Purchase of freehold as a leaseholder

There are numerous terms used in the process of buying or selling a home that might be confusing. Three such terms are freehold, leasehold and commonhold / share of freehold, and the confusion comes not only in understanding their definitions but also what it means to you as the buyer or seller.

Before getting on to the subject of purchasing a share in the freehold if you are currently a leaseholder, here is a look at all these terms to help you understand the differences between freehold, leasehold, and commonhold. This will also help you to look at what problems to look out for as well when you're in the housing market, as well as identifying some clear benefits in each case.

Principally, this is what the terms mean:

•   Freehold - this is relatively straightforward in that a freeholder is the legal owner of a property, can dispose of it at any time, and is totally responsible for its maintenance and ongoing upkeep.
•   Leasehold - technically if you are in a leasehold property, you don't own it; that is the responsibility of the freeholder, who owns the ground and the property (or properties) that are situated on it.
•   Commonhold / share of freehold - being a commonholder means that you are somewhere between the freehold and leasehold positions. To be in a commonhold property, you would own the property in perpetuity, as would the other dwellers in the units of a block of flats or on an estate. The difference from a freehold or leasehold comes with the unit-holders looking after the agreed shared common ground and utilities together (either as a collective or through a management company). Each individual has their own lease for their unit.

One other way of looking at it is this: as a broad rule of thumb, houses are most likely to be freehold, while flats are usually leasehold.

But what if you are currently in a leasehold property, beholden to the freeholder, but want to purchase the freehold as a group with other leaseholders?

This is not a common practice currently, but buying a share of the freehold, also known as “collective enfranchisement”, is established when a group of the leaseholders come together as a collective to own at least part of the freehold of the land and the property (or properties) located on it.

Borrowing from the leasehold process, the collective will also share the responsibility for the management of the property, controlling the decisions regarding how it is overseen.

Even though you might own the share of the freehold between the members of the collective, that's not the same as owning the freehold. With a straightforward freehold, you own the property and its land outright, while owning the freehold with others means that you own the leasehold on your part of property, while maintaining a responsibility for the common and shared areas.

You should be aware that certain properties are disbarred from buying a share in the freehold (if the property is owned by the National Trust, is located as part of a cathedral precinct or there are live railway lines close by that might run across the boundary of the property, you'll need to ensure that you are not prevented from going ahead with your plans).

Importantly, once you embark on the process, you are strongly advised to appoint a solicitor, who will be on hand to identify the situation through a series of conveyancing searches. With this information to hand, they will help you through the complexities of buying a share in the freehold.

Before you embark on the expense and time required to purchase your share of the freehold, you need to think about whether it's the right thing to do for you. This is also the case if one of your neighbours contacts you with their idea of buying a share of the freehold.

With someone else in the driving seat, it might be easier to let them get on with it and pitch in as and when required, but you absolutely need to discuss the plans and look at not only the benefits of going ahead, but also some of the drawbacks when the purchase is completed. You should then have enough information to decide whether it's worthwhile pursuing the plan or dropping it before you've invested too much time and effort, and of course money, in it.

• Ground rent

When you take on a lease, you will have a set of terms that you have agreed with the freeholder, who will likely be charging an annual ground rent (a term that describes the rent that you pay for the land upon which your leasehold property stands). With the establishment of your share in the freehold, such costs are avoided since the ground rent is meaningless.

• Service charges

Because you are in control of everything along with your fellow shareholders, you can focus on value for money when it comes to any servicing and maintenance costs, thus eliminating the involvement of management companies and their additional high costs.

In addition, because you will have a key input into how maintenance is managed along with your co-shareholders, it is much more likely that you will have lower costs, since the emphasis will be on keeping costs to a minimum.

And it shouldn't be forgotten that you will be in a good position to balance the costs with a quality result to ensure a higher standard of workmanship than might have been the case under the principal freeholder, who most likely would have opted for the quickest and cheapest option that may well be of a lower quality than you would want.

