Can't grant a lease to myself

[Micah]

Hello LandlordZone Forum,

I own the freehold of a building which I have split into a shop and two-bed flat, all on the ground floor. The two-bed flat has a seperate title legally speaking and I want to create a lease on this flat for the purpose of raising finance. There is also a three bedroom flat above, not owned by me, which has about 112 years remaining on its lease.

My solicitor has informed me that I cannot grant a lease to myself (although I can't see why not; where's the conflict). He suggests one way to progress would be to create a limited company (which I have done, limited by shares) and give ownership of the newly created lease to the company (which I haven't done yet).

Before I go ahead I would really be more comfortable if I could see all the pro's and con's - and even if there is another option besides going the company route.

So would anybody like to reply with an authorative guide on the intricacies involved in such an endeavour? There seems to be plenty of information out there regarding leaseholders options & rights, but what about us freeloaders... I mean freeholders.

I also get the feeling (do you agree?) that my solicitor should be giving me the low-down, but he seems to be giving me the work to do - e.g. asking me how much I want to value the new lease at?? - Well I don't know, how much should I value the lease at? How do I value the lease? How much ground rent should I charge? Which taxes will be incurred in the process?

Thanks in anticipation.


p.s. If it helps, the freehold of the property was originally purchased for £43,000. The two-bed flat has been recently valued at around £175,000.

[billmccallum]

I'm not a legal expert, but I'm sure that a lease is the right to the property assigned by the freeholder, as the freeholder you would never need a lease, additionally, the freehold would be worth far more than a lease.

[Richard Webster]

I'm not a mortgage expert, but I think you need to look at who you are getting the finance from.

A lot of mainstream lenders are wary of lending on flats where there are commercial premises in the same building, so you would need to investigate whether you can get a mortgage, presumably a buy to let one (?) on the flat in these circumstances.

Another option is to go to your bank or other commercial lender and ask for a loan on the shop and the flat. People who buy shops as businesses often have a flat with the shop, so it must be quite common for there to be a commercial mortgage on the whole premises in this kind of situation.

Also few mainstream lenders will do owner-occupier or BTL mortgages for companies. I have had had clients who have been advised that it is best to have a BTL property held in a company for tax reasons, only to find that the problems/costs of getting a mortgage loan for the property are for a company are greater than for an individual or individuals.

Your basic problem is that solicitors tend not to know the detailed requirements of the specialist mortgage market and the mortgage brokers don't understand the legal distinctions, so they come up with suggestions like granting a lease.

If you have to grant a lease then, if you are married or have a partner, you can use different combinations of the people involved. X cannot grant a lease to himself but X and Y can grant a lease to X or X can grant a lease to X and Y.

Also there is a lot of hassle in drawing up a lease because it needs to be capable of being sold to someone else if you default on the mortgage. Your solicitor is going to charge you for the time spent in doing this which involves sorting out how the structure of the building is to be maintained and insured and who will pay for this and in what proportions etc. You need to be sure that the extra cost and hassle is actually going to be worth it.

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

[Micah]

Thanks for your reply billmccallum,


I'm not a legal expert, but I'm sure that a lease is the right to the property assigned by the freeholder, as the freeholder you would never need a lease, additionally, the freehold would be worth far more than a lease.

Except that in my case I am trying to raise finance on the flat alone, not the shop or both (commercial mortgages generally have a higher interest rate) and the lenders I have spoken to so far, including one of the main high street banks, require the property to have a lease before lending. It's true that the freehold is valuable, but not worth more when it comes to securing finance.

[Micah]

Thanks for your reply Richard Webster. (Please read Richard's full post if you are going to pick up on the quotes below).


you would need to investigate whether you can get a mortgage, presumably a buy to let one (?) on the flat

Yes indeed it would be a BTL mortgage and I have found a number of lenders apparently willing to lend, I've even had offer letters drawn up but then it comes back that it wouldn't be possible without the flat having a lease. This has been the stance of every lender I've approached including my high street bank.

Currently I run a pottery studio from the shop, and the flat is rented on a 6 month tenancy agreement. Since I might want to sell either the flat or the shop seperately in the future i'm not keen on tieing ( excuse my dyslexia ) them both into a long-term lending arrangement.


I have had had clients who have been advised that it is best to have a BTL property held in a company for tax reasons, only to find that the problems/costs of getting a mortgage loan for the property are for a company are greater than for an individual or individuals.

Right, this is exactly the situation I would want to avoid. Would that be just a BTL property or all mortgages and ( without meaning to put words in your mouth ) do you mean that they are subject to higher rates of interest and more paperwork than loans to an individual? I am comfortable if necessary in running a small company but definitely not if it's just going to cause more problems ( and liabilities ) than it solves.


If you have to grant a lease then, if you are married or have a partner, you can use different combinations of the people involved.

Yes this seems to be another very viable alternative. I think my problem at the moment is collecting all the possible alternatives so I can make a better assessment... compounded by the basic problem you mentioned earlier.


Also there is a lot of hassle in drawing up a lease because it needs to be capable of being sold to someone else

Well at this point I would tend to agree. As I own the freehold to the whole building I have the lease document for the upstairs, seperately owned flat, and can use this to work with... along with my solicitor who I'm meeting this Friday.

Cheers you've been a great help.

[jeffrey]

Re the new lease: work backwards!
A. Who will be borrowing the mortgage advance?
B. That mortgagor/borrower (B) must have a leasehold interest in the flat intended to be mortgaged.
C. So f/r in the flat must be in a name other than just B. It could be B + someone else (X), for instance, which would necessitate a simple "gift" transfer from B to B + X.
D. Thus B + X are able to grant the new lease to B.