If you own a flat, you may be interested in buying a share of the freehold. There are three main ways in which you can do this. We explain the potential benefits of owning a share of freehold and take a look at how you can buy in.
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We have helped around 10,000 people like you buy a share of their freehold or extend their leases – so you know you can rely on our team’s specialist knowledge
Why buying a share of freehold is a good idea
As a flat owner, you will almost certainly own it on a leasehold rather than freehold basis – even if the lease is what is known as “long leasehold” – i.e. originally granted for at least 21 years, but more commonly 99 or 125 years, and sometimes extended up to 999 years. The freeholder will own the building and the grounds and you will have a lease for a specified number of years.
The freeholder is responsible for maintaining and insuring the building. They will charge the leaseholders a service charge to pay for this. And you may well also have to pay an additional annual fee known as “ground rent.”
Your lease will contain rules which you need to obey and limits on what you can do. For example, the freeholder may require you to ask for permission before making any alterations to your flat. They could have the right to say no, or they may be entitled to charge you a fee for agreeing.
But if you and your fellow flat owners joined together to buy the freehold of your block, there are several very real advantages. These include:
· Extending your lease
· Deciding how much service charge to pay each month
· Arranging your own insurance and maintenance
· Eliminating ground rent
· Adding value to your property
The importance of using specialist solicitors
Few solicitors deal with lease extension or freehold purchase on a regular basis. And that’s important to understand, because as you will see from the information on this page, that it’s essential for your solicitor to understand this niche area of work – and keep to the correct procedure and the strict timetable involved.
Here at Bonallack & Bishop we have a 5 strong team who deal with nothing but lease extension, enfranchisement and the right to manage – possibly the largest, most specialist team of its type in the country.
Extending your lease
As a flat owner, you hold a lease of your property. As the number of years on the lease gradually runs down, your flat loses value. In general terms, the shorter your lease, the less it’s worth.
And although you may not be aware, it’s almost always a good thing to extend your lease before the remaining lease term dips below 80 years. That’s because the moment your lease is under 80 years, your freeholder is entitled to charge an additional premium – known as “marriage value”. This is likely to be many thousands of pounds so missing out on your lease extension could be very expensive. And in addition to the any you’re going to need to pay to your freeholder (known as “a premium” to your freeholder to extend your lease, you’re also going to have to pay for both your own legal valuer’s fees, as well as the reasonable legal and surveyors costs of your freeholder.
But if you and some or all of the other flat owners own the freehold yourselves, you can all agree to extend your leases without needing to pay a premium or valuation costs. That can be a big saving.
Click here to read more about Lease Extension
Deciding how much service charge to pay
Block management, particular building maintenance issues, can be a real headache. Your freeholder might not maintain the building to a satisfactory level, and quite often, because the ultimate maintenance costs don’t come out of their pocket, they may not worry too much about the cost of maintenance – whereas you, as a leaseholder have to pay those costs through a service charge. This can prove very expensive for leaseholders.
But if you own a share of freehold, you are together responsible for maintenance. So you can ensure that the block is maintained at a decent level and you can ensure that costs such as insurance and maintenance are kept under control. It’s amazing how much you can save if you know it’s your own money you’re spending!
You will generally also pay a regular sum into a sinking fund. This is important, because this kind of fund is there to pay for pay for any large items of expenditure when they arise, such as replacing or repairing a roof in poor condition. And keeping close control of your sinking fund is important. You certainly don’t want to be paying too much into the fund, but equally it’s very dangerous if you and the fellow leaseholders don’t have sufficient funds in a sinking fund to pay for large, planned works. A large and unexpected maintenance or building bill can cause enormous problems for many flat owners in blocks.
Arranging your own insurance and maintenance
You can shop around and find the best insurance deal for the property. Similarly, you can also decide what maintenance is needed, obtain quotes from different providers and choose when to have work carried out.
Eliminating ground rent
The freeholder will usually charge ground rent, which often amounts to hundreds of pounds each and every year, and often goes up on a regular basis. But after coming together and buying a share of the freehold, you would usually agree not to charge those with a share of the freehold any ground rent.
Adding value to your property
If you own a share of the freehold as well as the leasehold interest in your flat, it makes it more desirable to buyers. It can also add value, particularly if you extend your lease.
