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The phrase ‘a share of freehold’ is often used in property transactions. To understand what it means, you need to know the context in which it is being used.
If you own the freehold of a property, this means you own the property outright, as well as the land on which the property is built.
If you own the leasehold of a property, you only own the property itself (not the land) and this only lasts as long as your lease. Once the lease comes to an end, the property reverts to the freeholder.
There is also commonhold, which is similar to leasehold but is intended for multiple occupancy developments. Commonhold was introduced in 2002 as a way of enabling the owners of flats in a block, or houses on an estate, to avoid the shortcomings of leasehold ownership (i.e. by allowing them to take responsibility for the maintenance and management of the block/estate). It didn’t take off, however, as lenders can be reluctant to lend against this type of ownership. Instead, the ‘share of freehold’ has become the preferred approach.
Estate agents and sellers alike often refer to a leasehold property as having ‘a share of the freehold’ but there are different variations of this.
The phrase is often used where respective leaseholders in a building or estate share the freehold title between them (with their names on the freehold title register). This set-up is often managed in a relatively informal way, with the residents amicably agreeing to share the cost of repairs and maintenance on an ad hoc basis. This can work well but residents can also receive a nasty shock if large expenditure is suddenly needed (e.g. to fix a leaking roof). Often in this case little or no ground rent is collected.
Buyer’s solicitors can be apprehensive about this approach. Even if the relationship between the residents is amicable now, that could change when a new buyer comes in with different views, causing disputes and deadlocks in decision-making.
An alternative approach is where the leaseholders set up a limited company (often referred to as a ‘freehold management company’), which owns the freehold title to the property. The company itself takes responsibility for the day-to-day management of the property. Each leaseholder is entitled to be a director and shareholder of the company. The company has the responsibility to collect funds, arrange the buildings insurance, manage expenditure and issue accounts each year. Overall, it is a much more formal approach.
As a rule of thumb, it surely makes sense for flat owners in larger blocks to adopt this more formal approach. Although companies managing larger blocks will incur much greater costs, and are much less personal and controllable, they are more likely to be able to build up a reserve fund to cover any large expenditure.
We would strongly advise buyers to check the set-up of the share of freehold when viewing properties or making an initial enquiry with an estate agent. Estate agents should also check this thoroughly with sellers, so that they have accurate information before marketing a property for sale.
If you have any questions about buying freehold or leasehold property, please contact our expert Residential Real Estate team.
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