Shared Freehold Explained: From Residential to Commercial Property

What is Shared Freehold?

Shared freehold is a type of property ownership where leaseholders collectively own the freehold of the building. This means that, in addition to owning their individual leasehold flats, they also share ownership of the building and the land it stands on.

There are two common ways to structure this type of ownership:

• Limited Company - Leaseholders form a company that holds the freehold, and each owner becomes a shareholder in that company. This structure helps streamline decisions about property management.
• Personal Names - The freehold is held directly by the leaseholders as individuals (similar to tenants in common). This setup can be more complex when it comes to decision-making, especially if one party decides to sell.

Shared freehold is most commonly found in residential properties, but commercial property investors can use related structures like commonhold to manage shared ownership in buildings. For example, office space in London could use a joint ownership structure to give tenants more control over building management.

While traditionally a residential concept, shared ownership structures like commonhold have clear relevance for commercial property investors, allowing for flexibility and shared control over property assets.

Shared Freehold vs Leasehold

Shared freehold and leasehold are both common forms of property ownership, but they offer different levels of control, financial responsibilities, and property rights.

With leasehold, you own the property for a set period, often for decades or centuries, while the freeholder retains ownership of the land. Leaseholders typically have limited control over management decisions, and the property value may decline as the lease term shortens. Additionally, leaseholders are often required to pay ground rent and service charges, and they may need permission from the freeholder for alterations or extensions.

In contrast, shared freehold offers greater control. Leaseholders collectively own the freehold, giving them direct involvement in the management of the property, such as choosing maintenance services and deciding on service charges. Additionally, they can extend their lease more easily, often without the need for external negotiation. Shared freehold also eliminates the burden of ground rent, making it a financially appealing option.

Commonhold for Commercial Properties

While shared freehold is rare in commercial properties, similar joint ownership structures like commonhold can offer significant benefits to commercial investors. Commonhold allows multiple owners to share ownership of a commercial building without the complications of a traditional leasehold structure.

For commercial property investors, commonhold provides flexibility and long-term control. Owners can collectively manage the property, make decisions on maintenance, and adapt the building to suit their needs. This structure is particularly useful for buildings like shopping centres, where multiple tenants may have a stake in the property's management and maintenance.

Investors who own portions of commercial properties through commonhold can also benefit from regular rent reviews, which help ensure rental income keeps pace with market conditions. In some cases, a full repairing and insuring lease (FRI) may be used for commercial tenants, allowing property owners to shift some maintenance and repair costs to tenants, reducing their own financial burden.

Advantages and Challenges of Shared Freehold (or Joint Ownership)

Advantages

Beyond the benefits already mentioned in this article, shared freehold provides financial advantages. For example, retail properties in Edinburgh under shared ownership can eliminate ground rent payments, reducing ongoing costs for investors. The process of lease extensions is also simplified, offering long-term stability.

Investors in shared freehold arrangements can benefit from greater property yield, as controlling ownership of the freehold allows for more flexibility in managing rental income and expenses. Another potential strategy is the use of sale leaseback, where owners sell the property but lease it back to retain operational control while freeing up capital.

Challenges

However, collective decision-making among multiple owners can lead to disputes if not properly managed. Clear legal agreements are essential to resolve potential conflicts, especially in large commercial properties like hotels in London, where shared ownership structures can become complex.

Administrative burdens can also be a challenge. Managing shared responsibilities, such as handling maintenance contracts and compliance, can be time-consuming. Investors must be prepared for the hands-on nature of shared freehold ownership, which differs from the more passive role in leasehold arrangements.

Flying Freehold in Commercial Properties

A flying freehold occurs when part of a property extends over or under land that is not included in the freehold ownership. This situation can arise in commercial properties, where sections of a building overlap with neighbouring properties. Managing flying freeholds can be challenging, as it requires clear legal agreements between property owners to handle maintenance and structural responsibilities.

Commercial investors considering properties with a flying freehold should ensure that these agreements are in place to avoid disputes over repairs and access rights.

FAQs

Do I need to extend the lease with a share of freehold?

Yes, even with a share of freehold, your lease is still a separate legal document. The benefit is that you can typically extend your lease more easily and at a lower cost than if you were just a leaseholder.

How does shared freehold apply to commercial properties?

While more common in residential settings, shared freehold concepts can be adapted to commercial properties through joint ownership structures like commonhold, providing investors with more control over management and maintenance decisions.

What's the difference between shared freehold, commonhold, and leasehold?

Shared freehold means leaseholders collectively own the freehold of a property. Commonhold allows individual ownership of units while sharing ownership of common areas. Leasehold only grants ownership of the property for a set period, with limited control over the freehold.

Actionable Steps for Potential Investors

Before investing in a shared freehold or joint ownership structure, ensure that all legal agreements are clearly defined, especially concerning management responsibilities and decision-making processes. Evaluate the property's financial health and condition, including any maintenance liabilities. It's advisable to consult with legal and real estate professionals to avoid costly mistakes and ensure a smooth transaction.

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