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Freeholds and leaseholds explained

What is the difference between a freehold and a leasehold?


A freeholder owns the land that properties are built on and leaseholders have the right to occupy that land for as long as the lease lasts.


What is a share of freehold?


A freeholder can sell a share of the freehold.


What generally will happen is if you own a flat in a block, as a leaseholder, you can get together with whoever owns the other flats and buy a share of the freehold.


Often, the leaseholders will set up a company to buy the freehold and then you would own a share in the company that owns the freehold asset.

If the person that owns the freehold wants to sell, as a leaseholder you have the right to buy it before anyone else.


So, the freeholder has to serve notice on the leaseholders and tell them that they are selling, along with the price that they are hoping to get.


The leaseholders then have two months to buy it and if they don’t it will be put on the market for anyone to purchase.

For the time being, leaseholders do not have the ability to force a freeholder to sell, but the government will soon be implementing new legislation around leaseholds and freeholds, so that could well change.


One thing leaseholders can do, however, if you’re not happy with the way your freeholder is managing the block, you can set up a right to manage company.


You would get together with the other leaseholders and through your right to manage company, you can instruct and arrange for the management of the block.


This would then cut the freeholder out of the management side and all they would receive is their ground rents.


What are some problems with share of freehold?


One of the main issues that leaseholders have with their freeholder comes due to the fact that under the terms of a lease, freeholders can make the decisions as to what is going to be done to the building.


What some freeholders have been doing Is setting up their own management agencies because in the lease it says they can charge fees for managing the block and they can earn commission on insurance premiums and contractors.

This has resulted in some freeholders ripping off their leaseholders.


If you have a block of ten flats, for example, a freeholder will collect their ground rent and then they’ll also make money by arrangingthe insurance and the contractors.


There is no legislation to say that the insurance they get for the block has to be priced reasonably and so the freeholder will over charge the leaseholders and then get a kickback from the insurance broker.

And in the case of contractors, the freeholder will charge a certain amount for managing the block and then use all their own contractors to carry out the works.


As such, the contractors will then pay the freeholder a kickback for choosing them to do the works.


Is it worth buying a share of the freehold?

Absolutely, because it gives leaseholders more control over costs.

If you don’t own your freehold, at any time the freeholder can decide to do works on the block and if the leaseholders don’t want to or don’t have the money to pay there is nothing they can do.


Whereas, if the leaseholders also own the freehold, they can choose when suits them to do works and they can find their own affordable contractors.

If you are considering buying a freehold now, however, it may be worth taking your time and waiting to see how the new legislation could benefit you and potentially reduce the price of the freehold.