Freehold ownership by two or more owners

In most cases, to become the legal owner of a property, you must be the registered legal owner at HM Land Registry. However, legal title can then only be held by up to four registered legal owners. So what happens in situations where multiple unrelated tenants have exercised their right to purchase a freehold? Or several individuals have pooled money together to purchase a property? Or where estate common parts are to be held by several common users?  Do only four lucky individuals get to become legal owners and the others are left by the wayside?

The answer is a resounding 'no.' Co-owners can choose to document their ownership in one of two ways – by way of a declaration of trust or through incorporation of a company. Each has its pros and cons which we discuss below. Whilst this article will focus on freehold ownership subject to leases, it is equally applicable to any co-ownership structure.

Please note that there will also likely be tax considerations for choosing a certain option. Advice on tax is outside of the scope of this article; we recommend that you liaise with your financial advisor or we can refer clients to someone who can assist.

The co-owners could appoint one to four individuals to be the registered legal owners. Those individuals would usually hold the legal interest in the freehold property as tenants in common. 

Unlike joint tenants who hold 100% of the legal interest in a property together, tenants in common hold a specified share of a property. The shares can be held equally (50/50) or in unequal, specified shares. 

This arrangement is different to 'joint tenants' where, if one party passes away, their interest in the property automatically passes to the surviving party by way of 'survivorship', so that surviving party will then own 100% of the property alone – this is clearly unsuitable for, as an example, unrelated co-ownership groups who have purchased a freehold together and want their share be linked to their ownership of a related leasehold title rather than to simply pass to the remaining freehold owners in the event of their death.

But holding a legal interest as tenants in common only deals with part of the arrangement. What happens if a tenant sells their leasehold interest, wants to step-down as a freehold owner or purchases another leasehold property in the building? This is where a declaration of trust fits in.

Declarations of trust are bespoke documents which means they can be tailored to the co-owners’ specific needs. They must set out how the beneficial interest in the property is to be held but commonly will also include clauses to determine how various costs (e.g. insurance, property maintenance etc.) will be met and what happens in the event one party wishes to sell their interest. Declarations of trust are most commonly used where there are a small number of legal owners who wish to document their beneficial ownership shares and regulate how the property is dealt with. In the event of a freehold being beneficially owned by a large group of co-owners via a declaration of trust there is scope for an extremely detailed, bespoke document to be prepared but that is not without its potential pitfalls. Some of the key advantages and disadvantages are listed below, although please note that each case will be highly fact specific. 

Advantages

• The legal owners can hold the title on trust for a greater number of beneficial owners
• Bespoke drafting can be used to address the co-owners’ specific concerns and needs and to ensure any lease obligations are complied with
• Legal owners are not obliged to comply with administrative obligations for maintaining a company or a company office such as a director

Disadvantages

• Each party to the declaration of trust will need their own independent legal advice which, depending on the number of parties, may result in significant costs, particularly if every party proposes amendments which must be considered and advised upon
• The declaration of trust will need to be re-executed each time there is a change in the beneficial ownership which means there will be ongoing costs, administration and legal advice required
• The requirement for re-execution means that there is the potential for an unhappy party to try to use the re-execution process to change the terms of the declaration of trust
• If the legal and beneficial owners are different then the trust will need to be registered with the Trust Registration Service and the trust structure may incur tax charges both at inception and an ongoing basis. There may also be accounting and administrative trust considerations

An alternative arrangement to a declaration of trust is ownership by a company.

This will involve a company being incorporated. At the point incorporation the company will need to adopt a set of articles of association ('the Articles'). The Articles dictate the governance of the company for instance day to day running of the company, the rights of the directors and the rights of the shareholder etc. Whilst, the company has the option to adopt model Articles available at the point of incorporation, we do recommend companies have bespoke articles of association. This is because the model articles are not tailored for arrangements involving freehold ownership and property maintenance/management.  

The company will become the landlord and will own the freehold. In collective enfranchisement situations, each participating leaseholder will be issued a share in the company. In freehold purchase situations, it would be the purchasers who are issued shares in the company.

The company can hold the freehold property on trust for certain leaseholders or purchasers. This means although each leaseholder/purchaser will own one share and will have an equal voice in decision making, the property itself is held by the company on behalf of a specific shareholders/ leaseholders which allows the economic rights (e.g. the proceeds arising on the sale of extended leases) to be held differently versus the voting rights.  

Below we have listed the most common advantages and disadvantages for a company structure arrangement. This is not an exhaustive list and each matter will be dependent on the facts. 

Advantages

• You can have more than four owners owning the freehold by forming a company
• New legal transfers of the freehold are not required every time the leasehold title changes hands  
• Decision making is easier to deal with on all aspects of the management of the freehold / communal areas
• Provides assurance to existing / potential long leaseholders that there is a proper structure is in place to maintain the value of the building and regulate relationships between leaseholders
• The structures are well-established and there is an existing and well-established body of law to help resolve disputes between shareholders

Disadvantages

• A number of leaseholders/purchasers will be appointed as directors and taking on the role of a company director involves familiarity with the numerous duties and responsibilities, which may be time consuming
• There is some cost to maintaining a company in terms of filing accounts etc. although that cost is limited
• Engaging a professional and experienced managing agent to deal with the day-to-day running of the building does not absolve leaseholders/purchasers owning a share in the freehold company from ultimate responsibility for making sure it is done properly and their duties as directors will continue to apply
• Decisions may be made by the directors or shareholders by majority (under Company Law principles) which can cause potential issues between leaseholders/ shareholders

Whether the freehold of a property is owned by individuals with a declaration of trust or by a company (which may also involve a declaration of trust) will likely depend on the nature of the property itself and the relationship between and number of the freehold owners. Our family team, corporate and commercial team & real estate team have great experience in advising on the best arrangement for commercial or residential property and preparing adaptive documentation to reflect both simple and complex arrangements.