What does share of freehold mean?

Prospective buyers in the UK may lean towards freehold rather than leasehold properties. With freehold properties, they have greater control in the running of their property, avoid ground rent and service charges, among other benefits. But freeholds may be more expensive than leaseholds, and not everyone can afford to pay for the entire freehold outright. That's where share of freeholds come in.

Purchasing a share of freehold means exactly what it says on the tin. You're purchasing a share of the freehold for the building your property it's situated in, as well as the land beneath it.

Share of freehold can be a complicated process but it does come with a lot of benefits, the most enticing being having more of a say in how your property is run.

So what exactly does share of freehold mean? What are the benefits of purchasing a share of freehold? And are there any problems that come with this kind of purchase?

What does share of freehold mean?

Buying a property with a share of freehold means you own your property leasehold, as well as a share of the freehold for the building your property is in, and the land it's on. It grants the owners more control over their homes than if it was a leasehold property.

Flats and share of freehold often come hand in hand because there can be multiple owners of different properties within one larger building. If a flat owner purchases a share of freehold, they'll own the leasehold for their individual flat, whilst also holding a share of the freehold for the entire building and the land it's built on.

Each co-owner is responsible for the upkeep and maintenance of the property up to the value of their share. For example, if you own 40% and your neighbour owns 30%, you'll need to keep 60% of the exterior, communal areas and shared facilities in good condition as you have more of the share and so have more control.

Types of share of freehold

If you own a share of freehold property, it's important to know which type of share of freehold you own. You can own a share of freehold either through joint management (joint ownership) or through a management company (company ownership).

Joint ownership

Joint ownership occurs when there's a maximum number of four flats or properties in the same building. Only four persons can be registered as joint owners of a freehold title.

A freehold held in individual names (under joint ownership) where everyone holds an equal percentage share of the freehold may also be referred to as tenants in common. For example, four flat owners who owned the property on a share of freehold basis would each own 25% of the freehold.

Share of freeholds in personal names operate based on trust, which can of course be riskier. But because everyone has an equal investment in the property, the tenants in common approach might be better, especially as you don't have to pay charges to set up a limited company.

Under company ownership, the share of freehold property may be owned by a corporation rather than an individual. An alternative approach to this type of ownership would be to become a member of a management company that owns the freehold flat. There may be other flat owners in your building who are members of this corporation.

Freehold property versus share of freehold

During the initial purchase, the share of freehold buyers can pay anywhere between 30% and 75% ownership of the property. The specific share will be decided by a mortgage advisor. You can't buy a share of freehold property outright because the policy is designed to help those who can't afford the whole freehold.

Staircasing

You can gain full property ownership of your share of freehold property by staircasing it. This means gradually buying more shares in instalments, once you've bought your initial share of freehold.

Freehold vs Leasehold ownership

If you own a freehold property, you have outright property ownership as well as the land it sits on and the airspace above it.

As a leasehold property owner, you have ownership of the property alone. You must pay service charges and ground rent to the freeholder or 'landlord' of the property. A lease can last for centuries, but once your lease runs out, you lose property ownership. It's therefore very important to know when your lease expires.

Share of freehold properties versus leasehold properties

A leaseholder only owns the lease of the property (which may last anywhere between a few years to a few centuries).

If you have a share of freehold for your building, you own your property on a long lease. As a co-owner of the freehold of the building, you (and any other co-owners) gain control over lease length. This means you can get a lease extension without having to wait for approval from the freeholder.

Under leasehold property ownership, you have to pay the landlord to extend your lease. But with a share of the freehold property, you'll have control over ground rent, service charge payments, buildings insurance, lease extensions and other freeholder privileges.

When do you pay ground rent?

A leaseholder will usually pay ground rent once a year. The charges can vary depending on the value of the property, which means they could be quite expensive if you purchase a higher-value home.

The freeholder may also charge the leaseholder for redevelopment and renovations, building insurance, keeping pets and emergency call-outs.

Benefits of having a share of freehold

There are plenty of benefits to having a share of freehold, such as:

• Leaseholders have more control over their homes. This usually means a higher standard of maintenance as the building owners will be more invested in how the building is managed.
• The residents have legal right to take over the freehold if at least 50% of the other leaseholders are also willing to do so.
• It's a good solution if leaseholders have issues about how the freeholder is running the building.
• Leaseholders can set the ground rent and find the best building insurance.
• Leaseholders can extend the lease up to 999 years at no extra cost. This helps to maintain the value of the property.

Does share of freehold add value to the property?

You can't say for certain that having share of freehold adds value to the property, or by how much. But there are ways in which some value could be added through share of freehold.

If you have a short lease (80 years or less), gaining a share of the freehold could add value to the property, as a longer lease means higher value. It could be cheaper to buy the freehold with the other leaseholders than extending the lease on your property. You can also add value to the property through maintenance and repairs, which may have been more difficult to control under a leasehold.

