You may hear people saying that they “own a share of the freehold of their flat” and “don’t have to worry about the lease”. In reality, they are leaseholders as well as joint freeholders. This means they are still bound by the lease just as much as any of their neighbours who do not own a share of the freehold!
In practice it should not be an issue because, for most properties made up of flats – commonly referred to as blocks for insurance purposes – the process of buying the freehold will provide the opportunity to up-date the lease so that so no-one should have any issues with its terms.
Developers of some new purpose built or converted ‘blocks’ immediately transfer the freehold of the building to a company set up especially for the purpose of ownership. For example, a Residents Management Company (RMC).
Such companies are jointly owned by all the leaseholders, who must relinquish their share if they sell up and the leave the block, so ownership stays within the building. In such case, all leaseholders will own a share of the freehold.
Other developers, of course, sell the freehold on to third parties as an investment opportunity, do remember that you always have the right to come together and buy the freehold – the right to collective enfranchisement – and create your own Right To Manage (RTM) company.
Sometimes there will be leaseholders who choose not to participate in this process. However, providing a fair price is agreed, and at least half of qualifying leaseholders want to participate, then the current freeholder is obliged to sell. It is a fairly complicated process but there are plenty of good solicitors well-versed in making it happen as smoothly as possible and at a fair price.
What are the benefits of buying the freehold?
Top reasons to buy the freehold are to gain control. This could include for example to:
- Take over management of the block and improve standards
- Be in a position to appoint someone you select to manage the block on your behalf, like a property management company
- Be able to grant leaseholders longer leases and so give the value of their individual leases an immediate boost
- To reduce ground rent to a peppercorn rather than risk having investors use it as a cash cow
- Make variations to the lease to remove antiquated clauses and introduce new controls over, for instance, short-term lets like Airbnb.
- Leaseholders who have freehold control can agree their own priorities for the block and negotiate their own service fees accordingly.
- The residents that share the freehold (some may choose not to participate) have a responsibility to fulfil the landlord’s obligations within the lease.
Some of them will need to step up to the plate and act as directors of the freehold company and ensure accounts are filed, legal obligations under the lease are met, and managing agents or contractors are overseen.
This workload generally brings no payment but lots of legal liability, so it is a usual consideration to take out directors and officers liability insurance. A good accountant is essential when setting up and running the company, and they are often paid to act as company secretaries.
Do remember that, even though not everyone in the block may have taken a share of the freehold, they all have the same rights as leaseholders. There isn’t a two-tier system and the company will be subject to challenges for unfair practices if it discriminates, just as the old freeholder would have been.
Investors in the freehold should not be tempted to feel that non-participants are getting a free ride and all the benefits of enfranchisement for no input. Shareholders get their fair return from the increase in value of non-participants’ leases as they get shorter, and might even realise dividends for the company.
Note: While UK Law does allow for the introduction of completely new form of ownership, commonhold, take up so far is minimal. Buying the freehold within the old leasehold system is still simpler, it seems.
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