Shared Freehold Pros and Cons
ARTICLES AND FAQS
Some of the things people ask and problems they have, with our comments and answers.
1. General
Mostly, shared freehold flats are better than leasehold flats with an outside Landlord, but this isn't always the case, so this page sets out some of things to look out for.
Our page about Choosing a Property to Purchase advises asking the seller (and the neighbours) about how a building with flats in is managed. This is very important.
In general the main advantages of shared freehold are:
- You don't normally have to pay any ground rent;
- There is no outside landlord to make a profit out of you, particularly when leases need extending. There might be a managing agent, but he works for you, so you as a group can decide to sack him
- Decisions can often be made quickly and in a less formal manner and costs can be kept down that way
- Potential buyers, particularly in London, see "Shared freehold" as a bonus, whether that perception is always right is another matter - see further down this page - but the fact remains that the perception does exist.
2. Larger Blocks less likely to have major issues
Generally, with larger blocks, the management is impersonal and often administered by an outside managing agent on behalf of the residents who are then usually shareholders/members of the company that owns the freehold. See below for the different types of ownership involved with the general category of "Shared Freehold".
Apart from the very obvious advantage of flat owners having a say in the running of the company, such blocks are very little different in the way they are managed from those with outside Landlords. Management by the residents themselves without a professional managing agent to assist them often works well.
However we do occasionally find that a small group of people take effective control of the block and make decisions to the exclusion of others who are either too scared or can't be bothered to challenge them. It is often difficult to get enough flat owners together to overturn a decision made by a ruling group.
3. Smaller Blocks more likely to have issues
The smaller the number of flats in the block the less impersonal it becomes.
This can be GOOD in that it is easy to organise things informally, but also BAD in that some people will realise that they are in a position of power, and some exploit that.
At this point the way the freehold is shared becomes significant. It can be held so that the freehold title is registered in the name(s) of:
A. All the flat owners, or at least a representative from each flat. This will only work with up to 4 flats, as 4 is legal limit on the number of individuals who can be registered as proprietors of land. I will call this "Literal Shared Freehold". The one PRO of this method is:
* Cheapest and simplest method to set up when the freehold is initially purchased by the flat owners.
The CONS are:
* Everybody has to sign to transfer the share in the freehold whenever anybody wants to sell their flat or have their lease extended so there are problems if such signature cannot be obtained, which could be because:
~ the individual concerned has disappeared and/or had his flat repossessed; or
~ he is having an unrelated dispute with another flat owner and wants to use his refusal as a bargaining tool; or
~ if a lease extension is involved, he either wants to be paid a proportion of what an ordinary landlord would get, because his lease has already been extended; or
~ he won't sign to extend because can't be made to understand that there are still leases even though it is "shared freehold".
* All have to agree on carrying out works of maintenance and setting any service charge.
* Although mortgage lenders have usually accepted "literal shared freeholds", because of ambiguities in the attitudes of some of them to a particular paragraph in the CML Handbook, it is possible that problems could arise in the future with a refusal to lend on such properties. "Company Shared Freehold" (See below) is treated differently and shouldn't suffer from this possible problem.
B. Representatives of the flat owners who act as trustees under a trust deed that provides some rules about the freehold is to be dealt with. I will call this "Trust Shared Freehold". The PROs of this method are:
* It can get round problems caused by missing/uncooperative co-freeholders, but the extent to which this is the case will depend on the trust deed wording.
* No need for an accountant to audit the company's books
The CONS are:
* The concepts involved are not as easy to understand.
* Unlike a company there is no central registry where the major documents can be obtained. A firm of solicitors who acted on a sale or purchase of a flat may well have been involved in drawing up the trust deed and they may have kept the original. Years later when someone else is selling nobody can remember who they were to find the original document!
* The Trust Deed may not cover all the possible problem situations mentioned for "Literal Shared Freehold".
C. A company with some name related to the address of the building where the members/shareholders are only those who own flats in the building. which I will call "Company Shared Freehold". The PROS of this are:
* The Company owns the freehold and no changes are required at the Land Registry when flats change hands. The buyer gets membership or a share in the Company.
* Decisions can be made by majority vote.
* Mortgage lenders don't treat such companies in the same was as Literal Shared Freeholds because the company is a separate entity
The CONS are:
* If the company keeps a bank account and is "active" rather than "dormant" an accountant has to be employed to audit its accounts. (This can often be got round by the individuals informally carrying out works, paying for things and collecting informal contributions. If everyone agrees, then this works in practice, and the formal machinery of company meetings and bank accounts only has to be put in place if someone is difficult and the formalities have then to be got right.)
* Annual returns to Companies House, even of the most basic kind for a dormant company have to be filed and if they are not, then the company will end up being dissolved!
You can see it is not straightforward, and when buying a shared freehold flat, particularly one is a smaller block, it will often be a matter of weighing up all the factors and speaking to all the people concerned, remembering that they could change in the future!
Do not have a naive belief that the law will readily and cheaply help you if problems do arise. Any case is likely to cause no end of stress and upset as well as cost, particularly since you will usually be dealing with people living in the same building as you! This assumes that you will have some possible legal remedy, and in some cases this may not be the case at all.
We are not saying not ever to buy such a flat because we know, particularly in London, for some there is little alternative. However, if you do go ahead, you should have weighed and understood the risks involved.
It is usually quite difficult to get existing shared freeholders to change from a Literal Shared Freehold to a Trust or a Company because they cannot see what the problem is. When they do have a problem, because perhaps one of the flat owners has has his leasehold flat repossessed and he has disappeared, it is too late to deal with it without the likelihood of very expensive court proceedings that might not necessarily succeed.
Some examples of the issues can be found here:
http://www.houseweb.com/forum/showthread.php?t=1867
http://www.houseweb.co.uk/house/forum/Forum1/HTML/000371.html
http://www.houseweb.co.uk/house/forum/Forum2/HTML/000074.html (More lenders
now require 70 Years left on a lease than when this thread was written)
http://forums.moneysavingexpert.com/showthread.php?p=29771187
http://www.houseweb.com/forum/showthread.php?p=3738#post3738
http://www.landlordzone.co.uk/forums/showthread.php?33221-Trying-to-sell-flat-share-of-freehold-dispute
http://forums.moneysavingexpert.com/showthread.php?t=3789881 -
Can one get a buy to let mortgage on 64 years lease and share of freehold? - Company with 3 members, difficulty in getting agreement
Copyright: Richard Webster & Co 2011
Richard Webster & Co 30 Leigh Road Eastleigh Hampshire SO50 9DT
Shared Freehold Conveyancing Solicitors
Page Last Revised 14/02/12