Flat purchase with underlease structure - Very concerned

DDD_99

Hi,

First time buyer here, in the process of buying a leasehold flat in London. It has become apparent that this flat has an underlease, with a headlease held between the freeholder and a management company.

Freeholder – Headlease – Underlease (Me)

Admittedly, I was not aware this structure was a thing. It did not come up in my prior research into leaseholds. The extra layer in the structure is making me very anxious about this whole purchase.

After looking into it further, it seems this set up is not unusual and is not immediately a red flag. Can anyone offer any thoughts on this? If I were to pull out, would it be likely future potential flats would also have this structure? It seems odd that I had never heard of this structure previously if it’s really not that uncommon.

I do have two main concerns. The first being a lease extension. The flat I’m buying has a 99 year lease, so I will have to think about extending it in my ownership. I understand marriage value is set to be abolished but that is not in effect yet, so I do not want to consider it as a sure thing.

My research tells me you cannot do a voluntary extension of an underlease beyond the headlease. So assuming the headlease has a similar amount of time remaining, I would need the headlease to also extent if I were to. Does anyone know if costs would be incurred by underlease holders if the headlease were to be extended, or if the head lessee fronts the full cost?

If the head lessee does not want to extend, I can go down the formal route and extend beyond the headlease. This means, in the event the headlease ends, my lease will be directly with the freeholder. Is my understanding of this correct?

The second concern I have is with headlease forfeiture. If for whatever reason the head lessee breaches their lease and has to forfeit it, all under lessees will lose their underlease automatically. Underlessee’s can go to the courts for rescue but I assume that will be expensive and time consuming.

It seems bonkers to me that I can lose my underlease from the actions of the head lessee. I understand all leases have forfeiture clauses but if my lease was directly with the freeholder, I would atleast be in control of that. This extra layer is just an added risk.

I’m hoping there are people here who are more knowledgeable with underleases and can confirm if my concerns are valid or if I’m overthinking. My solicitor has not even specifically highlighted to me that I am buying an underlease. I only noticed as I saw they raised a query asking for the headlease (After receiving the underlease) from the seller's solicitor which led me to do some research into what it is.

Thanks

gm0

You need to read it yourself. And get parts explained by your legal help. This structure can exist as a historic aspect of how the bootstrap and dispersal of demised areas and additional appointments to roles were done. At construction/conversion of an estate launch. Moving whole title. Carving up title etc. I think we had one on the early 1990s property we had but it was of no consequence. Or there is something site specific that needed a "home" and that form was used by the developers legal help.

Extension did not apply to us new long lease - 999 so I think you are focused on the right stuff. How do I do X with 99

So it can be "harmless". Yes it exists. Yes it's a documentation complication that cannot now be undone.
But also can be of little real world interest or consequence

But ALSO can with some clauses or drafting - be more painful/problematic. You do hear anecdote of examples. But then you hear of direct leasehold horrors with specific direct leases too.

There is no generic way to tell you which situation this is. Potential impact one extension is the right initial focus

If the head lease doesn't add to the number of different actors or contain anything specific and troubling - you may gain reassurance after reviewing this with your conveyancer - assuming they are knowledgeable in the space. And the extension question is satisfactory. If there's a bit more legal work a few £k. Price it in.

I had one conveyancer who was doing their first ever leasehold transfer on a flat. Which made them keen and focused on detail in review but they didn't know much. (less than me). Your question would have floored them completely. You need the right advice - on the specific lease and the extension regimen

Can't say more really

MyRealNameToo

https://forums.moneysavingexpert.com/discussion/6679093/flat-purchase-with-underlease-structure-very-concerned

Really these are things to be speaking to your solicitor about, your concerns are at least partially true but there are mitigations and there has to be an element of realism on how often these things really happen.

On Forfeiture, 146(4) LPA 1925, provides a route for the underlessee to effectively get a new lease directly with the freeholder but the court can make this on a conditional basis, like paying any debts the head tenant had to the freeholder on ground rent etc.

