Looking to buy the freehold of your property? Many flat owners choose to join forces with their neighbours and buy part of it.
Here’s a handy guide that covers everything you need to know. From costs to negotiations, we’ve got you covered.
What is a Freehold?
First things first – a freehold is the permanent tenure of land or property. Therefore, a freehold property is owned outright by a freeholder.
The Difference Between Freeholds & Leaseholds
The difference between a freehold and a leasehold is that leasehold ownership of a flat is, in essence, a long tenancy with the right to occupation and use of the property for a long period of time. This is typically 100 years plus, for example. Over time the term of the lease reduces year on year.
If the lease is left to lapse and is not renewed then the ownership transfers back to the freeholder. The freeholder ultimately owns the bricks and mortar and the land it sits on. For example, this is common for flats and apartments in a shared block.
The leaseholder does not have full control over their property; certain work will need the freeholder’s consent, e.g. a conversion. Also the freeholder will normally be responsible for the maintenance and repair of the building. If so, the costs for doing so are paid through the service charges which are billed to the leaseholders.
Why Buy a Freehold?
While some homebuyers are happy to own a property on a leasehold basis, it can cause problems for some, for example spiralling ground rents. Ground rent is an annual charge paid to the freeholder. It’s paid in addition to service charges found with many shared blocks of flats.
In some cases, ground rent can double every 10 years due to clauses written into contracts by developers. The leasehold scandal proves that for many homeowners, owning the lease alone (not the property or land it sits on) can prove disastrous. Some people have bought leaseholds unknowingly. Plus, many have had to deal with spiralling ground rents and extra costs due to clauses written in by some developers.
Many leaseholders choose to buy their freehold because:
- It will give them more freedom and control
- No need to pay ground rent
- Easier to sell
- Short leases can make properties unmortgageable
- Can add value to the property
- Control over service charges
- Fewer conditions set out by clauses in your lease
- The building is poorly managed
- The freeholder is absent or unresponsive
If your lease has 80 years or less left on it – it might be worth considering buying the freehold but you should definitely start thinking about extending your lease. Any less than that and they’ll become much more costly to you.
Remember, it’s not just older flats – new build apartments are very often leaseholds too.
Work Out Your Situation
You can ask the existing freeholder to buy the freehold at any time. But, the rules of doing so are different depending on your situation.
If you live in a flat, you’ll likely have to buy part of the freehold, clubbing together with other residents in your block. This is often the more cost-effective option.
Should You Buy the Freehold?
Before going ahead – work out whether you should push forward.
For some, it’s often a no-brainer – but you must ensure you’re eligible. In many cases, you’ll need to have owned the leasehold property for two years minimum.
If you live in a flat or apartment you will need to establish if the cost of buying the freehold is the same, if not more, than extending the lease – or the ground rent itself. You’ll also need to get your neighbours on board. If this is proving tricky, use the reasons mentioned above to convince them e.g. you can add value to the property and it’s an attractive sales leverage.
While you’ll still have a lease if you buy part of the freehold, it’s likely you’ll be able to extend it for less, as you won’t have the freeholder to worry about.
How to Buy a Freehold Outright
Hopefully, buying the freehold will be straightforward. The first hurdle, if you live in a flat, will be getting the neighbours together. This also doesn’t mean that the freeholder won’t try and make things tricky for you.
To help you along the way, ensure you find a solicitor who can guide and advise you. Don’t agree to any terms and conditions without signing anything – this could backfire.
Essentially, you have two options:
- Informal route – simply approach your freeholder and ask them if they’d be willing to sell the freehold. They’re under no obligation to reply or sell, but if they do, you could save time and money. If the freeholder agrees – negotiations can begin. Should these fail, you can escalate matters to a tribunal. Ensure you always follow a formal agreement and always get everything in writing.
- Formal route – this is where freeholder and leaseholder follow a procedure set out in law – and the leaseholder is given more protection should both parties disagree on price or terms. After that, you should receive a ‘notice in reply’ within two months. A more formal route will require you to follow a procedure set out by a legal framework.
