Ground Rent: Understanding and Evading the Cost
- August 14, 2023
During your house search, you could come across leasehold properties that offer a share of freehold. This is a phrase that might perplex, so we’ll put it all out there and explain what it means to have a share of freehold, as well as the benefits and drawbacks of doing so.
A share of freehold refers to a type of property ownership where individuals collectively own both the individual units and the land on which the property is built. It grants the owners more control and responsibility over the property, typically found in leasehold properties in the United Kingdom.
A freehold property is essentially what you would expect it to be, but there are a few variant methods for setting it up. The first is where the freehold is shared among a number of flat owners within the property and held in their personal names. This can be accomplished by up to four freehold flat owners.
The second situation occurs when a firm owns the freehold and each of the tenants holds a portion (sometimes referred to as a membership) of it. So, if you acquire a flat with a share in the freehold, you’ll either get that share by way of having your name on the property’s deeds or a stake in the management company that controls. The end result is the same, whether it’s done one way or another – you’ll acquire a stake in the freehold of the property.
Many individuals are unfamiliar with the benefit of a freehold share. Why not simply get rid of the lease and have an entire freehold flat?
This is because transferring obligations such as property upkeep and service charge payments between owners in a freehold context is not simple. Having a lease in place ensures that these responsibilities are smoothly transferred between the seller and buyer, ensuring that all community duties are met without any additional action from either party.
Without a lease in place, individual flat owners may walk away from their community duties and property upkeep might be jeopardized.
Freehold means that you are the flat owner, but it is still owned by the state. The land your flats sits on will be owned by you as well as every other person who owns a share in this piece of land. If you own 100% of the freehold, then that means that nobody else has any legal right to the land.
When you as an owner have a percentage of 100% ownership, this is called a full share. In the case that there are multiple owners, each person will own a separate portion of the property’s title. This means that if somebody else owns 30% also, then the two owners will be co-owners of the land. Each co-owner holds a percentage of the freehold and inherits all the rights that come with owning the land.
Keeping records on dividing property can be an arduous task, so there is usually one title for each property. This means that you and your neighbour might each own 50% of the land, but you will both hold your shares of that one title. This means that there is only one set of records for who has what rights to the land, and this makes administration much easier.
Each co-owner holds equal responsibility in maintaining the condition of the property, up to their value. This means that if you own 40% and your neighbour owns 30%, then you as the co-owner with more shares will need to keep 60% of the exterior in good condition.
The value of a freehold home is determined by the market and can vary depending on many factors, such as location and price. To purchase a share in the freehold does tend to increase the worth of the property, but it also adds to the purchase price.
The value of freehold can be increased by taking out a lease extension on the property, which is typically for at least 21 years. The party that has taken out the lease will have full rights to use the property but will not own it 100%. With this in mind, there are benefits and disadvantages when you purchase a share in freehold.
For those who are keen to take on a buy-to-let property, the value of the freehold may increase over time. If an investor purchases a flat with a share in freehold, that investor will then become part-owner of the building’s freehold. So if the building which hosts the unit is worth more than the unit itself, this added value will also impact the property’s worth.
The benefits of taking on a share of freehold include an increased return on investment and future capital growth. So long as there is interest in buying freehold share properties, they are expected to increase in value over time.
Another approach to increase the value of your home is to negotiate a lease extension, which you are legally allowed to do as you have stayed in the property for at least two years.
When compared to a comparable property, buying a freehold adds 1% to the value of a flat, according to surveyors.
However, the increase in property value isn’t always a reliable factor. Owning your freehold flat can save you money on other bills like service charges, ground rent, and building insurance, leaving you with more money for spending.
If you live in a flat, you may consider the ‘right to manage,’ which allows you and your fellow tenants to take on the responsibilities of property managers. This is a reasonable option if you have a broken lift that has been needing urgent repair for years.
Finding out how well the property is being maintained before committing to purchase a home with a share of freehold may be quite beneficial. While there are financial benefits to owning a freehold share, together with increased security and more control, management difficulties can quickly develop. When there is only a single freeholder in charge of the structure, difficulties with management can arise.
While holding a freehold share, it’s vital to note that you will still be held to the provisions of your apartment or flat lease. Although simply having a portion of the freehold does not imply that the other leaseholders can ignore his or her obligations. Of course, with a share of freehold comes a slew of responsibilities and legal requirements. As a result, it’s worth taking some time to think about whether you’re willing to accept these responsibilities for your new property.
