What Does Share of Freehold Mean?

When purchasing a flat in the UK, you may encounter the term “share of freehold”. But what does share of freehold mean? Understanding this concept is crucial for prospective buyers, as it offers a unique form of property ownership that differs from traditional leasehold arrangements. This article explores the meaning of share of freehold, how it works, its benefits, potential drawbacks, and key considerations for homeowners.

Understanding Share of Freehold

In a standard leasehold scenario, you own the right to occupy your flat for a specified period, but the building and land are owned by a separate freeholder. With a share of freehold, you not only own the leasehold interest in your individual flat but also a portion of the freehold for the entire building and the land it stands on. This collective ownership is typically shared among the flat owners within the building. 

The concept of share of freehold became more popular in response to concerns about leasehold properties, where freeholders often have significant control over lease terms, service charges, and ground rents. By owning a share of the freehold, flat owners gain more control over the management and financial aspects of their property.

How Does Share of Freehold Work?

There are two primary structures for managing a share of freehold:

1. Limited Company Structure

In this setup, flat owners form a private limited company that holds the freehold title. Each owner becomes a shareholder and may serve as a director of the company. This setup provides a formal framework for decision-making and property management. The company, rather than individual owners, is the legal owner of the freehold, and shareholders have voting rights on key decisions.

2. Tenants in Common

Alternatively, the freehold can be held directly in the individual names of the flat owners, with each owning an equal share. This arrangement relies on mutual agreement and cooperation among owners for property management decisions. This method is simpler in some ways but can be more challenging if disagreements arise over repairs, lease extensions, or other management issues.

Advantages of Owning a Share of Freehold

1. Extended Lease Terms

One of the most significant advantages is the ability to extend lease terms at minimal cost. Leasehold properties typically come with a finite lease period, and extending a lease can be expensive. With a share of freehold, leaseholders can agree collectively to extend their leases up to 999 years, increasing the property’s value and marketability.

2. Greater Control Over Property Management

Owners with a share of freehold have a direct say in maintenance decisions, service charges, and building regulations. Unlike leasehold arrangements, where a separate freeholder dictates service charges and maintenance schedules, share of freehold owners can collectively decide on these matters, potentially leading to better-maintained properties.

3. Financial Benefits

Owners may experience reductions in ground rent and service charges. Since the owners collectively manage the building, there is no external freeholder looking to make a profit, leading to lower running costs.

4. Easier Dispute Resolution

Since the freeholders and leaseholders are the same people, disputes that would typically arise between tenants and external freeholders can be resolved internally. This often leads to better cooperation and property upkeep.

Considerations and Potential Drawbacks

1. Management Responsibilities

Collective ownership requires active participation in property management decisions. Owners need to be involved in organising repairs, setting service charges, and complying with legal obligations. This can be time-consuming, and not all owners may be willing to take on these responsibilities.

2. Financial Commitments

Owners are collectively responsible for funding maintenance and repairs, which may result in varying costs over time. If an emergency repair is needed, all owners must contribute, which can be a financial burden if not planned properly.

3. Complex Decision-Making

Reaching consensus among multiple owners can be challenging, particularly in larger buildings with more stakeholders. Disagreements over maintenance costs, lease extensions, or property improvements can cause delays and complications.

4. Potential Difficulties in Selling the Property

While share of freehold properties are generally more attractive to buyers, complexities in management and decision-making can deter some buyers. Additionally, mortgage lenders may have specific requirements when lending on share of freehold properties, which could impact a sale.

Lease Extensions and Share of Freehold

Even with a share of freehold, the individual leases for each flat still exist and may need to be extended. However, extending lease with share of freehold is typically more straightforward and cost-effective, as the freeholders (i.e., the flat owners) can agree collectively to extend their leases without significant expense. A longer lease enhances the property’s marketability and avoids issues associated with short lease terms. 

Freehold vs Leasehold

Many leaseholders ask, is share of freehold better than leasehold? The answer depends on individual circumstances. While share of freehold offers greater control and financial advantages, it also comes with added management responsibilities. Leasehold, on the other hand, requires less direct involvement but may involve higher costs and less control over lease extensions and service charges.

How to Obtain a Share of Freehold

There are two primary ways to acquire a share of freehold:

1. Buying a Flat That Already Has a Share of Freehold

If you purchase a flat with a share of freehold, you automatically become a co-owner of the freehold. In this case, it’s important to review the current ownership structure and management practices before buying.

2. Collective Enfranchisement

If you currently own a leasehold flat and want to acquire a share of freehold, you and other leaseholders in your building can apply for collective enfranchisement. This legal process allows leaseholders to purchase the freehold from the current freeholder, provided at least 50% of leaseholders participate.

Is a Share of Freehold Right for You?

A share of freehold can be a great option for those who want more control over their property and potential cost savings. However, it comes with added responsibilities and requires cooperation among multiple owners. Before opting for a share of freehold, consider the following:

• Are you willing to participate in managing the property?
• Do you understand the financial commitments involved?
• Are the other freeholders cooperative and responsible?
• Will your mortgage lender approve a share of freehold arrangement?

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