What is a freehold flat and why is it unmortgageable? A freehold flat is just what it says – a freehold flat without any leasehold title. Basically the freehold land is split horizontally so the freehold titles are stacked on top of each other like building blocks. It is rare and should not be mistaken for a “share of freehold” flat where there is both a share of the freehold and lease in place (see http://www.ker.co.uk/what-is-a-share-of-freehold/).
Nor in theory should it be confused with a house which is subject to a flat let on a long lease – where either the upper or lower parts or sometimes basement has been let on a long lease (usually 99 years or more) and the owner of the freehold retains the other part of the building and occupies that as a separate dwelling. We say in theory because these arrangements are often confused with freehold flats by lenders and the only way deal with the problem is to create a new lease even though the same problems of enforcement highlighted below do not really exist in this arrangement. It can be fixed with or without the consent of the tenant of the long lease by creating a new lease of the freehold part however the format of the lease must follow the existing lease of the flat already granted in the building.
Returning to the problem of ‘freehold flats’ – this is driven by instructions from lenders – banks and building societies.
The basic problem is that most lenders will not accept a freehold flat as ‘good security’and therefore they are a problem to both mortgage and sell.
There are some areas of England where these types of arrangement are commonplace but they are limited exceptions and even then only a few lenders will lend in such circumstances.
The legal problem is that there is no automatic system of making the liabilities to pay monies run automatically with freehold land – this means that within the building your freehold flat is situated you are reliant upon your neighbour to maintain part of the structure such as the roof mains walls or foundations and yet there may not be a clear legal obligation or agreement between you to force each other to carry out those repairs or spend the money on sharing the cost of those repairs. Even if there is an agreement at present it can be easy to break this agreement if one freehold flat is sold on without the new owner entering into the same agreement.
With a leasehold obligations can run with the land and therefore it fixes the problem of maintenance and repair (although it requires specific covenants in the lease).
Because of the legal problems associated with a freehold flat and the lack of lenders the value of such properties are adversely affected. It also makes the flat more expensive to remortgage because there are very few lenders who will lend on it.
How can we fix it?
The basic fix is available provided that all owners in the building co-operate in bringing together the freehold to grant leases of each of the flats.
You cannot set up a leasehold title correctly unless all the freehold of the building is held.
This means if three out of the four flat owners in a building want to set up the leases you cannot do this successfully without the consent and involvement of the fourth owner.
The key steps to achieving this are:
- Get all parties on board in principle – it is helpful to have a quote from us at this stage so you can understand the costs (see below).
- Instruct the lawyers to proceed with the process – all owners of the freehold would need to do this at the same time.
- Obtain the consent of the lenders – the lawyer will generally do this by asking the lender to accept the new leasehold title in substitution for the old freehold title pointing out that the leasehold title will offer better security for the lender.
- Obtain the lease plans – the Land Registry require the compliant lease plans to be in a particular format and to scale.
- Draft the leases – the style of lease used will depend on your current arrangements as to maintenance (if any) and the size of the block.
- Complete the leases and register these changes at Land Registry.
Each new lease needs a ‘Compliant Plan’ showing the exact floor plan layout of the flat usually edged in red and it should also show any external areas (such a garden or parking space edged in green). 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. 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.
It is therefore best to employ a surveyor or specialist company e.g. www.floorplanz.co.uk www.londonleaseplan.com or 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 or surveyor. The company’s fees may be reduced for multiple instructions so it is sensible to instruct the same company to deal with the whole building.
What format do the leases take?
How long is the lease going to be?
You would normally create a lease with a term of 999 year leases at a peppercorn (nil) ground rent (often referred to as a virtual freehold).
We will include by default provisions relating to the communal use of the building for example rights of way over common paths, rights for pipes and wires to pass through each others land and general rights of support and shelter. These provisions are amended to suit the plans and information you give us.
Maintenance and Repair
You need to decide how you wish to deal with the maintenance repair and insurance for the building in the future. In theory you have a free hand to mutually decide the format of the lease but this can depend on what is recommended due to the size of the building.
Generally there are three ‘types’ of lease format :
A. Maisonette style lease (Tenants to insure and repair building).
This will match your current arrangements we suspect. It is only really suitable for 2 flats in the building although in theory lenders will accept this arrangement in units up to 4. Generally this is where the upper flat is responsible for all parts of the building (including structure and main roof) from the level of the joists of the floor separating the property from the lower flat and the lower flat is responsible for everything up to the ceiling of the lower flat including the mains walls of the flat and the foundations). Each flat owner is also responsible for the insurance on their own part of the building.
