Extending a lease on a share of freehold can be easier and less costly than renewing the lease on your flat.
Actually, when you own a share of the freehold, you could technically extend your lease for 999 years and only pay legal fees.
What does the extension process involve, and do you need to get all joint owners on board before extending the lease?
Read on below to find out.
Typically properties in England and Wales are either leaseholds, where you own the property for a limited amount of time or until your lease expires, and freeholds, which means you own the building and the land it sits on outright.
A share of freehold property is something in between and usually applies to houses that have been converted into flats.
If you buy this type of property, you own the leasehold for your individual flat and a share of the freehold for the building and the land it is on. This means that you will have the duties of a leaseholder (including requesting permission to make alterations to the property or claiming a lease extension) and a freeholder, such as maintaining the property and covering building insurance.
There are a few different ways to set up a share of freehold.
One is where up to four leaseholders buy the freehold in their names and act as trustees for themselves and other tenants who do not co-own the freehold (if any). This option is more common with smaller freeholds and usually involves the trustees entering into a Declaration of Trust to avoid possible disputes down the line.
Another option is for the leaseholders to incorporate a company in which all or some of the tenants will own shares or act as members of the company. The building will then be run as a company, i.e. the articles of association will outline how decisions are made and resolutions passed. This will also make it easier for one of the joint owners to renew the lease, as the trustees or directors will have the power to grant lease extensions under the articles of association.
Gaining a share of freehold is common for leasehold properties with a short lease (usually under 80 years).
Joining forces with the other leaseholds in the building and buying the freehold is a much cheaper and less complicated alternative than extending your lease. Actually, it is estimated that the price of an individual flat in a share of freehold (not counting legal costs) is more or less the same as renewing a lease by 90 years. Extending the lease without a share of freehold could cost you between £16,000 and £20,000.
When you own a share of the freehold, you will also have a say in both the long-term and day-to-day management of the building, giving you more control over how the property is run and thereby adding to its value.
There are challenges, nevertheless. The administrative tasks can be overwhelming, and disputes may arise over various decisions, including major works on the property, service charges and leasehold extensions. Since these are disputes between neighbours, they could make your life very difficult and even require you to take the other co-owners to court.
Just because you own a share of the freehold doesn’t mean you can ignore the lease on your flat.
If your lease is about to end, you will still need to extend it, although doing so when you own a share of the freehold will be much easier, not to mention less expensive.
As stated above, one of the biggest perks to owning a share of the freehold is the ability to extend your lease for up to 999 years while only paying for legal fees and Land Registry costs.
To extend a lease with a share of freehold, you first need to get the other freehold owners to agree. This is a must as their involvement may be required in the transaction, depending on how the freehold title is held.
Note that not all co-owners have to extend their leases at the same time, although collectively renewing leases would be an even more cost-effective procedure.
Usually, an extension will contain the same terms as the existing agreement and only change the length of the lease. On rare occasions, a new lease will be prepared, but this is only if the current contract is defective in several aspects or the key terms in the agreement are not the same as the other leases in the building.
Worth noting: In addition to extending your lease, you could use the opportunity to amend a few aspects of the contract in order to comply with current requirements and make the property easier to sell or let (if your lease allows it).
Typically a lease extension takes four months to a year as it requires giving the freeholder at least two months’ notice and getting the property valued.
Since the joint freeholders are, in effect, the landlords in a share of freehold, the lease extension process should go much faster.
Given that you and the other freeholders own the property, there is no need to pay the premium to yourselves, which at £5k is the costliest part of the lease renewal.
You will only need to cover legal fees, which start at £450, depending on the number of flats in the building (some solicitors may offer a discount for blocks of 10 or more flats).
Apart from legal costs, you will need to pay
Your lender might also charge you an administration fee, although this rarely goes over £100.
Since the most common reason for purchasing a share of the freehold is to extend your lease at a lower cost, there is no reason why the other landlords will not agree to a lease renewal.
However, sometimes disputes can occur as the right to renew a lease is not granted automatically. The other freeholders might refuse to extend your lease, hoping to get paid a premium in return or a chance to buy your flat at a lower cost (the valuation of the property drops as the lease is nearing its expiration date).
The easiest way to handle this is to include a clause in the Participation Agreement that allows any of the freeholders to extend the lease with no premium charged.
Another solution is to enter into a Declaration of Trust with the other freeholders when purchasing the freehold or once you have acquired ownership. A Declaration of Trust is a legally binding document that outlines the relationship and duties of the co-owners and makes provisions in case one of the joint owners does not agree to extend your lease, including referring disputes to a third-party arbitrator.
Finally, you could serve the other freeholders with a Section 42 notice—a formal request from the leaseholder to the landlord to start the statutory lease extension process. This process is costly and complicated for both parties, which might just convince the other freeholders to grant your lease extension.
Remember that even if you take the matter to court, there is no guarantee that you will win, as was the case for Parkes v Wilkes .
That’s why it is best to either set rules at the start or extend the lease as soon as you purchase the freehold i.e.when you are all on good terms and have a joint interest in the property.
Extending a lease with a share of freehold is still possible even if you are dealing with an absentee freeholder. In this case, you would need to apply to the court for a vesting order, giving the court the right to grant the lease extension instead of the landlord. However, you would need to prove to the court that you have done everything in your power to locate the freeholder and make contact with them.
Extending your lease with an absentee landlord is an extremely difficult and complex process. Plus, you might end up paying the premium for the extension, which would ultimately defeat the purpose of buying the freehold in the first place.
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By clearly setting the terms in the Participating Agreement or recording a verbal or written agreement regarding lease extensions will help you avoid costly and complex legal procedures as well as any potential arguments with the other freeholders.
If this route is unavailable to you, then consider extending the lease as soon as possible, preferably right after the purchase of the freehold. This way, you will not have to deal with an absentee landlord or worry about the extension increasing the value of the property, which could lead to the company managing the freehold paying Capital Gains Tax.
No, although a 999-year lease is unlikely to run out, it is not the same as owning the freehold or a share of the freehold. Despite the government recently terminating the ground rent charge, leaseholders, even those on a long lease, still have to complete the duties of a leaseholder, including paying the service charge and sharing the cost of major construction works on the property with the freeholder.
Yes, it is possible although there are only a handful of lenders willing to offer a home loan on a share of a freehold property. You will also be required to pay a larger deposit and get higher than average interest rates.
If you own a share of the freehold you can technically renew your lease for up to 999 years without paying the extension premium. To do this though all other co-owners must agree to grant you a lease extension.
Although this usually goes off without any major issues, disputes are known to happen, which is why you need to consider extending your lease on a share of freehold property as soon as you and the other joint owners purchase the building.
My name is Marija, and I'm a financial writer at DontDisappointMe. Although finance might not be everyone's cup of tea, my 10+ years of working in one of the biggest banks in my country, and my interest in extensive research on everything finance/investment-related, have made me somewhat of an expert in the field (if I do say so myself). No longer having the passion to work in a corporate setting, I decided that I couldn't let all of this knowledge go to waste so I started writing. And, here I am! Today I try to share my knowledge with my audience in the hopes of making this topic as simple and interesting as possible. In my leisure time, I like spending time with my family and travelling to new locations.