Leasehold flat purchase- merge freehold reversion?

[Dave Waring]

Hi All
I am looking at purchasing a flat which is part of a converted terraced house. Currently the freeholds(2) are individually owned. In order to get a mortgage easier I would be looking ate merging the downsatirs freehold with the upstairs and providing 999year lease.
I am looking at approaching the other owner and putting forward this suggestion.
Can anyone provide a list of pro's and con's so I can present these to the owners of the freeholds and hopefully get them to agree to merge the 2 freeholds.

Thanks in advance
Dave

[Worldlife]

We have just created a joint freehold and two separate leasehold flats from two freehold flats.

Freehold flats are really only attractive to cash purchasers who reckon they are a better buy than leasehold.

The problem is that on the open market many lenders will not advance against freehold flats because of the vagueness of maintenance obligations for individual owners.

If you are buying then maybe the best way to expedite the change is to say you would like this done and are willing to contribute towards the legal fees of doing so.

The owners of the non selling flat may not want to put money up front for the changes. You and the vendor jointly may be able to make an attractive offer towards the legal costs to make it worthwhile for things to go ahead.

If you purchase and then try to get the changes you may find you are thwarted if the other owner is unhappy with the idea of change.

[Dave Waring]

Thanks for the info.
We have decided to offer to cover the legal expenses and present a letter outlining the advantages. ie. increased property worth and shared costs on what would be deemed common areas and extenals.
hopefully this will be enough to satisfy the owner of the non selling property thus making it a better property for all parties.

[Worldlife]

Good decision Dave... hope all goes well.

Guess you have an estimate from your solicitors as to the likely cost of the work.

If I recall correctly our bills were about £450 each and the solicitor of the other flat quoted the cheapest price!

[Dave Waring]

Thanks for the good wishes.
We have been quoted more like £600 but will cross that hurdle when they agree.

Thanks once again.

[Poppy]

Sorry, I don’t see what actual advantage this will provide. I am asking Dave Waring to share with the members the actual day to day advantages of this idea for him and the other freeholder (not any perceived/subjective increase in value).

As things currently stand, you will both be freeholders anyway. Will the property be managed in a different way? This after all is what owning the freehold boils down to - management.

Are you simply lining the solicitors’ pockets?

[Worldlife]

@Poppy

Some of the answer to your question is in post 2 of this thread. There is no sudden rise in value by effecting these changes. What you are doing is extending the available market for resale beyond cash purchasers and ensuring a mortgage can easily be obtained from all financial sources.

To elaborate the conversion of the deeds offers opportunity to clarify repair and maintenance obligations that are often vague and not enforceable.

It is an opportunity to review the projected maintenance costs and how such money will be collected (regular service charge?) and how the peppercorn rents, if any, are to be paid and how.

The fact that many Building Societies refuse loans against freehold flats is proof enough that problems arise in maintenance etc that are resolved by conversion of the flats to leasehold.

[Poppy]

Thanks Worldlife. I just want to be sure that Dave Waring has given us the all the relevant facts, so that I can get my head around his query.

So Dave Waring, for the record (and for my complete understanding), do the flats have leases at all?

[Dave Waring]

Hi Poppy et al

The reason I was making the enquiry firstly is down to the fact that I am looking at taking a mrtgage out in order to purchase the property. There is a very limited number of mortgage providers who will provide a mortgage on freehold flats.
In order to make it easier to aquire the property and longer term to sell again I would like to merge the 2 freeholds on the 2 properties and issue 999 year leases.

the current state is separate freeholds and some kind of rolling lease on a yearly basis (strange!??!) for each property.

At the moment the owner of the 2nd flat thinks it is just a hassel to go through this process so I was trying to persuade them into doing the merge for the benefit of both myself and the 2nd freeholder.

currently there is no need for renovations/repairs on either properties but I can see the benifits in providing for the future, for both freeholders even more so for the 2nd freeholder as they currently have the freehold on the roof which I feel will be the biggest area for expenses.

I was just looking to you guys for a bit of advice as I am new to all this.

Thanks
Dave

[Poppy]

Hello Dave Waring. Sorry for coming across as fick, but I felt it was necessary to clarify that both properties are freehold flats because I didn’t understand that to be the case in your first post.

To add some weight to your point of view, has your solicitor found any aspect of the maintenance to be lacking? For example, no provision to maintain the front boundary? I know it’s difficult to find something defective in legal documents, but that’s the angle I would try approaching the other flat owner from.

I can kind of see why the other flat owner isn’t bothered. At present, the only problem to their mind is that you are having trouble getting a mortgage. You should definitely also pay for their legal and professional advice (preferable to set a maximum from the outset).

At end of the day, you do realise that the other flat owner cannot be forced?

[Worldlife]

Poppy .. this is beating around the bush.

I definitely would not buy a freehold flat for investment purposes unless it was available at less than the market price for a comparible long leasehold property that does not have service charges imposed making profit for the freeholder. (i.e the case of a third party freeholder as distinct from a common freehold)

Think how much a thwarted sale costs the vendor or how much it is reducing the vendor's market opportunities by restricting sales to cash purchasers or those who can find the less well known sources of finance who may charge higher interest rates for a mortgage on a freehold flat.

It is agreed the other owner of the freehold flat needs to be made aware of the problems associated with freehold flats and Dave's generous offer to pay the costs of sorting the problem out.

Maybe Dave should make a conditional offer that enables him to withdraw from the purchase if the freeholds are not changed.

[Worldlife]

Thanks Worldlife. I just want to be sure that Dave Waring has given us the all the relevant facts, so that I can get my head around his query.