The insurance arrangement often criticised by lawyers because there is no way of easily monitoring that your neighbour has insurance on risk each year and they envisage a problem if the building is damaged by an insured risk causing damage to both properties. What happens if one of the flats is uninsured? – the insurance payout for the remaining flat may be insufficient to enable that flat to be rebuilt or repaired in full. You can get “contingent buildings indemnity insurance” to insure against the risk of your neighbour not complying with his insurance obligations but in our view it is better not to chose this option.
B. Maisonette style lease (Tenant to repair but Landlord insuring building on block policy)
Again only really suitable for 2 flats in a building. As above however the only variation is that the insurance is arranged by the Landlord and the cost is shared with each tenant contributing 50% towards the cost of the annual premium. This avoids the contingent insurance risk.
C. Modern Lease (Landlord to insure and repair and Tenant to pay service charge)
There is a third, much more common, lease style where the landlord retains the main structure of the building including the roof, main structural walls and foundations. The landlord is therefore responsible for the maintenance and insurance of the whole of the building structure and the tenants again pay a proportion of the cost of repair and insurance. This option works with all size buildings but is essential with larger blocks where the division of repair of the structure is not really going to work practically where there are a number of properties in the building.
You have to be careful with this option because at the moment you own the whole structure in your freehold – in particular the upper flat owns the roof and the roof space and they may not want to lose that ownership (for example if they want to build out into the loft) by moving this to the control of the landlord. This is one of the reasons why this option is not normally used for the conversion from a freehold flat where there is only 2 units in the building.
Other Lease Terms
The lease will contain a number of standard provisions about what you can and cannot do with the flat. They are designed to be a fair balance to reflect the communal living arrangements of a shared building. Generally these are again pretty standard across the board and will be needed to make the lease compliant with what lawyer and lenders will accept. They will include:
- Restriction on the use of the flat – including limiting the use to a single private dwelling,
- Restrictions on alterations – preventing alterations without consent of the Landlord – to prevent the structural integrity of the building being compromised by a change.
- Restrictions on assignment and underletting – generally restricting the sale or letting of part as opposed to the whole of the flat
- Introduction of communal rules- to prevent for example nuisance or noise problems in the building.
You will need to discuss you requirements with us at the time you start this process and everyone needs to agree the format as clearly the leases should be uniform throughout the building. We will first ask how you want to deal with the insurance and repair obligations and we can then draft and present to you what we consider to be a modern CML (Council of Mortgage Lenders) compliant lease to you to review. This will then enable you to see the detail set out above. We have to warn you though that because we are looking to achieve something that is acceptable to lenders and buyers we are not going to recommend major deviations from a “standard” format of lease – after all you are trying to make your property mortgagable and saleable in the future and having an unusual lease without key provisions which you may decide to amend or remove it not going to help you achieve that aim. You therefore need to place a degree of trust in the arrangements we set up for you as they may at first seem quite restrictive given your current arrangements.
How much will it cost?
To assist we need to give you a budget to help you understand the costs for the whole process. We offer a fixed fee service for this type of matter. The costs below are per flat.
- Legal fees for drafting and registering the new lease – £600 plus VAT
- Land Registry fees –£40 for the lease and £40 for the freehold transfer and merger
- Official Copies of your title – £6
- Lenders Consents – £0-£100 (depends on the lender and relates to non-commercial mortgages – in some cases lenders may require a valuation)
- Lease Plans – £200 – 300 plus VAT (again depend on the provider)
How long does it take?
It is difficult to predict because we are dealing with the Land Registry and they have varied timescales for dealing with matters which depend on their workload and the complexity of the application. As new leases are one of the more complex matters they deal with it can take a month or even several months for them to register the changes after we complete the lease although it is possible to try and speed this up if the matter is urgent for a specific reason – usually for a pending sale or remortgage.
Before we register we need to get to that point. We are in control of much of this process. If there is no mortgage on either title then we can complete the matter usually within a couple of weeks of obtaining all the documents from you. Registration will then take place as noted above. Where there is lender involvement for either flat it can take much long because we need to get their consent – this is no always straightforward but even if it is given the pace of lender’s correspondence they will add 2-3 weeks to the timescale.
Realistically 2 months is a not unusual time frame but it can take much more quickly or slowly depending on factors which are not always within our control.
Where we can help
We are specialists in dealing with these type of matters. If you require information about a particular aspect or just want to talk through the options call or email Mark Sadler on 01708 757575 email firstname.lastname@example.org
As a next step if you think you might want to use us we can circulate confirmation of our fees to you and any other owners in the building (usually by email) with a questionnaire – once this is completed and returned we can start the process immediately.