Leasehold and freehold explained
Leasehold residential properties are often sold as having a ‘share of the freehold’. This doesn’t mean that the flat is a freehold, rather that it is “carved out” of the freehold. Sometimes, although unusually, one flat in a converted flat will have the freehold title attached to it although it may be that 1 individual flat in a block, usually a conversion. It is worth remembering that with residential leases, typically the leasehold interests are the far more valuable and legally significant interest in the property and the freehold typically has only a residual value.
How freehold and leasehold interests interact with long residential leases
A lease of a converted flat will typically provide that rent must be paid but at a nominal or very low level. Older leases may require no more than a peppercorn rent, though not many peppercorns change hands these days. Rent will be payable to the freeholder and the “covenants” in the lease must be observed. Lease covenants are contract clauses by landlord and tenant that each will behave in particular ways in particular circumstances for the benefit of each and for the other leaseholders in the building. A good example relates to common parts, i.e. those areas that do not form part of one of the flats but are required, for instance to enable flat owners and their guests to pass from the street to the front door of the building and once inside to make the journey to the individual apartment. These are generally parts of the building which stay as the freehold and are not leased. Sometimes, they are now owned by a limited company set up by the freeholder or which is owned by all the leaseholders as a management company.
Problems with older leases
Purchasers of residential leasehold properties should ensure that their solicitors properly investigate the lease and the ownership of the freehold in order to ensure that there is no confusion or potential for future problems. Problems can arise particularly with leases which were granted some decades ago, since clause in leases which were considered suitable according to property law decades ago will often not be legally suitable or compliant under more recent law or accepted practice for mortgage lenders.
As an example, older residential leases often fail to provide for the leaseholders to grant each other, amongst other things, mutually enforceable covenants. In practical terms, each leaseholder only has a contract (the lease) with the freeholder and not with other leaseholders. So what if the leaseholder updaters is playing rock music at full blast day and night ? A mutual enforceable clause would allow the leaseholder suffering to compel the freeholder to take action against the other leaseholder creating the noise nuisance.
Share of freehold
Leaseholders who together own the freehold of the block via a limited company have more chance to come to an agreement with the owners of the other leasehold flats because they have a common interest in maintaining the common parts and they will be able to remove the profit incentive and manage the freehold more efficiently and cost effectively because if they don’t like the lease, they have the option to modify it. Even though the flat you are thinking of buying does come with share of freehold, changing the lease may not be very easy because you will not be able to take action alone and agreement with your new neighbours would still be a requisite. They may also find it easier to amend their leases both as to length and onerous covenants because there is no profit motivated freeholder who will negotiate hard for the price to buy an extended lease and may have no interest in relieving onerous lease terms.
All in all, take good legal advice !