On renewing its slightly better, the notice for a statutory renewal needs to go to the competent landlord, if the headlease doesnt have enough duration for the 90 year extension then the freeholder is the competent landlord. The premium is then apportioned between the two landlords, you continue to be the subtenant of the head tenant until their lease expires at which point your become the tenant of the freeholder or if they extend then you continue as their sub tenant. The downside is the costs are likely to be higher with two landlords to deal with.

These are fairly common setups, historically landed gentry or the church not wanting to to sell their land so giving leases to a development company who then subleases the properties they build out. These days its more commonly housing associations or council buying parts of a development for social housing as the head tenant and then letting them out but Right To buy or Share Ownership moves some to being (part) owners and hence the three layers. Plus to a lesser degree, multi-use buildings, with a direct lease for the commercial parts, a headlease for all the residential parts who then sub-leases. From the freeholders perspective they are just dealing with a handful of commercial lease holders

user1977

Why are you assuming the head lease is for a similar term to the under lease? It’s much more likely to be significantly longer.

MyRealNameToo

https://forums.moneysavingexpert.com/discussion/comment/82095513#Comment_82095513

Traditionally they were for 3 days longer but your right they dont have to be. Mayfair pretty much came about with Grosvenor giving a chap a 99 year lease in 1720 on the whole area and he gave different builders leases of 80 years mainly who then subleased again the buildings they built or reassigned the sublease to the buyer

DDD_99

https://forums.moneysavingexpert.com/discussion/comment/82095513#Comment_82095513

So in the underlease document it says:

By a lease (hereinafter called the "Headlease") dated the 2nd day of August 2001 made between the developer of the one part and the lessor of the other part the property was demised unto the Lessor for the term of one hundred and twenty-five (125) years from the 25th day of December 2000.

Weirdly, the underlease doesn't mention any specific term for the under lessee but its been advertised as 99 years, so very similar to the above headlease term. I wait for clarification from my solicitor.

DDD_99

https://forums.moneysavingexpert.com/discussion/comment/82095447#Comment_82095447

Cheers, this is great info. I have raised my concerns with my solicitor. I imagine they are waiting for a copy of the headlease (underlease received only) to write a full report which is why they have not addressed the underlease structure yet.

In your view, would I be safe to say that an underlease structure is not inherently bad providing there are no onerous clauses in either lease? I'm just thinking about future resale issues.

DDD_99

Another question regarding a requirement I have just read in the underlease, which is as follows:

"The Lessee is a holder of a share in the lessor"

Can anyone advise what getting a share in the Lessor actually results in? Ie. Getting input on the running of the building.

Looking at Lessor on the gov website, I can see the residents are there as directors but they all show as resigned, including the seller of the flat I'm buying. No idea what that could mean. The only active members are the management company appointed by the Lessor and three other individuals all with the same correspondence address, which is not the address of the flat.

MyRealNameToo

https://forums.moneysavingexpert.com/discussion/comment/82095748#Comment_82095748

There are always risks with property, its in part why we buy insurance. Clearly its causing you some doubts and so it may cause others doubts too but some will happily just continue with it too.

https://forums.moneysavingexpert.com/discussion/comment/82095832#Comment_82095832

You're more interested in who the shareholders of the company are than the directors, from what you say. What powers a shareholder will have will be dictated by the articles of association for the company. At its most basic they should have the authority to appoint and fire directors but in some companies it can be much wider than that.

If all shares are held by the existing sub-tenants and there are no sub-tenants without a shareholding then whos going to try and enforce the term? If the directors/managing agents suggested they were then they would find themselves out of a job quickly

silvercar

My son had a similar structure on the flat he was buying. There also turned out to be a problem in that a parking space the sellers had bought hadn’t been registered on the flat lease and this needed the consent of the under lease and head lease to sort. Added to which the under lease had been sold after the parking space had been bought. So we imagined that the under lease expected to own the parking space on purchase but it had already been sold.

We expected a nightmare process to sort this, compounded by a mortgage offer due to expire in short time.

The only headache was getting hold of the under lease people, who were in Guernsey. Once we located them, they sorted the paperwork within hours. Supposedly the structure is set up in this way for tax purposes, hence the Guernsey address for a flat in London. The people work efficiently and certainly seemed more responsive than solicitors here.