Freehold flat?

[Jessie]

I own a flat which is one in a block of two. I own the freehold title and the flat downstairs is let on a long lease. I let my flat out as does the owner of the flat downstairs. I collect the ground rent of £10 per year from that flat owner (in fact I don't, but I am entitled to).

I never got a mortgage on the property but now I would like to get one. I understand that this is not a typical 'freehold flat' and may fall within a exemption in the handbook that all lenders work to. I have tried to make sense of the handbook but with no joy.

Could anyone explain the exemptions to me in understandable terms and also advise me how I find out if this applies to my own flat?

I also wonder the 'right of first refusal' would apply to the flat should I want to sell it (as this I believe is one of the restrictions on the exemptions). How would I know if this applies? Can this right be excluded within the terms of the lease?

Any help would be very much appreciated.

Thanks

[jeffrey]

I own a flat which is one in a block of two. I own the freehold title and the flat downstairs is let on a long lease. I let my flat out as does the owner of the flat downstairs. I collect the ground rent of £10 per year from that flat owner (in fact I don't, but I am entitled to).

I never got a mortgage on the property but now I would like to get one. I understand that this is not a typical 'freehold flat' and may fall within a exemption in the handbook that all lenders work to. I have tried to make sense of the handbook but with no joy.

Could anyone explain the exemptions to me in understandable terms and also advise me how I find out if this applies to my own flat?

I also wonder the 'right of first refusal' would apply to the flat should I want to sell it (as this I believe is one of the restrictions on the exemptions). How would I know if this applies? Can this right be excluded within the terms of the lease?

Any help would be very much appreciated.

Thanks

1. The CML Handbook and conveyancing law generally do not favour freehold flats. There are enormous problems about how covenants can be enforced.

2. To mortgage your flat, you would be best advised to create a lease which would be the interest on which the mortgage would be secured. As you cannot be both lessor and lessee, the lease would need to be granted in separate ownership (eg by you alone in favour of you + someone else). The alternative, less desirable, would be to mortgage your entire freehold estate (inc. freehold reversion on other flat).

3. The same would apply if you wanted to sell only your flat but keep the freehold. You would grant a lease to the purchaser, and no right of pre-emption would apply because the freehold would stay yours.

[Richard Webster]

If you have looked at the CML Handbook then paragraph 5.5.3 is the one you want to look at.

Go to http://www.cml.org.uk/handbook/frontpage.aspx

Then select "England & Wales" where there is drop down box opposite "Select Handbook". (I assume this in England & Wales because, if it isn't, the advice is no use.)

Then select the lender you have in mind from the lower drop down box and hit either "VIEW" or "PRINT" Parts 1 & 2. (Print doesn't actually print - just formats so its printable). Part 1 is the General Handbook - Part 2 (in boxes in the "Print" text that I always look at) is the specific view of the particular lender on the point. You will find that most of the major lenders are quite happy about the scenario. Halifax equivocates a bit, but Abbey, Nationwide & C&G just say "YES". If you quote that at them then they can't really go back on their own officially set out view.

I don't entirely agree with Jeffrey on this, but perhaps it is only a matter of emphasis. He feels the best solution is to create a lease, whilst I feel this is an unnecessary extra expense, unless your choice of lenders is restricted to those that won't agree to the 5.5.3 situation. However what I would say is that there is a lot of prejudice and misunderstanding out there so that when you come to sell you could encounter resistance because of misunderstanding so that could be a reason for creating a lease.

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

[Jessie]

Thanks to both of you for your responses. Either way, it looks like I have options, either just mortgaging as it is, or by granting a lease, even if only to remove the stigma of it being freehold!

I have looked at both part 1 and part 2 but have been left more confused by it. I am looking to get a portfolio mortgage with Paragon who have said yes in part 2, but then it goes on to mention additional requirments set out below - this is what has thrown me.

Presumably the guy downstairs does have the right of first refusal? Does 5.5.4.2 mean I must have a leasehold interest too? I asked a friend who was a conveyancer, and he had no idea of this exception to the freehold 'rule'. I has always thought that the property was CML compliant but am now not sure if it is and if so, on what grounds.

Relevant parts of CML Part 2 (Paragon)
5.5.3- Do you lend in these circumstances?
Yes, unless under 5.5.3.1 the long leasehold of the other flats have the Tenant's Right of First Refusal under Part II of the Landlord and Tenant Act 1987.

5.5.4.1- Do you lend in these circumstances?
Yes, subject to there being in place satisfactory arrangements regarding the transfer of the borrower's share in the freehold interest should we need to exercise our power of sale.

5.5.4.2- Do you lend in these circumstances?
Yes, subject to our charge extending over both the leasehold and freehold interests vested in the borrower.

