House divided into two flats - leasehold confusion

greatcrested

You need to put out of your mind that "share of costs is between two sets of people and not three or more.  ".

To misquote artful, "I'll donate £15 to the charity of your choie if the freeholder shares these costs." The freeholder may be (probably is) responsible for organising maintenance, not paying for it.

If the freehold is jointly owned by the 2 leaseholders, that changes nothing legally - it just means that you (as one leaseholder) and your neighbour wear 2 hats: as freeholder you arrange repairs etc and then charge yourselves (as leaseholders) for the costs. Of course, since you own the reehold you have greater control over what to do, when to do it, and how much to spend.

princeofpounds

JeffMason said:

Follow up question: Most of these issues will still be the case with a share of freehold, right? The only difference is that I don't need to worry about renewing a lease and share of costs is between two sets of people and not three or more. 

Yes, share of freehold is legally no different to leasehold, except that the same person (you) occupies two roles. One is as a leasehold owner. The other is the owner of a share in the freehold (which is subtly but importantly different to just owning the freehold).

The main difference with share of freehold is that you have more control over how the freehold runs things (not absolute control - you are just a shareholder and may be a Director of a freehold company, unless you happen to own the freehold outright).

And in theory, having the leaseholders own the freehold helps because the incentives are aligned - leaseholders will take more care about the quality and price of work that is done. Most of the time, this is true. However, this is not a universal truth - sometimes leaseholders can be incompetent, and sometimes they can be cranks (this is a particular risk in a 2-flat property where one bad apple can't be easily outvoted).

You do still need to worry about renewing leases, but because you are negotiating with yourselves as a group, it should be easier. Many (perhaps even most) times share-of-freeholders will allow leases to be extended for a peppercorn, but that's not necessarily the case.

Let's say you and I own a freehold and two leases. My lease has 190 years left to run, yours has 90 and you want to extend. I might choose to hold you to making a payment inline with the statutory valuation, because that money can be paid as a dividend to the shareholders. You get half back as a result, but I get a windfall. In 100 years time, you will get your turn . Just a theoretical exercise, but it makes the point again that you can't always rely on informal arrangements with fellow leaseholders.

I don't understand your point about two or three sets of people. In probably 98% of situations, leaseholders bear all the costs, freeholders do all the organising and administration. Sometimes the freeholders just happen to be the same leaseholders acting as a group.

JeffMason

greatcrested said:

You need to put out of your mind that "share of costs is between two sets of people and not three or more.  ".

To misquote artful, "I'll donate £15 to the charity of your choie if the freeholder shares these costs." The freeholder may be (probably is) responsible for organising maintenance, not paying for it.

If the freehold is jointly owned by the 2 leaseholders, that changes nothing legally - it just means that you (as one leaseholder) and your neighbour wear 2 hats: as freeholder you arrange repairs etc and then charge yourselves (as leaseholders) for the costs. Of course, since you own the reehold you have greater control over what to do, when to do it, and how much to spend.

That's good to keep in mind, thank you. 
Sharing the freehold does also mean I don't have to worry about large costs of extending the lease (should it get to the that point - I've steered clear of properties with leases in the 80's) though, right?

When I was talking about sharing the costs between two sets of people and not three or more, I meant avoiding larger properties with more leaseholders. I've also found that the giant houses that have been split into 4 or more flats (or some older purpose built blocks) tend to have much larger service charges. I saw one a few weeks ago with charges of almost £3000 per year!

The big concerns seem to be - What has been replaced or repaired recently and what needs doing soon? And then just how much of a nightmare the other leaseholders might be - which I have no way of knowing, plus they could sell and move on anyway...

One place I'm looking at is leasehold, the same ad-hoc charges thing, but the other flat is rented out - so the leaseholders don't even live there, which sounds like an even more complicated situation and might be worth avoiding. 

I'd love to avoid flats altogether, but it's almost impossible with my budget in London.

JeffMason

So this also means that what the EA said to me is wrong. They said "obviously the freeholder is jointly responsible too so costs are shared between the leaseholders and freeholder." but the freeholder doesn't share the costs at all.

JeffMason

princeofpounds said:

JeffMason said:

Follow up question: Most of these issues will still be the case with a share of freehold, right? The only difference is that I don't need to worry about renewing a lease and share of costs is between two sets of people and not three or more. 

