Whilst historically the collection of ground rent by freeholders has been a steady income stream, since the implementation of the Leaseholders Reform (Ground Rent) Act 2022 there is now little incentive to retain the freehold interest on new build leasehold developments.
For those who are not aware, the Leaseholders Reform (Ground Rent) Act 2022 prohibits the collection of ground rent under leases granted from June 2023 onwards (with some exceptions). This change has led to a surge in new leasehold developments being sold with a ‘share of the freehold’ although for many buyers there is confusion as to what this actually means as well as how the different mechanisms for holding a share in the freehold work. The aim of this article is to explore some our commonly asked questions in relation to owning a share of the freehold and focuses on leasehold flats rather than leasehold houses.
What does having a share of the freehold mean?
A share of the freehold means exactly what is says – on completion you will own a share in the freehold of the building your property is situated in and the land that it is built on. Typically, the other residents in the building will also hold a share in the freehold meaning that collectively, all of the leaseholders own the freehold together in equal shares. This also means that collectively, the leaseholders are required to carry out the function of the Landlord and this includes compliance with the Landlord’s lease covenants such as the duty to consult on major works.
Does having a share in the freehold mean I no longer have a lease?
Whilst the idea of merging a leasehold title into the freehold and removing the lease may seem appealing at face value, due to the legal differences between freehold and leasehold titles, to do so would cause a number of issues. In particular, the positive obligations included in a lease, such as repairing and maintaining your property and paying service charge, would not automatically pass from owner to owner in a freehold context.
For this reason (amongst others), a share of the freehold is typically granted in addition to the grant of the long lease. This means for a buyer purchasing a flat with a share of the freehold, they will own both the leasehold interest in their flat and a share of the freehold building within which the flat is situated. Your ownership of the flat will still be governed by the lease and you will still be required to contribute to the sums set out in the lease such as service charge and buildings insurance.
How will I hold my share?
There are a number of different mechanisms for holding a share in the freehold and often this will be dictated by the size of the development and number of flats.
For smaller developments which consist of 4 or less flats (typically a converted house scenario) it is common for the individual flat owners to hold the share of the freehold in their own names.
For larger scale developments, a management company is often set up to hold the freehold title. Each flat owner will be issued with either a share in the management company or be required to become a member in the management company on completion of their leasehold purchase. Whilst the management company will retain the legal interest in the freehold, the members or shareholders in the management company will change as and when the leasehold flats are sold. In this type of scenario there is often a requirement within the lease whereby on the sale of each flat the share must also be transferred to the new owner or the new owner is required to become a member of the management company with the existing owner required to resign.
If all the tenants have a share in the freehold, how are decisions made?
Again, the decision making process between freeholders will often depend on what the freeholders have agreed.
Typically, where the individuals hold the freehold in their individual names, we tend to see that the management of the building takes a more informal approach with decisions relating to the repair and maintenance of the building being made on an adhoc basis between the owners. Whilst a reactive rather than proactive approach is preferred by some tenants it can give rise to situations where buildings are left poorly maintained or the legislative obligations on a landlord fail to be complied with. For example, seldom are resident freeholders aware of their legal obligations or procure fi re risk assessments and asbestos reports for the communal parts of a building.
In larger developments, professional managing agents may be appointed by the resident owned freehold company. In this scenario, it is the appointed managing agents who carry out the day to day management of the building on behalf of the freeholders in return for a fee which is paid via the service charge. Whilst there is an additional cost involved this type of set up tends to work better for large developments which tend to have higher running costs and require more ‘services’ to be provided.
In conclusion
There isn’t a one size fits all for the best way to hold a share of the freehold and the process can sometimes feel far from straightforward which is why having good legal advice is essential. This article does not constitute legal advice and is intended to be guidance only. Ashworths are specialist property solicitors based in Wimbledon and one of our team would be pleased to talk to you about the sale or purchase of your residential or commercial property.