I live in a top-storey flat in an old Victorian house, with two other flats below me. I own my flat via a share of the freehold, alongside my neighbour on the ground floor.
The lady in the middle flat doesn’t own a share. Her flat is leasehold, with myself and the neighbour acting as her freeholder. The flat is worth about £400,000 and she has 114 years remaining on the lease.
She has recently asked if she could buy a share of the freehold.
My neighbours on the ground floor are keen. They want to sell their flat and would like some extra cash. They think if we can get £30,000 between us it will be worth it.
How much should we charge? The ground rent is minimal – essentially covering the electricity costs for the communal hallway.
And is this worthwhile? What are the pros and cons of giving a neighbour a share in the freehold, and is it better having three ‘co-freeholders’ than two? How much will it cost and how long will it take?
Worth it? Our reader is wondering whether they should sell a share of their building’s freehold to another flat owner
Ed Magnus of This is Money replies: This is quite a complicated situation, but one that is not uncommon in expensive areas where former family houses are routinely chopped up into smaller flats.
This building was once owned by a single freeholder – probably the person who decided to split it into three flats.
The flats at that time would have been sold and owned leasehold, unless one of them was occupied by the freeholder themselves.
At some point, though, the flat leaseholders made an offer to buy the freehold.
For whatever reason, the owner of the middle flat at that time didn’t want to join, so the owners of the two other flats bought it between them and that property remained leasehold, paying their ground rent to their neighbours instead of the old freeholder.
While selling a share of freehold to the middle flat could be worthwhile, you may find she is not prepared to meet your neighbour’s price of £30,000 or more.
Given their lease has 114 years remaining and the fact her ground rent is essentially nothing, it’s unlikely that buying a share of freehold will boost her property’s value that much.
Of course, she may be desperate to own a share of the freehold and be prepared to pay over the odds to do so. So, there is no harm in having the conversation at least.
There are advantages, such as having a greater say in the management of the building. She may also think it will make her flat more sellable in future, given that leasehold flats can make some buyers cautious these days.
For expert advice we spoke to Mari Knowles, solicitor at Commonhold and Leasehold Experts, Andrew Boast, director at Sam Conveyancing, Linz Darlington of lease extension specialists, Homehold, and Olivia Egdell-Page, partner and head of the property department at Joseph A Jones & Co.
Olivia Egdell-Page, a partner and head of the property department at Joseph A Jones & Co
How does a share of freehold work?
Olivia Egdell-Page replies: Properties advertised for sale with a ‘share of freehold’ are often misunderstood by buyers, who are under the impression that they are purchasing a freehold flat.
Instead, the arrangement is that each individual property owner will own the leasehold interest in their flat or maisonette, with the freehold interest – the ownership of the roof, foundations and all that lie between the two – being held by one or more individuals, who are also the owners of the flats within the building.
The benefit of this is that the owners are then involved in the maintenance, upkeep and general management of the building. This includes things like its insurance, outgoings and day-to-day expenditure.
If the hallway needs redecorating, the freeholders will arrange this, as it is in their interests and for their own benefit.
If the leases need to be extended, this is a more straightforward – and usually cheaper – process than having to liaise with a separate freeholder.
How much is a share of freehold worth?
Linz Darlington replies: If the middle flat had joined in with the other flats when the freehold was purchased, the cost to them would probably have been minimal.
Assuming a fixed ground rent of around £100, this probably would have cost £3,000 to £4,000.
However, she – or whoever owned the flat before her – didn’t join in then, so she has no automatic right to participate now. This means that you’re free to ask what you want for a share of the freehold.
Of course, if you ask too much, they’d be advised to decline. The outcome of the negotiation will depend on what you each think it is worth.
Mari Knowles, a solicitor at Commonhold and Leasehold Experts Limited and a member of the Association of Leasehold Enfranchisement Practitioners
Mari Knowles adds: If you do decide to sell a share of the freehold, the process is unregulated. This means it’s up to the parties involved to agree what the terms of the sale are.