• Control

Because you are not beholden to an external management company for the management and maintenance of the property that comes under the group's share of the freehold, you will have a greater input to any decisions regarding the management and maintenance, therefore providing you with greater autonomy.

However, once you've pulled together your group of likeminded neighbours, you need to consider the size of your group against the number remaining on the estate or in the block of flats. You might find yourself to be a small cog in the greater wheel managed by the principal freeholder.

As you will be working as a collective, you all have an input to the process, which sounds nicely amicable and democratic, until one of you digs their heels into the point of impasse. Of course, it's healthy to discuss the plans and actions required, so that all views are made available, but, as soon as there is rigid dissent, this can create problems in getting to the group decision. It may even result in the breaking down of relationships between neighbours, and removing the key point for going ahead with the plan - and one of the main reasons that you wanted to buy a share in the freehold - the autonomy.

Sometimes, there will be opposing arguments as to the way forward, and such disagreements can cause delays or complications and, in the worst case, litigation.

• Management

You also need to think about the future management of the shared areas, maintenance and so on. Although the benefits of shared freehold ownership are clear with the removal of a faceless management company looking after the maintenance with no input from the leaseholders, not everything in the group management will be straightforward, and certainly won't be all the time.

It should not be underestimated how much time and effort will be required to keep the shared ownership group running smoothly, and none more so than when any opposing views and legal disputes come about. Be prepared to apportion some of your time to these necessary activities.

• Insurance

In some cases, the insurance cover required for a share in a freehold property may be more expensive than it would be for a straightforward freehold or leasehold property.

It's one of the items that might be considered as an afterthought, but you can do your homework before the process gets underway and obtain a few quotes for your plans. And it's something that you co-shareholders might appreciate to help them come to any decisions on finances.

• Resale opportunities

When you are in a leasehold property under a detached freeholder, extending your lease can be very costly, complex and time-consuming, and this something that often puts leaseholders off from pursuing it.

But, with the ownership of the overall freehold being shared (or at least part-shared), it is usually much easier to extend the lease to a maximum of 999 years, and often with no cost associated with that extension. It's also far less time-consuming an activity to pursue.

When the time comes to consider selling, with your property being a share of a freehold rather than the more complex singular leasehold, buyers will find it a more attractive proposition. With that demand, market forces will dictate more favourable selling prices, too.

Something else that you need to consider, however, is that, while a share of a freehold is more desirable than a leasehold in most cases, there may still be issues arising when it comes to trying to sell your part of the property.

The complexities of the shared freehold may create roadblocks if the other members of the collective are not willing to engage with you and the potential buyer's conveyancing solicitor or if none of you has an understanding of the intricacies involved. There is, after all, no legal imperative for them to do so, unless it is written into the Participation Agreement (see freehold process section), for which you'll need to get advice from your chosen solicitor.

Finally, if the rigidity of the management structure within the group sharing the freehold is too complex to understand, this might be a problem for some buyers, particularly where they are looking for a quick purchase.

• Financial considerations

The purchase of a share in the freehold, while increasing in interest throughout the country, and its unusual process mean that you should consider how you are going to purchase your portion of it (as well as considering the ongoing costs of the management and maintenance) as early as possible.

You'll find that there are some mortgage lenders who are not prepared to take the risk with your plans, so you'll need to shop around and see what is available with a list of prospective lenders. It's at this stage that you might want to procure the services of a mortgage broker, who will be able to guide you through the various options and secure a mortgage that meets your needs.

One final consideration when it comes to finances is to think about what happens should one member of the group default on their financial obligations to the group. With the structure of the group sharing the ownership of the freehold, it will potentially fall to the other group members to fill that monetary void. While this might be a temporary solution (and depends on a degree of trust), such cases might result in the group having to resort to taking the defaulting member to court. Such consequences can only undermine the integrity of the group.

