of having a share of freehold?
When you have a share of freehold, you get greater control over things like maintenance obligations. This eliminates the possibility of an unscrupulous landlord not living up to their obligations. Where all flat owners have a share of freehold, they will all be invested in the property to some degree. This increases the likelihood that the property is maintained to a higher standard than it might be if everything was owned by a single landlord whose only priority was profit.
Another important benefit is that it will not cost you anything to have your lease extended. This can be an enormous advantage that could save you thousands of pounds in the long-term. For example, a £250,000 flat with a £25 monthly ground rent charge and a lease that expires in 2090 could cost anything from £15,000 to £25,000 to extend, not counting additional costs. The ability to extend your lease cheaply is a huge advantage because a shortening lease becomes less valuable as time goes by. In other words, if you have a leasehold property without share of freehold, your investment will diminish over time.
What are the disadvantages?
With maintenance on an ad hoc basis, you will inevitably have more expensive years where more extensive work is required. However, it’s worth remembering that the service charge will usually be lower for self-owned blocks, so those costs should be offset to some degree, particularly if you stay for the long-term.
Another problem that some encounter with share of freehold is that they have difficulty getting the other owners to sign the transfer of the freehold when trying to sell their flat. There is also the need to get identification from each of the owners involved during the sale for the Land Registry. This can be problematic if one or more of the other shareholders is not available at the time of sale.
Sometimes, it may be necessary for the tenants to carry out administrative tasks. This can include filing tax returns for the company that owns the freehold and additional accounting work that must be kept up to date. Failure to maintain and file the necessary records could result in a significant fine and potentially involve the holding company being struck off, meaning additional reinstatement fees will apply. Property insurance must also be arranged and collected from each of the tenants every year.
The disadvantages listed may feel a little off-putting, but the benefits far outweigh the negatives. Many of the cons mentioned do not happen in most instances, but it’s important to be aware of the possibility that they might arise.
If you need further information on share of freehold properties, the experienced mortgage advisers at Think Plutus are happy to help out. Get in touch today and take advantage of our expertise – we’ll be able to help you get your property purchase on track no matter the circumstances.