Share of Freehold Issue

Planet_Switzerland

I'm trying to buy a flat in London at the moment. It's a converted flat, one upstairs and one downstairs and is a share of freehold.


The freehold is in the name of each flat owner and our solicitors requested the vendor to get this changed to a company name with the other flat which he didn't want to do. From my own research it seems to be more common for there to not be a company if there is only 2 flats so didn't see this as an issue.


After getting our official offer from the lender, Nationwide, our solicitor sent us this extract from the Nationwide CML handbook:




Other Freehold Arrangements


5.8.1Unless we indicate to the contrary (see part 2), we have no objection to a security which comprises a building converted into not more than four flats where the borrower occupies one of those flats and the borrower or another flat owner also owns the freehold of the building and the other flats are subject to long leases.


5.8.1 Does the lender accept security which comprises a building converted into not more than four flats where the borrower occupies one of those flats and the borrower or another flat owner also owns the freehold of the building and the other flats are subject to long leases?


Yes


View all answers to this question


5.8.2If the borrower occupying one of the flats also owns the freehold, we will require our security to be:

• the freehold of the whole building subject to the long leases of the other flats; and
• any leasehold interest the borrower will have in the flat the borrower is to occupy.

5.8.3If another flat owner owns the freehold of the building, the borrower must have a leasehold interest in the flat the borrower is to occupy and our security must be the borrower's leasehold interest in such flat.


5.8.4The leases of all the flats should contain appropriate covenants by the tenant of each flat to contribute towards the repair, maintenance and insurance of the building. The leases should also grant and reserve all necessary rights and easements. They should not contain any unduly onerous obligations on the landlord.


5.8.5Where the security will comprise:

• one of a block of not more than four leasehold flats and the borrower will also own the freehold jointly with one or more of the other flat owners in the building; or
• one of two leasehold flats in a building where the borrower also owns the freehold reversion of the other flat and the other leaseholder owns the freehold reversion in the borrower's flat; check part 2 to see if we will accept it as security and if so, what our requirements will be.

5.8.5 Does the lender accept security which comprises one of two leasehold flats in a building where the borrower also owns the freehold reversion of the other flat and the other leaseholder owns the freehold reversion in the borrower's flat? If so, are there any specific requirements?


Yes to bullet 1 clause 5.8.5 - see 5.14 for our requirements for leasehold securities generally
Yes to bullet 2 clause 5.8.5 Yes We require the borrowers leasehold interest in the flat they occupy to be charged and we also require a charge over the borrowers freehold interest in the other flat subject to the lease in favour of its occupier.



They said that it means that Nationwide won't issue a mortgage without the other flat being a part of the charge which obviously cannot happen. The only way round it is to set up the company as first proposed or we buy just the leasehold or the other flat owners are removed from the freehold.


I'm no legal expert, but I read from the above that this is only the case where you own the freehold of the other flat on the last point. The solicitor confirmed that the last point wasn't relevant to us, but said this is still the case.


They have sent an enquiry to the lender which will apparently take a week to respond.


Do you think I have anything to worry about?


I find it hard to believe that one of the biggest lenders won't lend on a setup that a big chunk of properties in the biggest city have. Furthermore, I would have thought that being on the freehold would be more favourable to the mortgage company than not being on it as it would more likely sell if they repossessed it.

Planet_Switzerland

Can anybody help?

G_M

Try the mortgage board for expertise on mortgage lenders' policies.

Richard_Webster

Your solicitor is wrong. You are right, at least on the wording as I read it.

There is a situation - the Tyneside Flat/Criss Cross Scheme - where you have the leasehold of the flat you occupy and the freehold of the other flat (where there are only two flats involved). This is not the case here.

Nationwide cannot possibly get a mortgage on the other flat's leasehold or on the freehold without the other flatowner's agrement - and why on earth should they agree? If the freehold was owned by a company in turn owned by the two of you the same point would apply.

However you do need to think about the risks here. I imagine the freehold is held jointly by the seller and the other flat owner. You will want the seller to alter this so that you and the other flat owner end up owning the freehold together. To do this you will need the other flat owner's signature. He may be prepared to give this, but doesn't have to!

However, suppose he defaults on his mortgage and disappears and you later want to sell your leasehold flat and transfer the "share in the freehold" - you can't find him - you are stuck. If the freehold belonged to a company the Land registry entry as to its ownership would not need changing and you as a surviving company member could agree to the new buyer becoming a company member. So from that point of view companies are better - but you have to remember to file the annual returns! If you don't the company gets struck off!

Another alternative is for you to get him to sign a deed of trust which means an entry at the Land Registry which says that dispositions of the freehold can only take place in accordance with the deed of trust, which can in turn say that if you can't find the other flatowner only one need sign to "transfer" the freehold.

Problem all the time is getting the other flatowner to agree to a company or a deed of trust - he won't understand the need until a problem occurs and then it is too late....

Planet_Switzerland

Richard_Webster wrote: »

Your solicitor is wrong. You are right, at least on the wording as I read it.

There is a situation - the Tyneside Flat/Criss Cross Scheme - where you have the leasehold of the flat you occupy and the freehold of the other flat (where there are only two flats involved). This is not the case here.

Nationwide cannot possibly get a mortgage on the other flat's leasehold or on the freehold without the other flatowner's agrement - and why on earth should they agree? If the freehold was owned by a company in turn owned by the two of you the same point would apply.

However you do need to think about the risks here. I imagine the freehold is held jointly by the seller and the other flat owner. You will want the seller to alter this so that you and the other flat owner end up owning the freehold together. To do this you will need the other flat owner's signature. He may be prepared to give this, but doesn't have to!

However, suppose he defaults on his mortgage and disappears and you later want to sell your leasehold flat and transfer the "share in the freehold" - you can't find him - you are stuck. If the freehold belonged to a company the Land registry entry as to its ownership would not need changing and you as a surviving company member could agree to the new buyer becoming a company member. So from that point of view companies are better - but you have to remember to file the annual returns! If you don't the company gets struck off!

Another alternative is for you to get him to sign a deed of trust which means an entry at the Land Registry which says that dispositions of the freehold can only take place in accordance with the deed of trust, which can in turn say that if you can't find the other flatowner only one need sign to "transfer" the freehold.

Problem all the time is getting the other flatowner to agree to a company or a deed of trust - he won't understand the need until a problem occurs and then it is too late....

Thanks for your reply.


I know the vendor has got the other flat owners on board with this sale in terms of signing what they need to sign.


I get why a company could be better, but like you said it depends on whether the other flat owner is willing.


Hopefully its just the solicitor being over cautious then.