Yes, share of freehold is legally no different to leasehold, except that the same person (you) occupies two roles. One is as a leasehold owner. The other is the owner of a share in the freehold (which is subtly but importantly different to just owning the freehold).

The main difference with share of freehold is that you have more control over how the freehold runs things (not absolute control - you are just a shareholder and may be a Director of a freehold company, unless you happen to own the freehold outright).

And in theory, having the leaseholders own the freehold helps because the incentives are aligned - leaseholders will take more care about the quality and price of work that is done. Most of the time, this is true. However, this is not a universal truth - sometimes leaseholders can be incompetent, and sometimes they can be cranks (this is a particular risk in a 2-flat property where one bad apple can't be easily outvoted).

You do still need to worry about renewing leases, but because you are negotiating with yourselves as a group, it should be easier. Many (perhaps even most) times share-of-freeholders will allow leases to be extended for a peppercorn, but that's not necessarily the case.

Let's say you and I own a freehold and two leases. My lease has 190 years left to run, yours has 90 and you want to extend. I might choose to hold you to making a payment inline with the statutory valuation, because that money can be paid as a dividend to the shareholders. You get half back as a result, but I get a windfall. In 100 years time, you will get your turn . Just a theoretical exercise, but it makes the point again that you can't always rely on informal arrangements with fellow leaseholders.

I don't understand your point about two or three sets of people. In probably 98% of situations, leaseholders bear all the costs, freeholders do all the organising and administration. Sometimes the freeholders just happen to be the same leaseholders acting as a group.

Thanks for this. Really helpful.
In most of the share of freehold's I've seen, the lease has been 900+ years so I'd never need to extend. But some of the leasehold's have had 91 years left so I might want to extend at some point. It was just removing the worry about that I guess.

The two / three sets of people thing I explained above. I've seen a two properties recently, one in a larger house split into flats and another in an art deco block where the service charges were double the charges I've seen in the mostly two flats in one house places I've looked at.

I take your point about the two flats and one bad apple... I'm trying to make sense of the best way to go with flats, but it seems that whatever way I go, there are issues...  

princeofpounds

JeffMason said:

So this also means that what the EA said to me is wrong. They said "obviously the freeholder is jointly responsible too so costs are shared between the leaseholders and freeholder." but the freeholder doesn't share the costs at all.

Yes the EA is almost certainly talking rubbish (especially with the 'obviously' part)...

JeffMason said:

Sharing the freehold does also mean I don't have to worry about large costs of extending the lease (should it get to the that point - I've steered clear of properties with leases in the 80's) though, right?

No, it does not mean that, if you read my previous post (you may have missed it before replying). It could mean that, but it doesn't have to. Buying a property with a lease in the 80s is still totally fine (specifically >82 years as you can use the statutory process to force a lease extension after two years of ownership), but you should incorporate the fact that you may have to pay for a lease extension much sooner into your price.

JeffMason said:

When I was talking about sharing the costs between two sets of people and not three or more, I meant avoiding larger properties with more leaseholders. I've also found that the giant houses that have been split into 4 or more flats (or some older purpose built blocks) tend to have much larger service charges. I saw one a few weeks ago with charges of almost £3000 per year!

My experience has been that leasehold arrangements tend to work best in small groups, but not necessarily two people.

If you have a large block, let's say 15-20 flats+, you tend to have more absentee leaseholders and communication is far more difficult, putting barriers in organising voting majorities. That means it is often harder to discipline the freeholder with the threat of right-to-manage or collective enfranchisement (where leaseholders force the purchase of the freehold).

Or if you are share-of-freeholders already, it tends to inch the situation closer to acting like there is a third party freeholder, as everything has to be done on a more corporate and arms'-length basis. Typically it gets to that point when scale means you want to be appointing a managing agent to handle things day-to-day.

If you have 2 leaseholders only, then it can work fantastically well. But on occasion you get someone who is a crank, very lazy, or very poor. In those situations, the remaining leaseholder can find it hard to impose good co-operative solutions (whether as share-of-freeholders or when the freeholder is a third party) as you can't get a sensible voting majority.