Does your view still stand Richard knowing I will be using Paragon? I will probably grant a lease prior to selling, but as this will be some years off, I would prefer to do this at that stage if possible to ensure that the lease at that time is fully compliant with CML.

Thanks again for both your contributions

[Richard Webster]

I think that if you were BUYING a flat where you were going to own the freehold of the whole building subject to a long lease or leases of another or other flats then the seller might well have to go through the motions of offering the freehold to the other flat owners at the same price as you were paying - that's the Right of First Refusal.

In this case the price would be higher than normal in such a situation because vacant possesion would be obtained of your flat so it is difficult to see what the other lessees would want to splash out that much. Also as far as I understand the legal position here, although on a sale there is a legal duty (and its a criminal offence not to comply) to serve the notices on qualifying lessees, more than 50% of the lessees have to serve a notice saying they wish to purchase. If there is only one lessee does he qualify on his own to serve a notice desiring to purchase?

I'd be interested to see what Jeffrey and Corinne say about this - can a single lessee of the other flat insist on buying the freehold under a right of first refusal or does he have to co-operate with the other flatowner (who is buying the freehold and presumably therefore won't join in with him?).

However my argument in your case would be that if you are the existing freeholder and you are not presently selling the flat there's no way the right of first refusal can arise so I would say you are OK to remortgage - again what do Jeffrey & Corinne think?

The scheme involving creation of a lease to you and a friend seems to be treated by most solicitors as being acceptable because they can say that the freeholder and the lessee are separate - but are they really? 5.5.3 talks about the freehold being owned by the borrower or another flatowner. We can say legalistically that it isn't the borrower because it is you + friend but I wonder whether a lender who had a problem down the track would interpret it that way. The reality is of course that if you didn't pay the mortgage then with you and friend would disappear and they would be left with a missing landlord of the flat they were trying to sell under their power of sale.


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]

I didn't finish off by commenting on 5.5.4.1 & 2.

5.5.4.1 relates to the siaution where there are separate leases but the freehold is then jointly owned by the lessees. There can be difficulties with this if one of the lessees disappears and Paragon seem to want some arrangements in place to deal with the transfer of the borrower's "share" in the freehold. This isn't your situation so we don't need to go into it.

5.5.4.2 certainly deosn't apply to you but relates to the "Tyneside" flats scheme used by some builders such as Laings for their maisonettes. There the upstairs lessee owns the freehold of the downstairs and vice versa so they can each enforce covenants against the other and there is never any "outside" landlord involved. Quite reasonably they want a mortgage on both titles which in that kind of case isn't a problem.


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

[jeffrey]

I think that if you were BUYING a flat where you were going to own the freehold of the whole building subject to a long lease or leases of another or other flats then the seller might well have to go through the motions of offering the freehold to the other flat owners at the same price as you were paying - that's the Right of First Refusal.

In this case the price would be higher than normal in such a situation because vacant possesion would be obtained of your flat so it is difficult to see what the other lessees would want to splash out that much. Also as far as I understand the legal position here, although on a sale there is a legal duty (and its a criminal offence not to comply) to serve the notices on qualifying lessees, more than 50% of the lessees have to serve a notice saying they wish to purchase. If there is only one lessee does he qualify on his own to serve a notice desiring to purchase?

I'd be interested to see what Jeffrey and Corinne say about this - can a single lessee of the other flat insist on buying the freehold under a right of first refusal or does he have to co-operate with the other flatowner (who is buying the freehold and presumably therefore won't join in with him?).

However my argument in your case would be that if you are the existing freeholder and you are not presently selling the flat there's no way the right of first refusal can arise so I would say you are OK to remortgage - again what do Jeffrey & Corinne think?

The scheme involving creation of a lease to you and a friend seems to be treated by most solicitors as being acceptable because they can say that the freeholder and the lessee are separate - but are they really? 5.5.3 talks about the freehold being owned by the borrower or another flatowner. We can say legalistically that it isn't the borrower because it is you + friend but I wonder whether a lender who had a problem down the track would interpret it that way. The reality is of course that if you didn't pay the mortgage then with you and friend would disappear and they would be left with a missing landlord of the flat they were trying to sell under their power of sale.


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


Re 5.5.3: Mr A is different person from Mr & Mrs A. Different ownership of f/r and leasehold therefore creates no problem, and mortgagee (lender) is adequately secured.
Creating new lease (whether so as to mortgage it or so as to realise flat's capital value on sale) will not trigger any rights for lessees.
I agree with your comment that there's no pre-emption (right of first refusal) under LTA 1987 unless f/r owner wants to transfer. Lessees still have collective enfranchisement rights under LRHUDAct 1993.

[Jessie]

Thanks for your thoughts on this, it has certainly given me something to think about,
Jessie