Freehold flat to leasehold flat headache

tinydancer123

Hi everyone,

I had an offer accepted on a top floor flat which shares the building (built late 1800s) with two other flats.  Each flat has its own freehold (unusual, I know) and each owner wants to convert the freeholds to leaseholds.  Neither of the other two flats is mortgaged.

The current situation is that building work/repairs and building insurance is split equally between each flat.  I haven’t been able to get a lender to approve a mortgage and so would need to be a cash buyer which isn’t ideal but is possible.
 
Please go easy on me as I’m completely new to this, how difficult is it to convert a freehold flat to a leasehold?  What would be a rough idea of the cost?  I have no idea if this is something that’s relatively simple to do or if I should be running for the hills.  Also, would the other flat owners be able to dictate whether or not I can rent my flat out if we developed a shared freehold arrangement?  
I don’t want to lose the property but need to be sensible if it’s potentially a headache.  

Thank you,
TD 

DullGreyGuy

What you can and cannot do with the flat as the leaseholder would depend on the terms of the lease... depending on how the three of you agree to make decisions (unanimous, majority etc) then they may agree not to have a clause about renting or may disagree. 

AlexMac

My experiences of owning my three past leasehold flats in converted “Shared freehold” blocks have been entirely satisfactory. I’ve never owned a “freehold” flat, so don’t know the relative benefits, but I assume the other two leaseholders have reasoned that this is a preferred form of tenure.  I far prefer this to absentee freeholders who are in it for the money. 

Dunno about costs but I’d guess at a share of several hundred quid each flat to draw up a lease, etc. 

so if you like the flat, don’t be put off but take advice from a well-reviewed solicitor ( I assume you’ve not gone for a cheap or online conveyancing factory). Coincidentally my three were historic 19th century blocks; on Grade II listed, which was no problem. 

If you go ahead, a crucial issue is the relationship between freeholders. I assume that as part of the change, you three flat owners will become members or Directors of a  new (non profit), formally constituted Freehold Management company, with “Limited liability” ( a Ltd Company) to protect you against personal liability for, say, accidents or injury by contractors or visitors?  As well as being the accountable owners, it helps if you get along. 

This company’s constitution ( its “Mem & Arts; the memorandum and articles of association) and the individual leases will need to be competently drafted. 

Essentials might include
- How the company is managed; joint or sole directors, AGM or meetings etc. 

- Service charges (for insurance of the block, maintenance or energy costs of common areas …) and how these will be apportioned; 

- ideally, very precise detail of what is common expenditure ( one heritage block I owned went into brilliant detail including that the freeholder covered roofs, gutters/downpipes, eternal decor, maintenance of windows etc through a shared levy. It even covered damp - eg specifying that while internal skim plasterwork was down to the leaseholder, structural damp in the tender and brickwork below was a shared problem) 

-Subletting; more usually covered in the lease; typically whether Freeholder permission is required and often specifying that sub-lets have to be a minimum of 6 months to avoid neighbours being disturbed by holiday let’s or AirBnB

- whether pets are allowed, with or without permission 

Oh and don’t let the drafting lawyers slip in any nasty little self-interest clauses. In one flat I owned, the b’stds had specified that they had to be involved in every future sale even if they weren’t either parties’ conveyancer! A £50-100 fee for doing s0d-4ll. 

A final consideration is day to day management. Not necessarily in the lease but it might be worth asking your potential Co/owners what their plans are.  In most of my  past flat, we did it ourselves; insurance, contracting roof work and external decs (likely to be every 6-8 years in an old property) thus saving agent fees.  It’s not rocket science to collect Serrvice Charges, keep basic accounts and file a couple of lines annually online with companies house!  In consequence we had the cheapest Service Charges in the street, and usually, a healthy annual surplus to bung into  a Sinking Fund for future major works. 

So subject to the other two owners not being power crazed idiots. I’d say go for it 

NameUnavailable

You can't have a freehold flat (in England/Wales anyway) so I wonder if there's some misunderstanding or if something else has happened here?

The only thing I can think of is that someone bought the building, converted it into 3 separate flats and never sold any (but how did the person you're buying from buy it?).

Have you checked what details are on the Land Registry website? Ususally there'd be a freehold and then a lease for each flat. As it's a shared freehold maybe your vendor doesn't realise they also have a lease?

All very odd. Sounds like a headache as there will be legalities and costs to deal with and do you know if the others are willing to co-operate and pay the costs?

Jonboy_1984

Adding to the list from @AlexMac it would likely be worth specifying the share of freehold/any directorship has to transfer to the new owner of the lease upon sale. 

I have heard stories of this not being done and then the old freeholder being untraceable or just plain awkward…

eddddy

tinydancer123 said:

I haven’t been able to get a lender to approve a mortgage and so would need to be a cash buyer which isn’t 

ideal but is possible.

As you say, getting a mortgage is very difficult for a freehold flat.

It looks like NatWest group (NatWest, Royal bank of Scotland, First Direct) are the only mainstream lender who will consider Freehold flats - as long as all 3 freeholders have signed repair covenants.

Here's what the various mortgage lenders say about this:  https://lendershandbook.ukfinance.org.uk/lenders-handbook/englandandwales/question-list/1836/

tinydancer123 said:

 
Please go easy on me as I’m completely new to this, how difficult is it to convert a freehold flat to a leasehold?  

You're correct that this would be a good idea, and it would make the flats mortgageable.

As you probably realise, the current set up is...

• Freehold Flat 1 - owned by Mr A
• Freehold Flat 2 - owned by Mr B
• Freehold Flat 3 - owned by Mr C

And you probably want to end up with this situation (which estate agents call "shared freehold")...

• Leasehold Flat 1 - owned by Mr A
• Leasehold Flat 2 - owned by Mr B
• Leasehold Flat 3 - owned by Mr C
• A Freehold Building - jointly owned by Mr A, Mr B and Mr C

I'd guess that the legal fees for doing this might be a few thousand in total.

I'm not sure whether a single solicitor would agree to act for all of you together - or whether they would fear conflicts of interest. And/or some of you might specifically want separate solicitors to look after your own interests.


I guess the biggest challenge might be agreeing all the details of the leases between the 3 of you. For example...

• Are pets allowed (with/without consent)?
• Is subletting allowed (with/without consent)?
• What's the situation with alterations?
• What's the situation with repairs and maintenance of the building?

All 3 of you will need to agree. If one person objects and refuses to sign the documents, you'd be stuck.

chalky_white_2

Freehold flats are not great, as they typically lack necessary rights and mortgages cannot (will not) deal with them. 

You could always looks at commonhold, which Mr Gove appears to be pushing to use more instead of leasehold? However, very few solicitors know how to deal with this, and mortgage companies also will also be limited!

A shared freehold with individual leasehold flats would be the current norm, and can be done by most solicitors and mortgage lenders. 

But you would also want an accountant to check potential tax liabilities of any proposed structure. 

All that being said, if you are trying to buy into this there could be issues in facilitating any purchase with your lender.