When buying the freehold of a block of flats it is possible to buy under individual names, but it may be preferable to set up a company to buy the freehold instead.
There are advantages and disadvantages to both, but which one you chose will usually depend on the size of the block.
If the freehold is held in the individual names of the owners it will almost certainly be held as ‘tenants in common’, which means that each individual owner holds a defined share in the value of the freehold (e.g. four owners with 25% of the freehold each).
If the freehold is held as ‘tenants in common’ it means that legally speaking it is held on trust. Up to four individuals can be registered at the Land Registry as the legal owners of the freehold, those owners will be the ‘trustees’. Both the trustees and any other owners whose names do not appear on the freehold title will be the ‘beneficiaries’ under the trust. The trustees have a duty to manage the freehold property for the benefit of the beneficiaries.
The major advantage of buying in individual names is that there is no additional administrative work involved. Unlike a company there is no need to account to any third party.
This set up usually works well when there are two or three flats in the building. There are several reasons why it may not be suitable if there are four of more flats.
- Only four owner’s names can be registered at the Land Registry, so if there are more than four owners then those who are not registered may feel their interest is not secure
- Every time one of the owners registered on the freehold title sells their interest in the freehold, the title would have to be transferred out of the existing owner’s name and into the new owner’s name, which is an administrative hassle
- It might be necessary to enter into a deed of trust to set out clearly how the legal owners should deal with the freehold title in the event of a dispute
Where the freehold is held on trust problems can arise where the owners fall out with one another, particularly if no deed of trust has been entered into.
The default position is that all trustees must make decisions unanimously, which can cause management to grind to a halt. If the dispute is intractable, court involvement may ultimately be necessary. Whilst this worst case scenario can arise whether there are just two flats in the building, the more flats involved the more complicated matters might become.
For these reasons, where there are 3 or more owners it is considered preferable to buy through a company vehicle instead.