InsightsInsight - Property and Conveyancing - UPDATED: August 10 2023
Owning a share of the freehold
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There are ways in which leaseholders can acquire a share in the freehold of their building/blocks of flats, principally by a purchase/transfer or by enfranchisement. The freehold can be held in an individual capacity or by a company.
Individual flat owners may decide to hold the freehold to their building/block in their individual names, often with an appropriate Declaration of Trust.
The Declaration of Trust would show each owner’s respective individual interest. It could also be decided between the owners that any decisions relating to the building will be made by unanimous vote. The owners might also decide that administrative tasks relating to the freehold (such as arranging insurance for the building) would be delegated internally to certain individuals. The names of the individual owners can be recorded on the freehold title, with a maximum of four legal owners. Whilst ownership of individuals over four in number can be recorded by way of a Trust, for this reason ownership of the freehold to a building by persons in their individual capacity is more commonly encountered with buildings housing a small number of flats. A disadvantage of holding the freehold in the names of the individuals, is that each time one of the flats is sold, the freehold title will also need to be updated to reflect the change in ownership which will incur a fee at the Land Registry and each freeholder will also have to verify their identity to comply with the Land Registry’s anti-fraud requirements.
Whilst owning the freehold subject to leasehold interests provides the benefit of control, it does also come with responsibilities, particularly to maintain the building and abide by the terms of the leases. Difficulties can arise in decision making, for example if one of the owners is of the view that maintenance works to the block/building should carried out (incurring costs by way of service charge) but other owners do not believe the work is necessary. If matters cannot be resolved through negotiation, parties should consider the potential costs of litigation and future relationships, as they would still be neighbours.
The leaseholders could incorporate a company as a vehicle to own the freehold. It would have its own Articles of Association to set out the rules by which the company should be run and how decisions are to be made. These would usually be passed through a board resolution and then passed onto the directors to implement.
The land registry title would be updated with the company’s name as the freeholder and each member of the company would receive a share certificate as proof of membership (if the company is limited by shares), or other membership certificate (if the company is limited by guarantee). Ownership via a company is more commonly seen with buildings with a larger number of leasehold properties in view of the limitation on the number of legal owners mentioned above. Some members of the company will typically also be directors/officers of the company. Although the creation of a company can be advantageous, it does create additional administrative duties, as annual returns would need to be filed (as would other paperwork required by Companies House),. This is in addition to arranging maintenance schedules and insurance of the building.
These responsibilities can be passed from the officers of the company onto a separate managing agent., However they would charge a fee for this service so the freeholder owners would need to consider the impact of this upon the service charge.
Roles and responsibilities
It is important to note that ownership of a freehold subject to leasehold interests also carries significant responsibilities. The freeholders would still be required to maintain the building in accordance with the term of the lease, comply with all relevant legislation (for example, relating to building and fire safety) and would also be required to give leaseholders the requisite notice of major works according to s20 of the Landlord and Tenant Act 1985. Any costs incurred in carrying out such obligations are typically collected from leaseholders via the service charges.
As a leaseholder, depending on the provisions within the lease, an individual may still require the formal consent of the freeholder to either sub-let the property, carry out alterations or to keep pets. Even though owning a share of the freehold may make it easier to obtain any necessary permissions (though obtaining permission for pets may prove difficult if other leaseholders do not wish for them in the building), the lease should be reviewed and relevant permissions should be sought before any action is taken, with the required procedures followed and documented (which is important for any future sale of the leasehold).
Leasehold interests diminish in typically lose value as the lease term gets shorter. Once the lease term drops to a certain term (typically 80 years) it may be difficult to get a mortgage (the requirements vary from lender to lender ) such that a lease extension may be required (as well as affecting value a short lease can make a property difficult to sell and will certainly have an impact on the value of the property). One benefit of being a leaseholder who also owns a share of the freehold is that it may be easier to agree a lease extension (given the leaseholders who require the extension also own the freehold) and depending on the precise freeholder ownership arrangement, it could be decided that leaseholders are not charged a premium and/or fee for this. If the owner seeking an extension is a leaseholder who does not own a share of the freehold, it may be more difficult to negotiate an extension with the third party freeholder and they are likely to charge a premium and a fee (in such circumstances it may be possible to claim a lease extension by using a statutory procedure).
Advantages of having a share in the freehold
A leaseholder who is also a freeholder would have the opportunity for greater control over the maintenance of the building, which may help in keeping service charge costs to a minimum. Consequently, if a party wants to sell their leasehold interest and owns a share of the freehold, this can also be more attractive to potential buyers.
Purchasers of leasehold properties sold with a share of the freehold should be informed of all implications relating to the purchase and enquiries should be made to other co-owners to ascertain whether there are any outstanding disputes and confirmation as to how matters relating to the freehold are dealt with. If there are or have been disputes and the freehold is held by the individuals, difficulties could arise surrounding the transfer of a property to the new owners.
There are often benefits to leaseholders also owning a share of the freehold of their property, particularly in relation to agreeing lease extensions and in having a greater degree of control over management matters . If you are considering purchasing a property with a share of the freehold, or are a leaseholder considering purchasing a share in the freehold, please do contact us and we will be happy to assist. We have a wealth of experience in assisting leaseholders purchasing a share of the freehold as well as acting on the sale of leasehold properties with a share of freehold.
This content is correct at time of publication
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