Separating leasehold and freehold (for flat)

D20

Hi! I wonder if anyone can give me some information on this before I go to a solicitor.

I own and live in a freehold flat. The building is split into two flats, with upstairs being a leasehold, and downstairs (mine) having the freehold.

When we bought it we were quite lucky that it seemed the mortgage company we went through happened to be one of the few who will lend on a freehold flat, but there were still some issues with it.

Now I'm thinking of selling, I don't want buyers to pull out/sales to fall through because of the dreaded 'freehold flat' issue with mortgage companies.

I therefore want to legally separate out the freehold for the flat, and create a leasehold. We could then sell them separately (I might offer the freehold to the other flat eg) or together, but hopefully bypass the 'computer says no'.

I just wonder if anyone has done this and what advice you might have?

eddddy

You just need to find a solicitor who will create (write) a lease for you.

Technically, you are not separating the freehold - you are leaving the freehold as it is. You are just leasing out part of the freehold building.

Your mortgage lender won't let the lease begin whilst you have a mortgage. So the new lease will probably have to start on completion of the sale (when you pay off the mortgage).

D20

I'm in the fortunate position that I don't have a mortgage, so presumably I could do it whenever?

Thanks for that important point about the freehold! I want to be clear what I'm asking for when I go to someone.

eddddy

D20 wrote: »

I'm in the fortunate position that I don't have a mortgage, so presumably I could do it whenever?

Yes - although the freeholder can't grant a lease to themself.

So, for example, if you solely own the freehold, you can't lease it to just you.

But if, for example, you jointly own the freehold, you could lease it to just yourself.

SeasideSally

When we bought our flat, it was freehold. Our bank wouldn't lend on a freehold flat, so a lease was drawn up. In our case, the vendor wouldn't pay for it, so we had to (or lose the flat). As eddddy said, you can't grant a lease to yourself. So the lease was drawn up and granted to us on completion. It was a very straight forward process, and our solicitor used the leases of the other flats in the building to draw ours up.

D20

Thank you, this is so useful and has helped me straighten it out in my head a bit!

da_rule

You don't have a freehold flat.

You have a freehold property which is subject to a lease (the lease therefore excludes you from part of the property subject to the lease in exchange for the ground rent they are paying etc).

You can get a lease drawn up, however this could create problems:

1) You cannot grant a lease to yourself (there must be at least 2 distinct parties to a deed);
2) What if the buyer only then wants to buy the lease and not the freehold? You will be left with all of the responsibilities and liabilities of the freehold.

Richard_Webster

Yours isn't a pure freehold flat where each flat in a building has its own separate freehold title.

You own a freehold subject to a lease of the other flat.

The Council of Mortgage Lenders Handbook for England & Wales (CML Handbook) paragraph 5.8.1 is as follows:

Unless 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.

You can see the attitude of various lenders to this situation at: https://www.cml.org.uk/lenders-handbook/englandandwales/question-list/2056/

So you sell it as it is but make sure that the estate agents tell every interested person that 5.8.1 applies and they should check with their lender because it is not a freehold flat as such. I know this could be difficult - best thing is to avoid explaining about the title until you have a potential buyer and then make sure they don't get the wrong impression and run off to the lender/mortgage broker saying that they are buying a freehold flat - which they in their innocence might think is a good thing! Their solicitor needs to write to the lender saying that is a case where 5.8.1 applies so that the clerks in the lender's head office then look this up and see that they actually accept it.

Alternatively, you grant a new lease similar to the other flat lease to your buyer. You don't need to have an already existing lease - builders when selling new build flats or those who split houses into flats to sell them simply grant a new lease - why shouldn't you?

Problem with this last scenario is that you end up retaining the freehold. You could set up a company and transfer the freehold to the company and then transfer shares/membership in the company to the buyer and also to the lessee of the other flat - then the two flat owners can sort out future management of the building between them.

Simpler and cheaper in the short term is to transfer the freehold jointly to your buyer and the other lessee. Trouble is that whenever you want to sell your leasehold flat you would also want to transfer the freehold title to be held jointly by the other lessee and the new buyer. Such a transfer needs to be signed by the other lessee and he may refuse to do so, be difficult to get hold of, or have had his leasehold flat repossessed and can't be found.

if the freehold stays with the same company and one shareholder won't co-operate the other shareholder can still transfer his shareholding/membership to his buyer without consulting the other lessee.