So Dave Waring, for the record (and for my complete understanding), do the flats have leases at all?

Poppy a FREEHOLD flat is a FREEHOLD flat.

The conditions of occupation of a freehold flat are usually defined by covenants imposed by the original landowner or an owner who converted a freehold property into freehold flats. These covenants are frequently archaic and non-enforceable.

[SteveP]

To add some weight to your point of view, has your solicitor found any aspect of the maintenance to be lacking? For example, no provision to maintain the front boundary? I know it’s difficult to find something defective in legal documents, but that’s the angle I would try approaching the other flat owner from.

Poppy, what he is saying isn't his point of view but rather a fact. Even if, taking the example you provide, the deeds stated that (for example) the gorund floor flat owner had to maintain the wall, or drains, or whatever, the covenant is unenforcable. That is THE problem with flying freeholds and why it is better to have a freeholder who has contractual obligations to the leaseholders and who in turn can recover the cost of works.

Dave is being very sensible.

[Harry]

Sorry that I've only just come across this.

I own two freehold flats in different properties, and as others have said, you have to go into this with your eyes open.

One is in a block of nine in a converted Victorian house. With a freehold flat, you actually own everything down to half the depth of the joists above and below you, and the entire "slice" through the building.

Don't ask about common areas - it's one of those things where it's best not to complicate things further.

The problem is that you are reliant on the flat owner below you maintaining his/her property, and the person above you is reliant on you.

Of course, this should all be taken care of by a deed of covenant between the owners, who agree to share the costs of maintaining the fabric of the building, painting the exterior, etc.

And first time round, that's fine. Then one of the owners sells, and must ensure that the new owner signs a new covenant, and so the fun begins. After so many years, you will find that virtually no one has exactly the same set of covenants, and that it's impossible to prove that every new owner kept the chain unbroken. If there is a gap (I'm told) the positive aspects of the covenants (ie you SHALL pay your share, etc) are invalid.

That's why building societies/banks are unhelpful.

The Royal Bank Of Scotland, by the way, will lend on buy-to-let freehold flats. I bought my second one (one flat of two in a converted house) through them.

[jeffrey]

The best and simplest rule for any purchaser is:
EXCEPT in commonhold schemes, NEVER buy a freehold flat.

[john1956]

i would be really interested how this pans out. I am in the same position. The occupier of the flat downstairs is not interested at the moment so we are stuck trying to get a mortgage. does anyone know of any banks or building societies that will help

[john1956]

I have the same problem as Dave. I am struggling to find a mortgage for the flat i am looking to buy because it is a converted house and both flats are freehold. Has anyone got any suggestions

[jeffrey]

I have the same problem as Dave. I am struggling to find a mortgage for the flat i am looking to buy because it is a converted house and both flats are freehold. Has anyone got any suggestions

THere are only two satisfactory solutions:

1. Simultaneously:
a. A transfers his flat's freehold to joint names of A and B;
b. B transfers his flat's freehold to joint names of A and B;
c. A and B grant lease to A for his flat; and
d. A and B grant lease to B for his flat.

2.
A and B create commonhold.

[Richard Webster]

Sorry that I've only just come across this.

Of course, this should all be taken care of by a deed of covenant between the owners, who agree to share the costs of maintaining the fabric of the building, painting the exterior, etc.

And first time round, that's fine. Then one of the owners sells, and must ensure that the new owner signs a new covenant, and so the fun begins. After so many years, you will find that virtually no one has exactly the same set of covenants, and that it's impossible to prove that every new owner kept the chain unbroken. If there is a gap (I'm told) the positive aspects of the covenants (ie you SHALL pay your share, etc) are invalid.

That's why building societies/banks are unhelpful.

The Royal Bank Of Scotland, by the way, will lend on buy-to-let freehold flats. I bought my second one (one flat of two in a converted house) through them.

I think you will find that there still has to be a scheme of mutually enforceable covenants for RBS to lend and as Harry says further on down the track you usually find the scheme breaks down. For all practical purposes unless they are in Scarborough (where the Scarborough BS and one or two others will lend) genuinely freehold flats are unmortgageable.

If all the flats in the building have separate freeholds then there will be significant discount on what they would otherwise be worth so uniting the freeholds in joint ownership and then granting lease should bring an increase in value. If you are not getting such a discount then you should not buy the property at all. It will be hard enough to sell anyway so you should get some benefit for the hassle! If the seller wants the full value then he must organise the putting right of the title first. If the other flat owner isn't interested then that is tough on the seller who will have take a hit on the price! After all he was silly enough to buy it in the first place!

I have clients at the moment who are buying such a property cheaper than it would be if there was a freehold of the whole building and long leases of each flat and are prepared to to take the risk that the freehold merger/lease grant scheme will not happen. If it does, they expect a significant increase in value.

People should not confuse the situation here, which I understand to be genuinely separate freehold flats, with one where one flat owner actually owns the freehold of a converted house split into up to 4 flats and the other flats have long leases. That situation is acceptable to most major lenders - see CML Lenders handbook para 5.5.3.

Also acceptable in general is the "Tyneside" flat scheme used by Laings for maisonettes where there are 2 flats where each has a lease and the same person owns the freehold of the other flat. Also of course, "shared freehold" generally means that either individually or through a company the freehold is owned directly or indirectly by the flat owners collectively but they still have separate leases.

As a conveyancing solicitor I believe the information given in the post to be useful but I accept no liability except to fee-paying clients.

[Richard Webster]

As a PS to last post - putting right the title is as outlined by Jeffrey in his most recent post.

As a conveyancing solicitor I believe the information given in the post to be useful but I accept no liability except to fee-paying clients