Personally I think the sweet spot is 3-12. 

JeffMason said:

One place I'm looking at is leasehold, the same ad-hoc charges thing, but the other flat is rented out - so the leaseholders don't even live there, which sounds like an even more complicated situation and might be worth avoiding. 

Absentee leaseholders (a landlord who owns and rents out the flat) can be a problem, but not necessarily. If they are communicative, it's unlikely to be an issue at all. 

JeffMason

princeofpounds said:

JeffMason said:

So this also means that what the EA said to me is wrong. They said "obviously the freeholder is jointly responsible too so costs are shared between the leaseholders and freeholder." but the freeholder doesn't share the costs at all.

Yes the EA is almost certainly talking rubbish (especially with the 'obviously' part)...

JeffMason said:

Sharing the freehold does also mean I don't have to worry about large costs of extending the lease (should it get to the that point - I've steered clear of properties with leases in the 80's) though, right?

No, it does not mean that, if you read my previous post (you may have missed it before replying). It could mean that, but it doesn't have to. Buying a property with a lease in the 80s is still totally fine (specifically >82 years as you can use the statutory process to force a lease extension after two years of ownership), but you should incorporate the fact that you may have to pay for a lease extension much sooner into your price.

JeffMason said:

When I was talking about sharing the costs between two sets of people and not three or more, I meant avoiding larger properties with more leaseholders. I've also found that the giant houses that have been split into 4 or more flats (or some older purpose built blocks) tend to have much larger service charges. I saw one a few weeks ago with charges of almost £3000 per year!

My experience has been that leasehold arrangements tend to work best in small groups, but not necessarily two people.

If you have a large block, let's say 15-20 flats+, you tend to have more absentee leaseholders and communication is far more difficult, putting barriers in organising voting majorities. That means it is often harder to discipline the freeholder with the threat of right-to-manage or collective enfranchisement (where leaseholders force the purchase of the freehold).

Or if you are share-of-freeholders already, it tends to inch the situation closer to acting like there is a third party freeholder, as everything has to be done on a more corporate and arms'-length basis. Typically it gets to that point when scale means you want to be appointing a managing agent to handle things day-to-day.

If you have 2 leaseholders only, then it can work fantastically well. But on occasion you get someone who is a crank, very lazy, or very poor. In those situations, the remaining leaseholder can find it hard to impose good co-operative solutions (whether as share-of-freeholders or when the freeholder is a third party) as you can't get a sensible voting majority.

Personally I think the sweet spot is 3-12. 

JeffMason said:

One place I'm looking at is leasehold, the same ad-hoc charges thing, but the other flat is rented out - so the leaseholders don't even live there, which sounds like an even more complicated situation and might be worth avoiding. 

Absentee leaseholders (a landlord who owns and rents out the flat) can be a problem, but not necessarily. If they are communicative, it's unlikely to be an issue at all. 

All incredibly helpful - thank you! I have always thought that low lease length = avoid, but that might be just becuase that I'd heard it might cause issues with getting a mortgage and/or cost a fortune to extend. And it was just my assumption that the least amount of people sharing a lease, the better - but of course you're right, two could be problematic.

There are so many what if's, making it is a very scary process for such a large amount of money...

JeffMason

I've emailed the estate agent asking for some more details. I expect them to be rolling their eyes about... now.

martindow

JeffMason said:

I've emailed the estate agent asking for some more details. I expect them to be rolling their eyes about... now.

Bear in mind the agent can't be relied upon for accuracy.  They can only pass on what the vendor tells them (which may contain various degrees of truth) and are likely to gloss over anything problematic.  EAs work for the vendor and want to make sales ...

Tiglet2

If you want specific details about the leasehold/freehold arrangement, don't ask the estate agent.  They are sales people and don't look at or access the legal documentation.  If you find a property you really like, then spend a little money on obtaining the leasehold and freehold titles for that property, together with the lease and read it!  If you don't understand it, then you could ask a conveyancing solicitor to review the documents and explain it to you in layman's terms, but you will have to pay for their expertise in doing that, especially if you decide not to go ahead.  Fees might typically be around £300 plus VAT, but might be worth it rather than going ahead and arranging a mortgage/surveys/searches etc before discovering any onerous terms.