Commonly, the parties will ask a valuer to calculate how much the purchase price should be.
The amount payable will usually depend on the terms of the existing lease as a starting point, and the terms of any lease extension, if one is required.
Freeholders will also typically ask for their legal fees to be paid on top of the purchase price, together with any tax liabilities.
Andrew Boast adds: You’ll need a specialist Royal Institution of Chartered Surveyors valuation to determine the premium that should be paid.
This would be the first step and will help both parties make a better decision about whether the transaction is worthwhile.
How much will we pay in legal fees?
Andrew Boast replies: The process will take four to eight weeks.
Additional costs include valuation and conveyancing on both sides; a solicitor acting for the share of freeholders and a separate solicitor for the leaseholder. Legal fees on both sides would be around £1,000 each.
Linz Darlington adds: Selling a share of the freehold is not easy.
You’ll either need to engage a lawyer to add the new co-freeholder to the title, if you own the freehold as individuals, or provide them with a share of the freehold company if you own it within a company structure.
How long it takes will depend how quickly the lawyer works.
What’s the benefit of a share of freehold?
Olivia Egdell-Page replies: The benefit of all leaseholders owning a share of the freehold is that the burden of the property management is shared, whether that means dealing with the utility providers or ensuring you are compliant with statutory requirements such as fire risk assessments .
All co-freeholders will be motivated to ensure the property remains in good condition and is well looked after.
Linz Darlington adds: The benefit of having the third flat involved is that you would then all have an equal investment and standing in the block, which might make living there feel more democratic.
If everyone owns a share of freehold, you can sometimes avoid some of the formalities of the freeholder-leaseholder relationship too.
Mari Knowles adds: Aside from any income from the sale, it may be beneficial to have all residents involved with the freehold.
It can often make decision-making easier, especially if, for example, you need a new roof or want to carry out improvements, such as installation of electric vehicle charge points.
What are the disadvantages?
Andrew Boast replies: The current freeholders need to ask themselves how they feel about the person in the middle flat.
Is she someone they want to work with, does she often ask for things around the building to be fixed, and would it be better if she was empowered to share the workload instead?
Having more freeholders can both spread the burden of responsibilities and make it harder to reach an agreement over big decisions.
Andrew Boast , director at SAM Conveyancing
For example, each time a leasehold is sold, all the shareholders must sign. If any one of them is un-cooperative or unreachable, problems can arise.
It’s important to remember that they may sell at any time, and you’ll have a new owner to collaborate with in the management of the building.
An additional consideration which does not apply to your neighbour in this case is an extension.
If they were on the top or bottom, becoming a share of freeholder would put them in a stronger position to be able to extend their flat.
However, being in the middle floor, it is unlikely that an extension would be feasible.
Linz Darlington adds: The disadvantage is that you and your downstairs neighbour will be giving up some control.
Unless you already have long leases, for example 250-plus years, with no ground rent, you should also extend these before you involve a new freeholder.
Olivia Egdell-Page adds: The drawback of this is that you are dependent on reaching agreement with the co-freeholders.
In the event of disagreement or dispute, this does have the potential to create uncomfortable neighbourly relations.
Why would the middle flat want to buy a share of freehold?
Andrew Boast replies: The new buyer will enjoy some increase to the value of their flat. A valuer will be able to appraise roughly how much.
The other reason the neighbour may want to buy a share of the freehold is that it can make it easier to extend the lease.
With 114 years remaining, there is little benefit to extending at this stage, but they will likely want to extend in around 20 years if they don’t sell up first.
Can the middle flat force them to sell a share of freehold?
Mari Knowles replies: There is no obligation on you to sell a share of the freehold to your new neighbour, so it is completely up to you and your co-owner to decide whether or not to proceed.
The first decision you will therefore need to make with your co-owner is whether or not you are happy to sell a share to your neighbour.
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