Freehold, Shared Freehold or Leasehold?

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Landlords often buy flats which are either Leasehold or Shared Freehold. What are these tenures and what should landlords look out for in these different forms of ownership?

Leasehold is one of three forms of tenure (property/land ownership) almost exclusively peculiar to the United Kingdom, though Scotland has a different legal system and few leaseholds. Alternatives are Freehold and Commonhold.

The legal concepts go back to antiquity in a tenure system where, unlike some other countries (USA for example, remember the land grabs) where ownership of land can be outright, the Crown owns all the land in the UK.

Freehold gives the stronger form of tenure, giving outright “ownership” of the land in perpetuity (forever). There is no landlord to answer to: to pay ground rent to, or annual service charges, or to get permission to do alterations.

Leasehold (sometimes known as long-leasehold) gives a time limited form of ownership (a tenancy) but there is a legal right to extend the lease. Especially in cities like London, leasehold ownership houses millions of people. The landlord may be a large property owning estate (The Devonshire Estate for example) which retains the freehold.

Commonhold is a relatively new form of property/land ownership in the UK, introduced in 2002 as an alternative to the long leasehold system. Commonhold is an attempt to bring flat ownership into the 21st century and it’s the equivalent of the US-style Condo (Condominium) system. Despite the innovation, take-up has been minimal.

As a Freeholder (outright owner) you have responsibility for your own property, insuring, repairing and maintaining. If you allow the property to decline and fall down that’s your own affair, you “own” it and the land it stands on.

As a Leaseholder, you are responsible for the internal repair and insuring (your possessions), but not for common areas, and externals such as roofs, drains, walls etc. All this is the freeholder’s (landowner’s) responsibility. Any one leaseholder would not be in a position to do this work; it needs to be organised centrally and for all, but of course it is charged back to each flat leaseholder in the form of service charges.

Service charges vary from block to block as they may involve paying for things like maintaining large communal gardens, electricity bills for communal areas, repair and maintenance of exterior walls, roofs and lifts.

The advantage of normal leaseholds is that the freeholder or his managing agent does all the organising and work to keep the property (the block) up to scratch. No one leaseholder can neglect her flat and devalue the whole building. The disadvantage is that some freeholders are better than others at managing blocks, plus repairs are invariably more expensive than if you were a freeholder doing and making your own decisions, mainly because of all the people involved and their fees.

There are legal safeguards to prevent freeholders overcharging leaseholders or doing sub-standard work, and this can be challenged through the Leasehold Valuation Tribunal. Nevertheless, disputes can prove very expensive to leaseholders as the freeholder’s legal costs in defending an action by leaseholders are usually charged-back to the leaseholders through service charges.

With commonhold, the individual flat owners (i.e. residents) own everything in perpetuity. There’s no landlord, freeholder or lease. The land the building sits on is registered as commonhold land (as opposed to freehold land), and each flat owner (unit owner) has two distinct legal interests:

(1) in his own individual flat, and (2) a collective interest as a member of a Commonhold Association (in effect a residents association), which owns the land and manages the shared parts of the property on behalf of all the residents. In the UK, commonhold ownership hasn’t really taken off since the 2002 Leasehold Reform Act introduced it, so commonhold is not so common in the UK.

Developers of blocks of flats like to retain ownership as freeholders through leaseholds, which gives them a long-term income through ground rents, and other fees when people renew leases and make alterations. There is therefore no incentive for the UK developer to sell on as a commonhold.

With Leaseholds there are two other aspects or forms of sub-ownership: shared management and shared freehold.

With shared management (Right to Manage) the leaseholders club together, form a management company, and run the block as a leaseholder management committee in their own company. The Right to Manage legislation lets leaseholders take over certain management tasks from the landlord without having to prove bad management. Leaseholders have a right to manage only when certain strict conditions are met – see Leasehold Reform Act 2002.

Leaseholders can buy a share of the freehold with the other leaseholders (such as other people living in a small block of flats) as long as at least half of them agree to buy a share, but if there are commercial parts (a ground floor retail premises for example) this complicates matters considerably.

