If you have developed your own freehold property into two or more flats you may think it is easy to obtain mortgage funding on your new properties.
This is often not the case despite the fact you have obtained planning permission, physically divided the property into flats, completed the conversion works and obtained a building regulations completion certificate. This is usually because the arrangement on the title deeds don’t match the lenders requirements because they will not lend on ‘freehold flats’.
To fix this a solicitor is required to draw up a new lease for each of the flats which needs to be registered at Land Registry. This is a complex document as it needs to comply with the lenders requirements, typically following the Council of Mortgage Lenders instruction for leasehold property, and be fully marketable and saleable in the future as an independent unit.
Difficulties with Lenders
You may have a helpful bank but this is not what we hear about the market. Lenders do not appear to understand these arrangements even though in a lot of ways a refinance combined with a new lease is no different to buying a residential flat ‘off plan’ from a large developer. Some lenders do not like the fact they have mortgages on several flats in the same building.
You may find that an experienced broker is needed to ‘translate’ for the bank and find the right product. Not all banks will lend on such arrangements but we come across many that do. Whilst we do not provide financial advice ourselves we can recommend a independent broker who specialises in such matters if you are stuck.
You will also need to carefully consider the maintenance and insurance obligations for the building – this may depend on your long term plans for the flats and the size of the building. In addition the rights of way parking and communal arrangements need to be correct. All of this will need documenting in the leases.
To help you with this we will send you at the beginning of the matter a detailed checklist to identify these issues to enable us to fit the lease to your particular circumstances.
If the flats have been created for a long period of time (over 10 years) the lender will not require a “new build” structural warranty (e.g. NHBC or similar).
However if the property is new or nearly new most banks now insist on a “new build” warranty or professional consultants certificate even though it is just a conversion.
The consultants certificate can be provided by your architect, engineer or other professional provided they have overseen the construction of the site. They will normally charge for this. You can also obtain insurance from a structural warranty provider e.g. NHBC, Premier Guarantee, LABC, Buildzone or similar and they will also inspect as the property is constructed/converted. Expect to pay from £1000 per unit for such cover.
If you have completed the flats then the only option is to obtain a “completed housing” structural warranty which is likely to be more costly.
The biggest problem we encounter is many clients want to use plans from the planning permission or building regulations consents. These are often difficult to use if we have been given paper copies. Photocopies of originals tend to distort the scale. Ideally we need scale electronic copies. This is because Land Registry are very exacting on this point – each lease needs a ‘Compliant Plan’ showing the exact floor plan layout of the flat. A Compliant Plan should be to scale, show a north point and typically be 1/250 to 1/500 scale but the list of actual requirements is long (see exact requirements below). This is why a professional drawing is nearly always required. The Land Registry are very fussy on this point and many transactions get delayed by problems with the plans late in the day.
You may be able to use your architects or planning consultants to prepare the plans from the planning documents. Otherwise you will need to employ a surveyor or specialist company e.g. www.floorplanz.co.uk http://www.londonleaseplan.com/ or https://www.leaseplans-photoplan.co.uk/ We have worked with all these companies and they can produce plans for flats for a fixed price which is often cheaper than an architect. The company’s fees may be reduced for large blocks or where good quality planning drawings can be worked from and so no inspection is required.
We are able to assist you in providing this service for a fixed price. Typically the cost of creating the new leases is £500 plus VAT per flat where there are two to four flats in the building. This will normally reduce due to economies of scale for larger blocks.
We can also combine this cost with the sale of the flats or re-mortgage to a new lender. Typically these add additional costs amount to £300 plus VAT on top of the lease creation costs for a ‘high street’ lender. More complex finance arrangements e.g. bridging finance will require specific quotes.
Adding Value – creating a freehold ground rent investment
Large developers make money from selling ground rent investments when all the flats are in the development are sold – so why not benefit yourself? As well as providing legal drafting we will also advise you on maximising the value of the property as a whole by creating value in the freehold interest in the long term (for example by using escalating ground rent provisions and shorter leases). Typically the value of the freehold reversion will be around £6-7000 for a building with two flats. This will increase according to the number of flats in the building e.g. a building with 4 flats should have a freehold value of £12-14,000 or so following the grant of the leases. This freehold interest can be sold separately in the future as there is a strong market for such investments. This is an area of added value which we bring to our clients in many transactions and this more that offsets the fees we charge.
For further help and assistance or a quote please contact Mark Sadler 01708 757575 or email firstname.lastname@example.org
Checklist of documents required for new lease and refinance:
- Copy planning permission for the development.
- Copy building regulations completion certificate.
- NHBC (or equivalent) if required (some lenders require this even for conversions).
- Three sets of plans (or electronic PDF copy) showing flats as per Land Registry requirements (as specified below).
- Copy block insurance policy.
Where a plan is required for any new deed or for any application lodged at Land Registry, it should be prepared having regard to the following guidelines.
- Drawn to and show its actual scale.
- Show its orientation (for example, a north point).
- Use preferred scales of 1/1250 – 1/500 for urban properties.
- Use preferred scales of 1/2500 for rural properties (fields and farms etc).
- Do not base on a scale of imperial measurement (for example 16 feet to 1 inch).
- Do not reduce in scale (see section 6.6 Plans reduced in scale).
- Do not mark or refer to as being for identification only.
- Do not show statements of disclaimer used under Property Misdescriptions Act 1991.
- Show sufficient detail to be identified on the Ordnance Survey map.
- Show its general location by showing roads, road junctions or other landmarks.
- Show the land of the property including any garage or garden ground.
- Show buildings in their correct (or intended) position.
- Show access drives or pathways if they form part of property boundaries.
- Show the land and property clearly (for example by edging, colouring or hatching).
- Have edgings of a thickness that do not obscure any other detail.
- Show separate parts by suitable plan markings (house, parking space, dustbin space).
- Identify different floor levels (where appropriate).
- Show intricate boundaries with a larger scale or inset plan.
- Show measurements in metric units only, to two decimal places.
- Show undefined boundaries accurately and where necessary, by reference to measurements.
- Show measurements that correspond, so far as possible, to scaled measurements.
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