Share of Freehold
So you have done it. You have been through the process of buying your freehold and you have emerged the other side as proud new ‘share of freeholders’. So what now?
The completion of the purchase of your freehold is far from the end of the story. Your freehold requires careful management and the time involved in the management of a block of flats should not be underestimated. If you choose not to instruct a managing agent and to manage the building yourselves you must make sure you are aware of your obligations and responsibilities both in the lease and in relevant legislation.
The most common misconception of a share of freehold property is that you no longer need a lease of your flat. That is not the case. Without the lease, you would lose the covenants in it which allow you as freeholders to do such things as collect service charges. Ownership of the freehold does not affect the validity of the leases which will remain in place. You will be a joint freeholder AND a leaseholder. You will wear two hats in that you will act jointly with your co-freeholder as Landlords and individually as a Leaseholder. You will be jointly responsible with your co-freeholder for the Landlords obligations and covenants in the leases and individually responsible for the obligations and responsibilities of the lessee in the lease of your flat.
People often get confused with this distinction and it is important to keep it in mind.
Once you acquire the freehold you can (and should) grant long leases of each of the flats to each of you as individual leaseholders. Each of the individual leases will remain in force and you will be responsible as individuals for compliance with your obligations as leaseholders and jointly as members of the company for compliance with your obligations as freeholder.
The terms of the leases will need to be extended as mortgage lenders require leases to be of a minimum term even if the freehold is owned by the leaseholders. Increasingly mortgage lenders require a term of 50 years plus the mortgage term.
If you buy your freehold in the name of a company the leases should be extended immediately on completion of the freehold purchase so as to avoid any potential liability to capital gains tax on the part of the company. If the leases are extended at the same time as the freehold purchase, the consideration you pay for the freehold is deemed to be paid for the lease extension also. If the leases are granted immediately there can be no increase in value between when the freehold is acquired and when the leases are granted and therefore there can be no chargeable gain.
Related Reading: Extending your lease
As a joint freeholder, you will be responsible for the maintenance, repair and insurance of the building and for providing various functions to the lessees.
You will be responsible for the maintenance of the building and you should consider before you purchase the freehold what works may be required in the short, medium and long-term, taking professional advice if necessary. You will also need to organise funding for these works and will need to call on the service charge provisions within each of the individual leases. It may be a good idea set aside a reserve fund to which you all contribute so that funds are available as and when works are required. If you live in a small block you may decide to deal with such works on an ad-hoc basis. You must be aware though of your obligations as a freeholder to consult with all leaseholders before works are carried out (see below).
Related Reading: Freeholder Responsibility
Most residential leases will provide that the landlord is responsible for the insurance of the building. As a joint freeholder, this will become your responsibility. You must ensure that you have insurance in place at the completion of the freehold purchase and you must ensure that you keep the building adequately insured. It may be a good idea to nominate someone to deal with the insurance renewal each year and to collect on account payments so that you always have enough money to pay the insurance renewal.
Your leases may provide that each individual leaseholder insures their own flat. You can continue with this arrangement or you may find it more beneficial to arrange a policy which covers the whole building. You can change the leases to provide that the landlord (i.e you joint freeholders) insure the building with your individual and mortgage lenders interests noted. Certainly, mortgage lenders prefer this position.
Most residential leases will contain a clause which requires you to obtain Landlords consent for any alterations which you wish to make to the flat. This requirement will continue even though you are a joint freeholder and you will need to seek the consent of your co-freeholder(s) before carrying out any alterations. You will need to document the consent by way of a formal licence for alterations. This licence cannot be unreasonably withheld but could be granted subject to certain conditions e.g re-assessing the apportionments for service charge percentages.
Statutory Obligations – Service Charges
Landlord and Tenant legislation provides that landlords must consult with their leaseholders before carrying out major works to their building. If works are required which will cost in excess of £250.00, as landlords you must carry out a consultation procedure. You cannot individually incur costs for which you are both/all liable without the other’s consent and there are strict procedures to be followed in relation to obtaining quotes and to the standard of work. Basically, as long as you all agree to the cost of works in advance there should be no problem but failure to follow the procedure does mean that you would not be able to collect the monies if there was disagreement about it.
As from 1 October 2006 it is a legal requirement for all Landlords to undertake a fire risk assessment which must be available for inspection by fire authorities. This applies to the communal areas of residential blocks of flats (but not to private living areas). The fire risk assessment must be undertaken by a ‘competent person’. If you do not appoint a managing agent who will carry out this function for you, you will need to familiarise yourself with your obligations contained in the legislation. Failure to do so may result in prosecution in the event of a fire-related incident.
Statutory Obligations – Control of Asbestos Regulations
As an owner of residential property which contains communal areas (eg hallways, stairs, lifts, roof spaces) you will need to comply with the Control of Asbestos at Work Regulations 2006.
As the Landlord you will be the ‘Duty Holder’ for the purpose of the regulations and therefore responsible for investigating whether the property contains asbestos, carrying out a risk assessment of the relevant areas and preparing a management plan for the management of the asbestos. You will need to instruct a suitably qualified surveyor to carry out a survey of the property to ascertain the presence of asbestos and if there is to carry out the risk assessment. Generally asbestos does not cause a problem if it is left untouched but if any asbestos has to be removed you must instruct a licensed contractor to remove it.