With shared or “share of” freehold there are two basic set-ups for the ownership of the freehold: (1) the freehold is owned jointly by a number (up to four) of the flat owners in their personal names, and (2) a company is the owner of the freehold and each of the tenants hold a share or membership in that company – they are directors of the company.

Leaseholders therefore, in obtaining a share in the freehold, their name will either be noted on the title deeds or will be issued as a share in the company that owns the freehold. In either case shared freeholders will own a share in the freehold.

Implications of Leasehold

As a leaseholder you have a lease from the freeholder (sometimes called the landlord) to use for a specific number of years. Leases commonly give 90 years, 12o or 150 years, but less common in London, can be as long as 999 years – known as a virtual freehold. Every leaseholder has a contract (lease agreement) with the freeholder, which sets down the legal rights and responsibilities of either side

The value of a lease starts diminishing from the day it is signed, year by year until it runs out at year zero when, if not renewed, the freeholder takes back ownership. Leaseholders can extend a lease at any time and have a legal right to do so. This should be done before a lease reaches 80 years as the value of the lease will diminish rapidly and the cost of extension increases inexorably below this point. That’s because most mortgage companies will not lend below 80 years or absolute minimum 70 years. Lenders will normally want the lease to run for 25 to 30 years beyond the end of a mortgage.

When buying a leasehold property always have an expert look over the small print of the lease document. Make sure that no one leaseholder can start legal actions against the freeholder, for which you are liable to pay for through service charges. This is just one aspect that can prove to be a liability.

Implications – Share of Freehold

Agents usually sell “share of freehold” as a positive, and in most cases it is. A straightforward lease is a wasting asset and becomes less valuable as it gets shorter. Eventually you will need to extend the lease, but normally if you have a share of freehold you will not be required to pay for this. It is therefore cheap and easy to achieve. This can be a significant saving. For example to extend a lease gone down to around 70 years for a £400,000 flat could be anything around £25,000 and upwards, paid to an independent landlord.

Make sure there is a proper management system in place for repairs and that there are no problems or disputes between the tenants before you buy.

Management

In the case of leaseholds, a good freeholder or managing agent will manage professionally and will save the leaseholders having the responsibility for keeping the block well maintained. However, this is rarely cheap and can be very costly in terms of poor maintenance or high fees or both if your block manager is bad.

Shared freehold is more common in small blocks where there will be obligations on the tenants to manage: filing accounts, annual returns for the freehold company, arranging tenant meetings and organising insurance and repairs.

Proper maintenance needs to be planned on an annual basis, but sometimes major works are required in any one year. This can cause volatility in the amount of service charges due, so to counter this effect a sort of saving-up, sinking or reserve fund can be set up which is paid in to each year.

Generally these types of arrangements are put in place where there is a professional managing agent running the block, usual for large blocks with multiple leaseholders or a sharing of freehold. But for smaller blocks the administration costs charged by a management agent may be out of proportion and too expensive.

Where a freehold is owned jointly in the personal names of the tenants, difficulties can arise in getting agreement on permissions for alterations / extensions and to get the other owner/s to sign a transfer of the freehold of the flat if it is to be sold. The Land Registry will require identification from each owner which can also cause further problems on transfers. Generally though, shared ownership advantages outweigh their disadvantages and share-of-freehold ownership helps the marketability of a flat.

Buying a Freehold

Leasehold Disputes

Leasehold Advisory Service

How Can a Flat Management Company Help You?

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – Freehold, Shared Freehold or Leasehold? | LandlordZONE.

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An Opportunity For Landlords To Trial A New Lifestyle For FREE

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Many self-managing landlords I speak to feel tied to their business and are becoming increasingly depressed about all the new rules and regulations they need to stay on top of. Some have decided to sell up whilst others soldier on

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Estate Agent Cartel broke competition law

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The CMA has secured the disqualification of two directors whose company broke competition law.

This follows an investigation that resulted in 5 Somerset estate agents being fined more than £370,000 last year for secretly agreeing between themselves the fees they charged.

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Northern landlords top voids list

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More landlords with property in the North of England experienced a void period in the past three months than in any other UK region according to findings from the UK Association of Letting Agents (UKALA).

53% of landlords with property in the North East and North West of England both experienced a void in the last quarter.