Taking control of your building
As owners of the freehold, you take over management of your block. This allows you and your new fellow freeholders to control the way the property is looked after and managed. You can impose rules and regulations as you see fit or do away with rules if you want to. For example, you could decide to allow subletting or to have pets in the building. You can also decide what alterations or extensions to the property you will allow.
Many of these restrictions will be contained in your lease. Owning a share of the freehold gives you the opportunity of changing the terms of your lease.
The importance of reaching agreement with your fellow freeholders
Although as the freeholder, you have much more control ( you can extend your lease, approve alterations etc), being able to make those decisions will depend on having the support of the other freeholders.
So if, for example there are 4 flats in your block, with each leaseholder owning an equal share, and only 3 of you agree to extend your leases to say 999 years, you won’t be able to go ahead. A decision that needs to be taken by the freeholder – needs to have support of all those with a share of the freehold.
And it’s also worth noting, that if some of the other leaseholders don’t own a share in the freehold, they can’t restrict your actions as freeholders.
When can I buy a share of freehold?
The three main ways you can buy a share of the freehold are:
· Collective enfranchisement – when you join together with other flat owners to buy the freehold as your legal right
· Ask to buy in when other flat owners already own the freehold
· Buy a flat together with an existing share of the freehold
Flat owners have a legal right to buy the freehold of their property in certain circumstances. This is known as collective enfranchisement. And in very general terms, a freeholder cannot refuse to sell the freehold.
To exercise this right, enough qualifying leaseholders must want to buy the freehold.
- Qualifying leaseholders
A qualifying leaseholder will have a lease initially granted for more than 21 years.
The building must also qualify. This means that it must contain at least two flats. At least two-thirds of the flats need to be owned by qualifying leaseholders. The building must also be 75% or more residential. This means that any commercial area must be at most 25% by floor area.
- Number of qualifying leaseholders needed to force the freeholder to sell the freehold
At least half of the flats must want to join in with the process. If only two flats are in the block, both must want to buy the freehold.
Some exceptions exist to the collective enfranchisement process, including where the freeholder or their family live in one of the flats. If the building is not purpose-built and has four or fewer flats, then if the freeholder or their family has lived there for the past twelve months, they cannot be required to sell the freehold.
Enfranchisement – the importance of participation agreements
1 of the biggest challenges with collective enfranchisement is getting enough people on board on day one and keeping them involved throughout the process. That problem is particularly thorny with large blocks.
That’s why it’s often really useful (and frankly essential with large blocks) to have a participation agreement drawn up at the outset for all of the participating leaseholders to sign. This can commit them to the enfranchisement procedure and the agreement will usually cover issues such as:
· Potential costs that the participants agree to pay
· Who will take the lead in dealing with the process, to include negotiations with the freeholder
· How ownership and management of the freehold will be dealt with once the purchase is complete, for example, any new rules that you propose to make
Click here to read more about Collective Enfranchisement Participation Agreements
The collective enfranchisement process
There is a strict procedure involved in exercising your collective enfranchisement rights – and it’s essential to stick to that timetable and to follow the correct procedure. Not doing so risks the failure of your attempt to buy your freehold, with potential wasted costs payable both to your own solicitor and valuer, and to the freeholder’s own legal team and surveyor. And if this applies to you, you’re not able to make another application to buy the freehold the 12 months.
That’s just 1 of the reasons why it is really important that when buying a share of your freehold, you make sure your solicitor is a genuine enfranchisement specialist.
NB the right to collective enfranchisement is known as the formal statutory procedure. But if you have a cooperative freeholder, it is possible to agree on an informal or voluntary enfranchisement. But although an informal freehold purchase can be quicker and cheaper, it means that you’re not exercising your legal rights, and you are entirely at the mercy of the freeholder, who that can change the terms, increase the price or simply refuse to continue at any stage.
- Enfranchisement – deciding who will deal with the purchase
The usual method of dealing with a freehold purchase is to create a management company. Each participating flat owner (one person per flat) can be a member of the management company. Once you have formed the company, it can start the collective enfranchisement process.
If it is decided not to set up a management company, the flat owners need select a nominee purchaser. This is the individual named in the notice that is served on the freeholder to start the procedure.
And with collective enfranchisement, it’s often very sensible to appoint one person to lead the project and be the main contact for both legal and valuation issues.. Just imagine how complex and expensive it would be for solicitors to have to deal with dozens of leaseholders on every issue!
