How a switch to freehold can bring higher costs - Gareth Shaw

Gareth Shaw, Head of Money at which.co.uk, provides answers to a major personal finance problem.

Many leaseholders dream of truly owning their own property

Dear Gareth,

I would love your help to solve our freehold problem. We bought our flat – one of six – on the edge of a small village in 1994 and have had a kitty of £15 per month which we all pay for the gardener, and general upkeep of the property. Last year we were able to buy the freehold and all agreed to go ahead.

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One of our fellow freeholders has now created a management company for the block, naming us all as shareholders. With that, we have to register on Companies House, have annual audits of our accounts, as well as paying fees to the bank and purchasing buildings insurance.

Our annual contribution has now tripled to £45 per month. This is an unacceptable increase to which, as a pensioner, I can’t afford. We bought the freehold of our property to avoid all ground rent costs so what rights do we have and can we opt out?

Name and address supplied.

Gareth says…

You’ve taken the complicated step that many leaseholders will dream of – truly owning their own property, rather than being tenants in the property they’ve purchased for hundreds of thousands of pounds.

Buying the freehold of a property gives you far greater control over what you pay in maintenance and insurance costs, and owning the freehold can remove restrictions on what you can change in your property as well as doing away with ground rent.

Buying a share of the freehold in a block of flats, however, is different from buying the freehold of a house. With a house, the freeholder is the land-owner on the property and its surrounding area. With a flat, you own the land alongside your neighbours, with a share of the freehold.

The process of doing this is called ‘collective enfranchise-ment’. It can be complex and expensive, but you do have some legal protections. You need at least half of the other freeholders to agree to buy a share, and you’ll need to carry out valuations and get legal advice.

And when you finally do purchase the freehold on a block of flats, it’s very common for a company to be set up to manage it. I spoke to Which?’s property expert Stephen Maunder, who said that “setting up a company to manage the freehold makes sense where there are many people sharing the freehold. For example, if there were 20 flats and we bought 1/20th each, you wouldn’t want an informal kitty”.

There are alternative structures that could be used where the compliance burden (and cost) may be lower. The Leasehold Advisory Service, an independent body that provides free advice to leaseholders, says a company structure can sometimes be too cumbersome in small blocks of flats.

An alternative, it recommends, could be a ‘declaration of trust’. This is where, to quote the Leasehold Advisory Group, the title deeds are owned jointly, and the obligations of the owners are set out in a binding document.

You’d need a specialist solicitor to set it up, but the management of everything would be much less formal than a company. However, it does note that this is only appropriate where there are four or fewer flats, because “an interest in land can be held in up to four names. This means that up to four names can be registered at the Land Registry as the freeholder”. Your block has six, so a trust may not work.

Stephen told me while the “formality of the arrangement has caused greater expense, it could be argued that setting up the formal structure is a reasonable thing to do to protect the interests of the freeholders”.

You can challenge your fellow freeholders to ensure that you are getting value for money when appointing maintenance firms, accountants and purchasing buildings insurance to see if there are ways to reduce costs.

But, as Stephen said: “If this cost is the drawback of having collectively bought the freehold, it needs to be weighed against the benefits of having done so – no ground rent, no covenants, control over service charges, no concerns over lease extensions, and ultimately a boost in the property’s value.”

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Thank you

James Mitchinson