Owning a property with a share of freehold can raise a number of issues for clients. Many in this situation frequently express surprise when being asked for a copy of their lease. “I don’t have a lease!” they exclaim. “I own a share of freehold”.
One consequence of this misunderstanding is that people owning a share of freehold tend to think that they have all the rights of an outright freehold owner. Many substantially alter and, in some cases extend, the boundaries of their property without seeking consent from their co-freeholders.
This can be disastrous since the lease will usually contain prohibitions on altering or extending the property. These terms remain fully enforceable even if somebody owns a share of the freehold. This is a regular cause of delay in conveyancing transactions, since it is necessary to ask the freeholders collectively to consent to any alterations made. This can be very difficult when there are a number of flats or properties involved, particularly if some owners are on holiday or living overseas.
Understanding your Lease and your Obligations
The reality is that when somebody buys a property that comes with a share of freehold, there is nearly always an underlying lease. This lease imposes many obligations on the owner that are ultimately enforceable by the landlord i.e. the freehold company or co-freeholders collectively.
So, why must there be a lease when a property is bought with a share of the freehold? This is because the vast majority of leasehold properties are flats or maisonettes or apartments. They sit on top of, or underneath each other in layered “slices” within a building. Buying such a “slice” without it being subject to a lease is, theoretically possible but, if you did this, you would never be able to get a mortgage on your property and would be holding a highly defective title.
The reason for this is twofold. The first reason stems from the law of covenants and an important distinction between “positive” and “restrictive” covenants. A positive covenant establishes an obligation to actually actively do something, such as, maintaining a building, mowing a lawn or to paying some money. A restrictive covenant merely obliges you to refrain from doing something, for example, to not build on land. .
Unfortunately, whilst restrictive covenants pass easily between successive owners of freehold land, positive covenants do not. This means that if you held a freehold flat it would not be possible to ensure that there were positive covenants in place for the purposes of ensuring that the building was adequately insured, maintained and repaired.
You could contract for this to be done as between the original owners of the land, but you couldn’t pass this obligation to successive owners of the flats or of the building itself without there being a fresh contract each time with the new buyer.
The second reason is that in a lease the landlord will conveniently retain the necessary rights to access the whole building for the purposes of carrying his obligations to maintain, repair and insure. Therefore it is nearly always the case that flats are subject to an underlying lease. This is not an inferior form of title ownership for a flat. It is, rather, the only desirable form of ownership.
Weigh up the Pros and Cons
So, having explained why a share of freehold must always have a lease, what are the disadvantages and advantages of owning property in this manner rather than a standard leasehold title?
- It is possible with the consent of your co-freeholders to re-write the lease e.g. by granting a lease extension or changing any other term.
- Co-freeholders are likely to be more flexible when enforcing the terms of the lease or agreeing the terms of a variation to the lease. They will be aware that you will have similar powers against them, so you will be engaged together in a mutual undertaking. .
- You have more control over the management of the building and thus can avoid expensive management fees and management abuse by the landlord.
- It can be time consuming to participate in the management of a share of a freehold property.
- Sharing the obligation to manage does depend on co-operation with the other co-freeholders. Quick and effective communication is essential or the management will suffer and the building could deteriorate in value. Just like in a business, you must know you can work with your co-freeholders. Where there are a number of co-freeholders or some are not resident, communication can be difficult and protracted.
- Owning the freehold as individuals means that all parties must unanimously agree to any measure that needs to be undertaken before it can be approved. If one person disagrees or approval cannot be obtained, a deadlock occurs.
- Owning the freehold via a company ensures hardwired voting procedures that would avoid a deadlock happening. However, being a director of a company comes with many serious responsibilities, upon which, you should take advice.
- Owning a share of freehold along with a leasehold property can be a good arrangement provided that the freehold is well managed.
A good solicitor should be able to advise you as to the existing management arrangements and structure. They should consider the relevant paperwork and advise you on whether or not your investment is likely to be complicated by any of the issues we have covered and your rights and obligations as a tenant and co-freeholder under the lease.