Having a share of freehold gives you greater control over things such as maintenance obligations which removes the possibility of being taken for a ride by an unscrupulous landlord. Holding a share of freehold also means that everyone in your property will be invested in the block to a certain degree.
This will imply that your home is maintained to a higher level than if you were renting from a landlord who only wanted to make money off of the property.
Another benefit of having a share of freehold is that you will be able to significantly increase the lease term up to 999 years.
Other benefits include: No ground rent, no service charges, and a right to manage.
The extra cost of ad hoc maintenance can vary depending on the year, with more money spent in one year than others should a major task be necessary. However, keep in mind that self-owned blocks will generally have a lower service charge, so this should be somewhat offset, especially if you stay there for long.
Another issue that some homeowners encounter when they have a freehold interest is that they may find it difficult to get other owners to sign the transfer of the freehold. It’s also necessary to verify each owner’s identification during the sale for the Land Registry, and if one of the other shareholders is not available at the time of sale, this might be a problem depending on the circumstances.
Because the freeholder essentially owns the land that the building sits on, when you own a property on a leasehold basis, you pay ‘ground rent’ to the freeholder.
Ground rent is typically payable around once a year and can vary depending on the value of the property. As ground rent payments are not fixed, they could become costly if you’re buying a more expensive home. On top of this, freeholders can also levy other legal fees for anything from permission to make alterations to your home, to emergency call-outs and insurance.
Conversely, when you own a property on a freehold basis , you don’t pay ground rent, and there is no fee for arranging a mortgage to mortgage lenders or keeping pets. You are also responsible for the cost of major structural repairs to your home which is money and time consuming. However, as you hold leasehold flat title rather than freehold title of the land your home sits on, you cannot sell your leasehold property without obtaining the freeholder’s consent.
Leasehold ownership is what most people are familiar with, and it remains more popular than freehold throughout the UK.
For many home buyers, there is little to no difference between freehold flats and leasehold flats – mainly because few manage to pay and purchase homes outright which come with freeholder titles.
It’s possible that you don’t fully own the freehold after the RTM company. There are two types of ownership:
If you were given a share of the freehold when you bought the property, check the paperwork your solicitor provided at the time.
Alternatively, you may request further information from the solicitor who handled your case in the first place. Perhaps you were one of the flat-owners that formed a collective enfranchisement application under the Leasehold Reform Housing and Urban Development Act and received a share in the freehold as part of it.
It’s also possible that the solicitor will tell you it’s “too early” to sell and advise against proceeding with the transaction. It may be more expensive than selling at a later date; however, this is something your solicitor can help you assess.
There will be a formal deed to transfer ownership if you are one of the freehold’s legal registrants. This document transfers ownership from all the other co freeholders, including yourself, to your purchaser.
The buyer’s solicitor will then send the transfer deed to HM Land Registry for registration. Before completion, your own solicitor will prepare the transfer document which will be delivered to all other co-owners for their signatures.
The sale will not be finalised until the deed is signed by all owners. If you can’t readily reach the homeowner, things will get complicated. You should also notify the other owners that you’re selling your home and advise them to sign the transfer deed if necessary.
If no one is living in the flat (for example, if it’s rented out), contacting them might be difficult. The “owner” may be anything from a foreign company to the decedent. You should contact other owners as soon as possible to improve your situation.
You must have a ‘share certificate’ or ‘membership certificate’ as a shareholder of the company that holds the freehold. (The precise sort of certificate is determined on the company’s legal standing.)
The solicitor will need to register the buyer as a new member of the firm. The solicitor must also remove your name from the membership list. This will entail contacting the company’s secretary or anybody else in charge of registrations.
At the time of their initial purchase, share of freehold purchasers can buy between 30% and 75% ownership of their property. The actual proportion they buy will be decided by the mortgage adviser once a financial evaluation has been completed to ensure that you are able to repay this loan. Because Share of freehold is a policy meant to assist individuals who can’t afford the whole mortgage, you would not be able to buy a shared of freehold home outright.
You may acquire full ownership of your shared ownership property by “staircasing” it. You can staircase to 100% Ownership in 10% increments after you’ve bought your initial share in your house.
It is highly recommended that you contact a solicitor before putting the property up for sale in an open market. Your lawyer can examine the freehold properties and leasehold property titles to verify their accuracy. They can also provide you with any necessary documentation forms so that you may complete them yourself.
On a no-sale, no-fee basis, solicitors operate. It costs the same to hire a solicitor whether you do so early or last minute. If you can get a solicitor working for you as soon as possible, do it now before selling your property to the new owner.