If you are still in the market for buying your freehold with other leaseholders in the building because of the benefits you will derive from moving ahead, and you aren't daunted by some of the issues that you might face, these are the steps that you need to take to ensure you in the best position possible to make it happen:

1. Verification of eligibility

There's little point in going ahead with the project if you then find some way down the path that you are not eligible to purchase a share in the freehold, for whatever the given reason.

First of all, you need to consider what kind of freehold is operating for the leasehold property you own.

The regulations state that the combination must be no more than a quarter used for non-residential purposes (for example, office or retail spaces) and the number of flats contained within it must be at least two.

Additionally, at least two-thirds of all the flats must have a lease that is at least 21 years in length.

At least half of the leaseholders of the flats within the freehold must also want to buy a share in the freehold. By extension, if there are only the two flats, then both leaseholders must agree to buying the shares in the freehold. For the purpose of the exercise, any garages and parking spaces will also be included under the definition of residential.

There is also the need to check the eligibility of the freehold itself, which means verifying that it is not formally excluded from selling shares in the freehold (for instance, if the property is owned by the National Trust, or is located in a cathedral precinct and so on).

It might take some time to pull all this information together from the various sources, but it will help when it comes to talking to your neighbours about joining you in the bid. If the activity is being driven by one of your neighbours rather than you, you can ask the questions to confirm that they have considered eligibility before going much further.

2. Setting up your group with neighbours

Given that you need more people involved than just you wanting to buy a share in the freehold for it to work, you'll need to gauge the opinions of others in the flats where you live.

Do a bit of homework, too, on the ground rent that your freeholder charges you, look at the management services and the efficacy of the service they provide, and assess the prior costs of maintenance and whether these looked consistently higher or not.

Armed with this information, you'll be in a far better position in your discussions with your neighbours to persuade them of the benefits of mounting a bid to buy shares in the freehold.

3. Establish how much buying a share of the freehold will cost

Once you are in a position to mount a bid for buying a share in the freehold, before you go any further, you'll need to understand what that will cost you.

Because of the intricacies of the general market for freeholds and the variety of factors that need to be taken into account, it's a more complex process to calculate the freehold cost when you are thinking of buying a share.

Some property experts suggest that the cost of buying the freehold has a parity with the cost of extending a lease. There are various extension calculators that are available online that can provide this “rule of thumb” estimate for you to work with, but be aware that this is open to subsequent change. The Leasehold Advisory Service is one such organisation that provides you with the basic figure for a lease extension for initial purposes only.

The true valuation of the freehold will come from the Valuation Report, which you'll have to organise with your appointed chartered surveyor. Don't forget to add the cost of generating this survey to your list of costs (see section 4).

As with any purchase or sale, it is essential that you also factor in the costs of obtaining quality legal advice (see section 6).

4. Identify the costs

You've got an idea of the cost of buying the freehold, which has been confirmed having spent the money on a good Property Valuation Report, and you've appointed your solicitor to manage the process. But that isn't it for the costs that you should include in the exercise.

When it comes to putting in a bid to buy a share in the freehold, you should be aware that allof the freeholder's costs are payable by you. These include their conveyancing solicitor's fees as well as any valuation costs that they incur as a result of your planned purchase.

If you are planning to create a company to manage the shared freehold (see section 10), you'll also need to allow for the costs of setting the company up, as well as ongoing considerations associated with it, such as an accountant's fees (since you will have to publish the accounts for the company each year).

Where there are shared costs across the members of the group, which will be the primary charges associated with the plan (solicitors, surveyors, external legal fees, your freeholder's costs, etc.), you should make it clear to the other members how much that will be, so that they can work on their own finances.

5. Create a management plan

When you've taken the plunge with your group to buy the share of the freehold, you'll need to be clear about what everyone involved is required to do.

It's very easy for the members of the group to let the principal driver simply get on with the job. Not only will this mean that that person has a huge amount of work to fit into their day along with everything else that's going on in their life, but they might also make default decisions on their behalf which might not meet with their approval. If that were to occur, roadblocks in the progress will be created, or, in the worst case, their withdrawal and potential abandonment.

