At PropTech Pioneer we typically provide advice and information for investors buying new build property off-plan. Most new build developments are sold with leasehold apartments, rather than with a share of freehold.
Because older apartments in converted houses can be sold with a share of freehold, we are frequently asked what share of freehold actually means for investors, we’ve put together this quick guide to set out the fundamentals that property investors should be cognisant of if they’re buying a property with a share of freehold.
But before we look at what share of freehold means, we’ll cover the rights and obligations that run with Freehold tenure, to help put a share of freehold property ownership into context.
In most European countries, the highest form of property ownership is freehold ownership (ownership in ‘fee simple’).
With freehold tenure, the owner of the property owns it outright, including both the land and the improvements built on it. The owner of the freehold is named as the ‘registered proprietor’ on the title. The benefits of owning freehold property are:
- As the owner, you are not subject to any obligations which are imposed by a lease;
- You have no party superior who you need to deal with;
- You do not need to pay ground rent, service charges, or other landlord charges;
- You do not require any approval or permission to deal with the title or the buildings (other than normal regulatory requirements).
- As the freeholder, you are responsible for maintaining the land as well as the built improvements on it, which can be more costly.
Subordinate forms of ownership
Below freehold, various subordinate interests can be granted by the freeholder. These forms of ownership are indeed subordinate to freehold ownership. However, this does not mean that subordinate forms of tenure are necessarily worse than freehold ownership.
In many scenarios, subordinate interests are created for practical reasons. For example, with a block of apartments, it is simply not practical to create multiple freehold interests, as there is only one parcel of land upon which all of the apartments are built. The most common forms of subordinate tenure are share of freehold, leasehold, common hold, and strata title.
What does share of freehold mean?
Share of freehold is as the name implies. Instead of a single freeholder, the freehold is jointly owned between several shared freehold owners, referred to as ‘common holders’.
Share of freehold is established in two ways:
- The freehold is split jointly between common holders within a block of flats or apartments. Within this structure, the maximum number of owners can be four; or
- A company is established to own the freehold and each of the tenants holds a share of that company.
In both situations, the owners of a share of freehold have both a level of ownership and control over the freehold interest in the land. Therefore, the owner of a share of freehold interest will have a share of ownership of the common areas of the building, such as the roof, walls, stairs, and hallway.
It is the responsibility of common holders to maintain the building, including its common parts. Collectively, the common holders are also required to insure the building.
Benefits of share of freehold
There are several benefits to owning a share of freehold:
• Greater control over decision-making concerning the property in all areas including maintenance costs and obligations. Therefore, you cannot be victim to overcharging by an aggressive freeholder. With
other common holders, you can negotiate service fees, find the best value building insurance, and negotiate better maintenance prices
• Generally, it is anticipated that the owner(s) of the shared freehold have a higher level of investment in the property, and therefore they are likely to maintain the property to a higher standard
• As a common holder, you have a level of control of the lease, including the costs associated with extending it
• Theoretically, it is easier for the owner of a share of the freehold to ensure that decisions are made by the common holders for renovations and repairs to their property.
Obligations in owning a share of freehold
Your obligations in owning a share of a freehold property are:
• Administration of the annual accounts and ensuring that the building is properly insured, which can be time-consuming
• Because maintenance tends to be done on an ad-hoc basis, the service charge can fluctuate dramatically if there are large repair items that need to be attended to.
As with all types of property ownership, there are advantages and obligations that run with owning a share of freehold. With any form of ownership, make sure you’re aware of obligations that run with your ownership structure so you’re fully informed before you commit to any investment.
Other forms property tenure
There are several other forms of property tenure including commonhold and leasehold. Read more about different types of tenure in the UK. If you’re looking for information on property tenure in Australia, check out our latest article here and if it’s details about New Zealand property tenure information you need, you’ll find it in our article here.
Important notice: Proptech Pioneer and its associated companies seek to provide investors with guides, information, and tools, but we cannot guarantee this information to be accurate or perfect. You use the information at your own risk and accept no liability if you rely on this information. Proptech Pioneer is not a tax advisor, accountant conveyancer, lawyer, financial advisor, or mortgage advisor. You should seek independent advice from independent professionals before making any investment decision.