Share of freehold

flat34

Hello all,

I know that the subject of freehold flats has been discussed before, but I still have some questions so would be grateful for some insights.

I just saw a flat come on the market where the listing mentions “share of freehold”. Looking it up on Land Registry shows that there is both a leasehold title (on the flat) and a freehold title (on the building, if I understand it right). The listing also mentions a £250 ground rent (that increases by £250 every 33 years) and a £2000 service fee. The whole development was built 4 years ago and has 40 flats more or less.

I do not understand what the benefit is except that you do not need to pay for a renewal of the leasehold. But other than that is seems that it comes with much more responsibility - and by responsibility I mean cost. If I still pay ground rent and services charges then what  is the difference if I own or not a share of the freehold. If anything, I would be responsible for extra costs e.g. for the building. 

Is it a good idea to buy such a property? Sounds like a lot of trouble with no actual benefit.

And if there is a management company (I think there has to be one, if more than 4 owners in the freehold?), would I have to become a shareholder or something? Again, that sounds like a lot of hassle for not much benefit?

Also, I’d expect a share-of-a-freehold property not to have any ground rent, am I mistaken?

user1977

The main difference is you don't have a third party trying to make a profit out of you all, and it's the owners of the flats who ultimately make decisions rather than having them made for you. In practice there aren't going to be "extra costs for the building" which the freeholder wouldn't be entitled to recover from the leaseholders anyway.

flat34

They do however make a profit out of me by taking ground rent and service charges. And from what you are saying it seems to me that if anything needs to be changed/maintained in the building, then all of the owners need to agree  which on one hand is good but on the other hand it might also mean that the building is not maintained properly if there is at least one owner that does not agree.  

user1977

flat34 said:

They do however make a profit out of me by taking ground rent and service charges.

How do you make that out? Those funds are going into the company which you own. "They" are you. The funds are not being siphoned out by a third party.

As for your second point, I very much doubt it's been set up in a way such that one owner out of 40 can veto anything being done.

flat34

Oh right, so this almost answers my question about whether I become a shareholder. So in effect what you are saying is that I will be a shareholder of the management company, or I got this totally wrong? I still do not get why I need to pay ground rent though. 

In terms of veto, you are probably right, I am just trying to think the worst case scenario!

eddddy

If you buy a 'share of freehold', you typically get 2 things

• A leasehold flat
• A share in a company. The company owns the freehold building.

There might be up to 40 shareholders in the company (because up to 40 of the leaseholders might own a share each). 

In theory, those 40 people jointly take on the rights and responsibilities of the freeholder - as described in the lease. But in practice, you often pick a small number of directors who will make decisions, etc.

flat34 said:

I know that the subject of freehold flats has been discussed before, but I still have some questions so would be grateful for some insights.

Maybe that's a typo - but a flat with a 'share of freehold' isn't the same as a freehold flat. If you describe it as a 'freehold flat' to a mortgage broker, you'll have problems getting a mortgage.

flat34 said:

I do not understand what the benefit is except that you do not need to pay for a renewal of the leasehold.

Not necessarily - it's up to the 40 (or whatever) shareholders to decide whether leaseholders have to pay for lease extensions. In some circumstances, it's fairer to insist that leaseholders pay.

flat34 said:

But other than that is seems that it comes with much more responsibility - and by responsibility I mean cost. 

The joint freeholders can make their own decisions about how the building is managed, maintained and repaired. They have more incentive to get 'good value for money' than a 3rd party freeholder (because it's their own money they're spending) - so they might get repairs etc done more cheaply, which would reduce the service charges.
.

flat34 said:

If anything, I would be responsible for extra costs e.g. for the building. 

No - freeholders recharge all their costs to leaseholders. For example, if a freeholder repairs the building, all the costs are added to the leaseholder's service charge bills.

flat34 said:

Also, I’d expect a share-of-a-freehold property not to have any ground rent, am I mistaken?

Again, that's a decision for the 40 joint freeholders. But it's generally good practice to reduce the ground rent to zero.

It might be a bit complicated, if different flats have different ground rents.

But there would also be legal fees for varying the leases - so maybe they didn't do it in order to save legal costs (but that's probably a false economy in the long run).

user1977

flat34 said:

Oh right, so this almost answers my question about whether I become a shareholder. So in effect what you are saying is that I will be a shareholder of the management company

No, the freeholders may however choose to employ a management company to deal with the management (pretty likely for this size of development). Who no doubt will be doing their bit of work for a profit, like any other trades etc you employ.

I still do not get why I need to pay ground rent though.

There doesn't need to be ground rent at a significant level, but to the extent there is, it's an asset of the freehold - which you'll (partly) own. It doesn't go to somebody else.

eddddy

flat34 said:

Oh right, so this almost answers my question about whether I become a shareholder. So in effect what you are saying is that I will be a shareholder of the management company, or I got this totally wrong? 

No - there will be a company that owns the freehold building. You will be a shareholder in that company.

That company will hire another company (called a management company) to manage the building.

eddddy

flat34 said:

I still do not get why I need to pay ground rent though. 

Originally, there would have been a 3rd party freeholder - who took all the ground rent.

Then the leaseholders clubbed together and bought the freehold building.

So it could be that nobody 'bothered' to change the leases when the leasehold building was bought.

Or it could be for 'fairness' - because different flats were paying different ground rents.

e.g. If one flat pays £250 per year ground rent, and another pays £100 per year ground rent and another pays £0 - why should one leaseholder save £250 per year, whilst another leaseholder only saves £100 per year, and another saves £0?


Edit to add...

But any ground rents collected should be shared out amongst the shareholders (including you).

eddddy

flat34 said:

And from what you are saying it seems to me that if anything needs to be changed/maintained in the building, then all of the owners need to agree  which on one hand is good but on the other hand it might also mean that the building is not maintained properly if there is at least one owner that does not agree.  

In reality, there will be a strategy for making decisions. It may be that a number of directors are picked/elected (maybe 3 or 5), and they make all the decisions.

Or for 'big' decisions there might be votes.

flat34

Thanks @eddddy and @user1977, that's all very helpful and gives me a better idea of how the whole thing works.

Just another thing: what does becoming a shareholder in the company that owns the freehold entail? Does it have any implications, such as becoming personally liable for any debts the company might rack up (e.g. if other shareholders fail to pay their share)? Or would I have to file a tax return or have any sort of other responsibility?

Many thanks!