Bear in mind nothing prevents the freeholder from asking for very high prices should they say yes.
With both options, if you can’t agree during the negotiation phase, you can escalate matters to a tribunal. This will then decide on the terms, such as cost.
How to Pay for It
There are different ways to pay for it, such as remortgaging your property.
Whichever option you choose, a solicitor is a must – as negotiations can be tricky. We can help connect you with the right people. Get a conveyancing quote below.
Something that is often forgotten is that if the freehold is worth more than £125,000 – you’ll be liable to pay stamp duty on it. This is the case even if you paid stamp duty for the property when you bought it.
Step-By-Step to Buying Part of a Freehold
Let’s break this down step by step. Buying the freehold is known as collective enfranchisement. Here are the steps you’ll need to follow to buy a share of it:
Not all home owners will be able to buy the freehold. For example, no more of a quarter of it can be used for non-residential purposes. So, if the building is used mostly for offices, buying the freehold won’t be an option.
Get the Neighbours Together
To buy the freehold of a block of flats, at least half of the residents need to agree to it. If ground rents aren’t spiralling or extortionate, this could be difficult. But, many could be drawn to the idea of having more control over their properties. Asking is the only way to find out.
Getting the neighbours on board will also largely depend on how much the freehold is. If it’s higher than the cost of ground rent or extending the lease – it might be harder to convince them to club together. Many lease extensions can be less than £10,000. The cost of a 90-year lease extension could be the cost of buying the freehold – so give this careful consideration.
But, should you own the freehold, chances are you can extend the lease for 999 years for free (with some legal fees). For many, that’s worth the cost.
To get a valuation for the freehold, use a property surveyor.
Work Out If You Can Afford It
If buying the freehold – a solicitor is a must, which will incur fees. Also, bear in mind you have to pay for a valuation for the freeholder.
Most mortgage lenders will lend you the money to buy the freehold. However, it’s worth finding out for sure before progressing any further. Need to find a lender? Get a no-obligation mortgage quote below:
Get It In Writing
Neighbours can agree verbally, but then drop out at the last minute. Prevent this with a participation agreement, drawn up by a solicitor. It’s essentially a contact that will also outline all the terms, such as lease extensions.
Nominee Purchaser vs. Company
For the freehold to be purchased, a nominee purchaser will need to be set. However, this can lead to disputes. So, another option would be to set up a company. But, this will incur more costs and legal and administrative responsibilities. You need to weigh up what’s right for you.
The Cons of Buying a Freehold
Despite more control and freedom, there are some inevitable downsides to buying a freehold. These include:
- It’s expensive (legal fees, valuation fees etc. – on top of buying the actual freehold)
- Could put a strain on neighbourly relationships
- It’s a big responsibility
- It will take time
- Relies on your neighbours co-operation
- Can lead to disputes
Tip: get your solicitor to write up a new lease at the same time, in case there are any unjust clauses within it. These will stay the same even if you buy it.
Right to Manage
This is an alternative option to buying the freehold. The Commonhold and Leasehold Reform Act 2002 gives leaseholders the ‘right to manage’ their property. This can give you more freedom.
You don’t have to manage it yourself, you can appoint a third party to manage it. This would involve everything, right down to changing the lightbulbs in the building.
To be eligible, there are some conditions:
- No qualifying tenant can be a housing authority
- Non-residential parts of the building can’t make up more than 25%
- Two-thirds of qualifying tenants must have a lease that was originally granted for 21 years or more
Bear in mind, with this option, you will still have to pay for lease extensions and you won’t add value to your property (unlike if you bought the freehold). However, you won’t incur many of the costs involved with buying the freehold.
Weigh up your options and think carefully about what to do.
Right of First Refusal
If the freeholder was looking to sell the freehold of a building containing flats, you might be offered what is known as Right of First Refusal. Tenants must be offered the option to buy it first – before it goes on the open market. It’s a criminal offence not to.
The price will be set by the landlord – and the landlord wouldn’t be obligated to follow through until the contract was legally binding. They also must give you time to consider the offer.
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