While share of freehold may not boost a property's value, it can boost the desirability of a property. A prospective buyer would find it easier to renew the lease, pay less ground rent and service charges, whilst also having a say in how the freehold area is managed.

Potential problems with share of freehold

Share of freehold may also come with its own share of problems, such as:

• At least 50% of the co-owners must be willing to buy the freehold.
• Co-owners need to cooperate and agree on how to manage the building.
• Share of freehold can be expensive. Service charges and maintenance obligations may vary month on month depending on the level of repairs and upkeep needed.
• You need to make sure you can afford the price of the freehold, the valuation survey, legal fees for the leaseholders and freeholders, and stamp duty land tax if the property is more than £125,000.
• It may be more difficult to get home insurance.
• You may have difficulty renting if your neighbours don't want to, or if your lease doesn't allow it directly.
• It might be difficult to get the co-owners to sign the transfer of the freehold.

Ground rent and services charges with a share of freehold property

When you own a share of freehold, you and other other shareholders in the building set and share the cost of the service charges and ground rent. Communal costs include things such as lifts and other parts of the building used by all residents.

Because you and other leaseholders have control of these charges, you're much less vulnerable to unfair charges.

Limited companies and share of freehold flats

Sometimes share of freeholders will form a limited company to give all the participating members a say in how the building will be run. Members of the limited company may also discuss renovation and leasehold extension issues.

Setting up a limited company can be hugely beneficial if residents don't feel they're being well represented by the management company. Not only does it give them the freedom to manage the building themselves, it can also save them a fair amount of money as they no longer have to pay an annual service charge to a third party management company.

Being part of a limited company does require leaseholders to dedicate enough time to ensuring it's run effectively. Residents will also need to manage company law procedures as part of their property ownership.

Share of freehold lease extension

Under the 1993 Leasehold Reform Act, leaseholders can extend their lease up to 999 years or collectively purchase the freehold. This is known as collective enfranchisement.

There are certain requirements to quality for a share of freehold lease extension, such us:

• At least 50% of all flat owners must be leaseholders and agree to buy the freehold.
• If the building is made up of two flats, both leaseholds must be willing to purchase the freehold.
• At least two thirds of the leasehold properties must hold long leases.

Surveyors conclude that buying a freehold and negotiating a lease extension adds 1% its value.

Selling a share of freehold property

If you want to sell your share of freehold property, the other share of freehold owners have to agree to the buyer's purchase. There will also be a formal deed to transfer ownership from all the other co freeholders to the buyer. The buyer's conveyancing solicitor will then send the transfer deed to HM Land Registry for registration.

The sale won't be complete until the deed is signed by all owners of the freehold. That's why it's useful to notify the other co freeholders that you're selling as soon as possible, otherwise there could be delays in the house sale if there are disputes.

As a shareholder of the company that holds the freehold, you must have a share or membership certificate. The conveyancing solicitor will then need to register the buyer as a new member of the firm and remove your name from the membership list.

As long as the leaseholders qualify for collective enfranchisement, the freeholder can't legally refuse to sell the freehold.

Freehold flats

A freehold flat means the buyer owns the flat but not the land or any of the communal areas of the building. Unlike regular flats, freehold flats don't have a leasehold title.

It's also possible to rent out freehold flats as you would any other freehold or leasehold property.

Share of freehold mortgages

While share of freehold flats don't come with any leasehold fees, it may be much more difficult to get a mortgage. Most mortgage providers won't offer mortgage deals on freehold flats because the unexpected costs that may come with share of freehold properties can put some lenders off.

However, there are some mortgage providers open to share of freehold flats, particularly if the flat has a long lease and has a freehold company managing the property you're looking at.

Because you have a smaller network of lenders to choose from, you may be asked to pay a higher deposit or higher interest rate. Make sure you do your research so you pick the lender that best meets your needs.

The value of a share of freehold property

As previously mentioned, prolonging the lease extension will increase the value of your share of freehold property. Whoever pays to extend the lease will have full rights to use the property, but (as per leasehold property regulations) won't own the property outright.

If you're looking for a buy to let investment, the value of the freehold may increase over time. If an investor purchases a flat with a share of freehold, they will become part-owner of the building's freehold as well. This could be great in terms of increased return of investment and future capital growth.

Summary: Sharing is caring...literally!

When you purchase a share of freehold, you're gaining more freedom and more control in how your building is run. You have more of a say when it comes to ground rent, building insurance, service charges and lease extensions.

But as we all know, with great power comes great responsibility! And with greater control of your freehold, the more responsibility you have to maintain it. That means staying on top of building repair costs, ad hoc maintenance and administration, as well as renovation and redevelopment. More shares means more care. After all, the more you invest in something, the more you'll care about that investment.

If you're unsure about purchasing a share of freehold, it's always best to consult a solicitor first. But if you're ready to sell your share of freehold property, you find the best agent to meet your needs using our Estate Agent Comparison Tool.