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The surge in private renting could cost the Tories the next election

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Tenant Fees Ban:

With an ever increasing number of under 45s renting privately, it’s almost inevitable that with no stake in property, and with Labour promising radical tenant-friendly legislation, their vote will go only one way.

A new study by Shelter, the homelessness charity, concludes that the growing cohort of private tenants could be just enough to tip the balance electorally and throw the Tories out of power.

For those renting in the private rented sector (PRS), over the last 10 years the 35-44 age group went form 13% to 26%, the 45 to 54 group went from 8% to 14%, and the 55-64 age group 3% to 9%, – see the chart below.

Young people are being priced out of the housing market and being forced to rent for longer, and with house prices increasingly out of their reach, some may rent for life.

The low interest rate environment since the 2008 market crash has pushed asset prices sky-high across the Western-world. This including house process.  Also, in Britain, according to one recent report, surging immigration has pushed house prices up by 20%. The result is that more and more under 45s are resigned to renting, if not for life, then a least well into their 30s and 40s.

This structural change has driven a coach and horses through the traditional Tory policy of building a house owning democracy; the Thatcher boom in council house purchases which led to a boost in home ownership, is a trend now in reverse.

This steady decline in house ownership in Britain means that by the next general election, due in 2022, there will be more renters than mortgaged home owners. With a large cohort of 35-44-year-olds now renting, a demographic that’s more likely to turn out to vote than younger tenants, Shelter warns that the Tories must do more to help tenants if they are to retain power.

Shelter fears that the proposed ban on agents’ letting fees, and a cap on security deposits, due for implementation next year, could result in higher charges by other means.  In a determined attempt to offset losses from letting fees, if the ban is not implemented properly, Shelter fears that agents will circumvent the legislation

Polly Neate, Shelter’s chief executive, says:

“In recent years the number of families renting privately has soared, meaning political parties can no longer afford to be tone deaf to the needs of renters and listen only to homeowners.

“It is vital for renters that this government bans letting fees properly, without leaving the back door open to agents to continue charging.

“It’s their main pledge to renters and if they get it wrong they might well feel the consequences at the ballot box in years to come.”

Director of the Renters Alliance, Clark Barrett, has said that letting fees are not the only issue with private renting:

“The main problem we see is not the letting fees, its poor service, its deposits not being returned, and its repairs not being done.

“Banning letting fees will just see landlords pass on the cost to the renter by taking more of the deposit at the end of the tenancy.

“It’s a systemic problem, and the real issue is the shortage of good properties in the rented sector.”

Shelter highlights the growing power of the tenant group at the ballot box by citing data from the British Election survey which shows that in 2017 voter turnout was more than 10% higher for 35-44 year-olds than it was for 25-34 year-olds, at 69% as opposed to 56%.

Source: DWP – Renting & Home Ownership Trends

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – The surge in private renting could cost the Tories the next election | LandlordZONE.

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Will I fall foul of discrimination law?

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I have been referencing a couple for one of my properties. There is a CCJ on one of the applicants reports, but I knew of this from the start and as its being paid and only a small amount I carried on with referencing.

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I am a Good Landlord, but need help for my tenant cousin please

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I am a landlord and I believe a good one. My cousin however has been subject to a bad landlord and I would like to help her.

I understand this is a landlords forum, but any advice would be very much appreciated.

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Sublet fees – More than I charge for a lot more work!

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I know this isn’t a new topic, but I would just like an opinion on clauses being used to try and get £160 for new sublet and £60 for a renewal (I own a Property management company and its more than I charge landlords for a hell of a lot more work).

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RLA calls for fire regulations review to include smaller existing residential property

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The Government’s review into building and fire safety regulations is missing the opportunity to assess fire safety regulations across all types of housing.

This is the concern being expressed by the Residential Landlords Association (RLA) as it formally responds to the Interim Report of the review led by Dame Judith Hackitt following the Grenfell Tower tragedy.

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Joint Tenants vs Tenants in Common (split 50:50)

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I own a BTL property (higher rate tax payer) but am in the process of transferring part of it to my wife (basic tax payer) for tax purposes

Is there any real difference between “Joint Tenants” vs “Tenancy in Common split in equal shares”?

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