Tenure: Leasehold versus Share of Freehold
The first point we would like to make is that all flats are leasehold, those that come with a share of the freehold have an underlying lease. This is a commonheld mis-conception. Many clients come to us confused on this and think that if one buys a share of the freehold with their flat they will not be purchasing a leasehold and be party to a lease. This is not the case and it is therefore important for all purchasers of flats to understand the concept of a leasehold.
Leasehold flats can be in purpose-built blocks, in converted houses or above commercial or retail premises. They will also include maisonettes which is a term generally given to flats which have an own separate entrance (or sometimes refer to flats over two floors). Leasehold ownership of a flat is simply the right to occupation and use of the flat for a long period – the “term” of the lease. The term is fixed at the beginning and will usually be for 99 or 125 years with newer leases now being granted for as long as 999 years. If it were not for inflation, the value of the flat would diminish over time until the eventual expiry of the lease when the flat returns to the landlord/freeholder. The leasehold ownership of a flat is dictated by the lease (the contractual document that evidences the ownership of the flat). We find it helpful to think of the lease as the rule book of the space you buy (“the demised premises”) and that of the rest of the building. Share of
Freehold typically refers to when you and the other owners each own a share of the freehold, effectively owning the whole freehold jointly through a residents’ management company. It is commonly thought that when you own a share of the freehold you own a physical part of the building. That too is incorrect. Owning a share of the freehold means that you own a certain number of shares in the management company that owns the freehold of the building. Therefore there still needs to be a lease in place to demise each individual flat to an owner in the building, dictate what they can and cannot do in that space and the communal areas and explain who is responsible for what parts. Share of the freehold ownership can give more flexibility as you have slightly more control over the building. You are one of the decision makers in how the building is run and maintained.
However, it comes with more responsibility and requires a good working relationship with your co-freeholder neighbours; it is up to all, as equal shareholders in the management company that owns the freehold, to work together to run the building. This means insuring it and maintaining it and so on. If you all agree about expenditure, as well as having the time to organise it, then great. If not, you may want to enlist a good block management company to organise this for you. They will charge a fee for this but it can provide a neutral negotiator when needed. If you own on a leasehold basis, you will need to pay the service charge when requested by the freeholder. You have less say in how it is managed and who does the work but also less responsibility as it’s up to the freeholder to run the building and he or she has the responsibility to chase up the neighbour if they’re refusing to pay their service charge. Approximately 70% of flats in London are owned on a leasehold basis, so when you search for a property, it is our view that you should focus first on the property and whether it’s a good purchase and one that you genuinely like as opposed its “tenure” and whether it comes with a share of the freehold.
There are properties that are run extremely well by freeholders, leases can more often than not be extended for another 90 years (if you have owned the property for more than 2 years by courtesy of the Leasehold Reform and Housing Act 1993) and sometimes a share of the freehold can be acquired further down the line. Leasehold versus share of freehold is more of a technicality and should not be a driving factor at the initial decision-making stage. It is important that with any purchase you use a good solicitor who can scrutinise the lease thoroughly and report to you on how the building is run. Leases are not standard documents and so each building can be run differently and have different rules. The length of a lease will also affect the price you pay, with longer leases being more expensive.
This article was put together using information from the websites of The Leasehold Advisory Service and the SP Property Group.