There may be specific roles and responsibilities that you want them to agree to in order to facilitate the process. And you might want to set up a clear communication structure - for example, updating emails and their frequency, regular physical meetings, the agenda and their frequency, a printed document detailing current status, future tasks, status, actions to be carried out, and so on.

This might seem like a significant overhead, but with the information clearly communicated (and, importantly, agreed with), there is far less likelihood that problems will arise that impact the project later because someone wasn't aware of what was required of them.

Some of this information can be fed into the process of setting up a Participation Agreement (see section 8).

6. Appoint an experienced conveyancing solicitor

Because of the considerable differences in buying a share in the freehold from a standard freehold purchase, you should be aware that there is a possibility that your usual firm of solicitors may not be experienced in this sort of transfer of ownership. Talk to them about your plans and they can confirm whether they have the requisite experience.

If they don't have the necessary experience or you are in the market for a solicitor for this job, as with any purchase and sale, it is imperative that you find a quality solicitor who has that experience and, if you are concerned about the looking after the pennies in this transaction, one who charges a fee that is great value for money for a high quality service.

You'll also want to ensure that your solicitor offers a ‘no completion, no fee' guarantee to protect you in the event that the exercise does not finish for whatever reason.

7. Identify how to afford it

As you've probably understood already, buying a share in the freehold is not necessarily going to be cheap.

But, once you've calculated how much the whole exercise is going to cost you, having divided up the shared costs with your neighbours, you'll be able to approach the financial institutions to apply for a loan.

While the majority of mortgage lenders will be prepared to extend your existing mortgage for the purpose of buying your bit of the freehold, the complexities of the process of finding a company to give you a loan might call for the expertise of a mortgage broker. Note that doing so will incur an additional cost, which you'll need to account for in the overall costs for yourself that you've totted up already (see section 4.).

Note that your mortgage lender will only be interested in how much your purchase of the share in the freehold will be in their deliberations as to whether to extend your existing mortgage or to set you up with a new one - or to turn you down.

It is unlikely that they will be prepared to cover other costs associated with the plan, such as the process of setting up a company (see section 10.). Therefore, you may be in a position where you also need to find finances from other sources. This will take time, so if you find yourself in this position, you need to identify potential lenders as soon as possible.

8. Create and sign off a Participation Agreement

While you might get on with all of those taking part in the scheme to buy a share in the freehold, you can't guarantee that any of the group members might suddenly get cold feet and want to drop out, or even change their mind about some of the terms you've verbally agreed to thus far.

If that happens, their portion of the costs and responsibilities will need to be spread across the remaining members of your little alliance, which could then make the plan unviable to others, causing the plan to dissolve to nothing.

Therefore, it makes sense to set the agreement on a professional footing. This is one of the primary tasks that you should request the assigned solicitor to do: set up a Participation Document.

The Participation Document is a legal article that sets out the details of the purchase plan, and provides information on what is expected of each of the participants both as part of the purchase and what they are signing up to in their responsibilities once the share in the freehold is successfully purchased.

Your solicitor will be able to guide you through the steps you need to take to get to the point where everyone in the group is bought into it and they know what is required of them.

9. Get a valuation from a reputable surveyor

As highlighted in section 3, you will need to obtain a professional valuation of the freehold. A Property Valuation Report is created by a chartered surveyor.

From this valuation, you will be in a good position to understand exactly what you'll have to pay individually and collectively.

Again, as with the conveyancer, you'll need to appoint a surveyor to perform the assessment. It is always a good idea to find a surveyor who has experience and knowledge of the area in which the freehold resides, so that they can apply that data to the valuation of the freehold.

10. Set up a company

Your solicitor will advise you to set up a company to manage the shared freehold on behalf of the members of your group.