- Freehold purchase – dealing with practical matters
There will be costs associated with the purchase and the flat owners will usually set up a fund to cover these. As well as the premium for buying the freehold, you will have your own solicitors’ and surveyors’ expenses, as well as the freeholders own reasonable legal and valuation costs.
It’s very important for your solicitor and surveyor to have plenty of experience dealing with lease enfranchisement. The process is entirely different from conveyancing .And your valuer is important too. That’s because they will provide a figure for the value of the premium you won’t going to need to pay and this will form the basis of negotiations with your freeholder.
- Serving the initial notice on the freeholder
The solicitor for the new management company or the nominee purchaser will need to serve an initial notice on the freeholder. It’s critical to get that right and that it contains the right information.
The notice will advise the freeholder that some or all of the leaseholders intend to purchase the freehold. It must also include the full details of the property and each purchaser as well as the price that you are offering. Everyone who is participating in the enfranchisement process must sign the notice.
Click here to read more about the Collective Enfranchisement Notice
- The freeholder’s response
The freeholder has two months in which to respond. They can serve a counter notice and it is open to them to accept or reject the purchase and to accept or reject the price. If the price is not acceptable, you can negotiate to try and reach an agreement.
If you cannot agree on the price, the matter can, if necessary be referred to the First-Tier Property Tribunal, to decide a fair price. Fortunately few cases make it to the Tribunal. That’s mainly because the Tribunal rarely award costs – so anyone going to Tribunal and expect to pay their own legal and surveyor’s costs to represent them at the hearing. And that doesn’t come cheap – and it usually encourages both parties to come to a reasonable compromise.
Once a price is agreed, completion can take place. This can either happen straightaway or a deposit is paid with completion within two months. You will pay the purchase money for the freehold to the freeholder on completion. Your solicitor will then arrange for registration of the freehold into the name of the management company or the individual owners at HM Land Registry.
Buying share of freehold already owned by other flat owners
If other leaseholders in your block already own the freehold, you may want to join them. There is no legal right to do this. You will need to negotiate with the flat owners who own the freehold or run the management company to see whether they are prepared to allow you to join and, if so, the cost of this. They can simply refuse.
If you cannot purchase a share in the freehold, you may want to extend your lease instead. You cannot, however, extend your lease during the collective enfranchisement process.
But once this process is complete, you will need to deal with the new freeholder to agree on the terms for a lease extension. The new freeholder will be the other flat owners who did participate in the collective enfranchisement or the management company formed by them.
If you don’t buy a share of the freehold, you still have the right to extend your lease, but you will need to pay your freeholder a premium for doing so.
Buying a flat with an existing share of freehold
If you are buying a flat and the seller owns a share of the freehold, you can usually expect them to include this in the sale price. That’s because virtually all enfranchisement projects involve conditions that when a flat with a share of freehold is sold, that share of freehold is automatically transferred to the new owner. That’s sensible – because it avoids people who no longer have any real interest in a block once have sold still retaining a share of freehold.
Your solicitor will check that the freehold share is included.
If the flat owners have formed a management company, then on completion of your purchase of the flat, the seller will usually resign as a member of the management company and you will be appointed in their place.
Your solicitor will deal with the paperwork for this. It includes registering your membership with Companies House.
If the flat owners own the freehold in their own names, then they will need to sign a transfer document transferring the seller’s share to you. The seller’s solicitor will send the signed transfer to your solicitor on completion of your purchase. Your solicitor will then register this with HM Land Registry along with your ownership of the flat.
What is the Right of 1st Refusal?
Sometimes, rather than the enfranchisement process being started by leaseholders, it’s the freeholder who makes the 1st move – offering to sell the freehold to the existing leaseholders. But the process is a little different from enfranchisement.
Click here to read more about the Right of 1st Refusal
Taking over control of your building – is there an alternative to buying a share of my freehold?
If your priority is to take over control of the freehold, then there is an attractive alternative – coming together with other leaseholders to take over the right to manage your block.
Unlike buying a share of freehold, this doesn’t involve you making any payment to the freeholder – so it’s much cheaper (the main costs to you will be legal costs).
Can we still buy a share of freehold if we can’t locate the freeholder?
Yes, again in general terms that is possible – using an order from a County Court called a Vesting Order. Our team handle these in regular basis.
Click here to read more about buying leasehold property with an absent freeholder