Alternatively, what is known as a “nominee purchaser” needs to be appointed from the group, who will then be the point of contact for anything to do with the exercise. This will be a considerable responsibility for whoever is chosen, and it therefore makes sense to set up a company where everyone is involved in the running of it, even if one person is nominated as the point of contact and information.

That's not to suggest that there is nothing to do when you set up this company - there are a few required activities to be performed, such as filing year-end accounts. Naturally, setting up a company incurs a cost, which will need to be accounted for (see Section 4).

Setting up a company is a relatively straightforward process, but you'll still need to ensure that everything is correct to avoid problems and legal issues further down the line. It is also not uncommon and generally more affordable to buy an existing company for a nominal fee and rename it to suit the new purpose.

In initiating this process of buying a share in the freehold, you will have appointed a solicitor to look after the legal side of things, but you might also want to sign up an accountant, who will ensure that all the financial side of things are tied up.

Either your solicitor or the accountant can provide guidance and assistance on how to set up a company. The most important part of the establishment of a company is the Articles of Association, a document which describes the purpose of the company, and provides the details of the voting rights and the control of the shares in the company and how these are to be governed in the life of the company.

11. Create the Initial Notice (and understand the Notice in Reply)

If you are on good terms with your freeholder, it's easy to slip into keeping the discussions and process informal but be aware that you have no legal recourse should that relationship disintegrate for any reason.

It's important to keep things on a formal and legal footing, so that everyone involved from your group to the freehold owner knows what is happening at every stage, and, more importantly, their role in it.

The process is this:

•   Issue an Initial Notice (formally known as the Section 13 Notice) to your freeholder via your solicitor. This document defines the aspiration to purchase the freehold, and it must be signed by all the leaseholders involved in the project. You should also confirm that the freeholder is not absent as part of the submission.
•   A Notice in Reply is returned by the freeholder, which must be returned within two months of receipt of the Initial Notice. Failure to do so will result in a court summons.
•   Of course, the freeholder has the right to oppose the intended purchase, but, in so doing, must give the reasons behind the decision they've taken. If they agree to the purchase as requested, they may specify an amount that they want as a deposit to help protect them from the sale not going ahead. This could be anything up to three times the annual rent that you are currently paying, which needs to be factored into your costs (and may scupper your aspirations).
•   If the freeholder agrees, you can begin the negotiation on what the price for the freehold should be, and remember that you have the Property Valuation document from your surveyor to assist in the discussion (see Section 9.).
•   If you reach an impasse with the freeholder (for example, who won't budge on the price and you think that's too high), or if they turn down the request in their Notice in Reply, you can always take your case to the First Tier Tribunal (England) or the Leasehold Valuation Tribunal (Wales) within six months of the receipt of the Notice in Reply.

Among the details of the Initial Notice, the required information contains the following:

1. The full names and addresses of all the tenants involved, all qualifying tenants, and the owner of the freehold. All must sign the document once completed.
2. Information and details of the freehold property and any specific plans which are relevant, including details on accesses required for the utilities, water and drainage and foot and vehicular traffic.
3. Information on the claim and your group's eligibility.
4. The suggested price for purchasing the shares of the freehold.
5. The expected date for the serving of the Notice in Reply by the principal freeholder.

One important point to note is that your Initial Notice must be accurate and complete - as can be seen from the list above, it's a considerable undertaking. Failure to ensure the completeness and accuracy may mean a wait of up to a year before you can try again, the resubmission of which will create recurrent costs that also then need to be factored in. If you appoint a quality solicitor, you will avoid such problems.

If you are considering a plan to buy a share in the freehold of the place you are living now, the whole process might seem daunting and might seem not worthwhile as a result. But you'll need guidance and legal input, so why not talk to us at Homeward Legal today about your plans?

The experts at Homeward Legal are well-versed in all aspects of the conveyancing process, providing a quality service at a fee that is great value for money!

Call  to get your conveyancing quote started, or to discuss your concerns with your plans to purchase or sell your next home.