Freehold flats

[Toilet Duck]

Morning all,

I looked at a flat last night that had a share of the freehold.

The flat was in an old victorian house that at some point had been converted into six self contained flats. I was told that the flat I looked at had "a quarter share of the freehold." I was advised that a management company does not exist.

What financial (and any other) implications does this actually mean? Say the outside of the property needs painting or the roof leaks, what happens? As I understood it (probably in my ignorance), if a flat was leasehold and you pay £XX in maintenance, that covers you against any work that needs doing. If you own a share of the freehold, then I assume you don't pay any ground rent/maintenance charges etc?

The flat in question can either be bought with a lease of around 160 years, or a share of the freehold depending on the offer the vendor receives.

If it matters, I'm looking for a BTL investment (there is a tennant in this flat who wishes to remain). Also, for those in the BTL business, is it better to rent a property furnished or unfurnished? I planned on going unfurnished so you don't have the responsibility/hassle if the tennant breaks/wears things out, but the flat I just looked at is part furnished by the vendor (white goods, sofas, bed etc) and that is up for negotiation if I so desire.

Many thanks in advance!

[n1ckm]

In this case it sounds as though freehold is managed informally between the four freeholders (I would assume that two of the six flats are still leasehold). You would pay a quarter share of the buildings insurance anually and maintenance would be dealt with on an "as and when" basis as agreed by you and your fellow freeholders.

What seems odd is that the vendor is suggesting that he will either sell the property with a 160 year lease or a share of the freehold depending on the offer he gets. This would suggest that the flat doesn't currently have a share in the freehold.

With share of freehold, there is still an underlying lease - it should technically be called leasehold with share of freehold. The length of that underlying lease is important from a mortgage perspective.

If the flat owns a share in the freehold currently, that share can't suddenly taken away and the flat sold as leasehold.

I hope that helps ?

[Toilet Duck]

n1ckm said:

In this case it sounds as though freehold is managed informally between the four freeholders (I would assume that two of the six flats are still leasehold). You would pay a quarter share of the buildings insurance anually and maintenance would be dealt with on an "as and when" basis as agreed by you and your fellow freeholders.

What seems odd is that the vendor is suggesting that he will either sell the property with a 160 year lease or a share of the freehold depending on the offer he gets. This would suggest that the flat doesn't currently have a share in the freehold.

With share of freehold, there is still an underlying lease - it should technically be called leasehold with share of freehold. The length of that underlying lease is important from a mortgage perspective.

If the flat owns a share in the freehold currently, that share can't suddenly taken away and the flat sold as leasehold.

I hope that helps ?

Thanks for the reply, thats a big help.

What the vendor told me was that they had just spent a few quid buying a share of the freehold, they said they did this because the lease was running low, so I assumed that rather than just "buy" a new lease they went a step further and bought a share of the freehold. They said that because they had just spent a lot of money getting the freehold, they didn't want to "give it away for free." As I understood it, this meant the flat will come with a 160ish year lease and the vendor keeps the freehold, or they give up the freehold if they get the price they want.

How would I get this checked out, would this be the job of a solicitor? If I put in an offer etc and its accepted, if there was a problem with the freehold/lease would the solicitor pick this up, and if so would the cost of the solicitor be my only financial loss (assuming any "problem" discovered can't be resolved)?

If the building insurance is split between the four freeholders and and maintenance costs dealt with on an as and when basis, would the two remaining flats (leaseholds) have to pay towards any maintenance charges? Who would they pay any ground rent etc to?

Thanks again for your help, much appreciated

[n1ckm]

Toilet Duck said:

Thanks for the reply, thats a big help.

What the vendor told me was that they had just spent a few quid buying a share of the freehold, they said they did this because the lease was running low, so I assumed that rather than just "buy" a new lease they went a step further and bought a share of the freehold. They said that because they had just spent a lot of money getting the freehold, they didn't want to "give it away for free." As I understood it, this meant the flat will come with a 160ish year lease and the vendor keeps the freehold, or they give up the freehold if they get the price they want.

How would I get this checked out, would this be the job of a solicitor? If I put in an offer etc and its accepted, if there was a problem with the freehold/lease would the solicitor pick this up, and if so would the cost of the solicitor be my only financial loss (assuming any "problem" discovered can't be resolved)?

If the building insurance is split between the four freeholders and and maintenance costs dealt with on an as and when basis, would the two remaining flats (leaseholds) have to pay towards any maintenance charges? Who would they pay any ground rent etc to?

Thanks again for your help, much appreciated

I think you need to ask a few more questions. Assuming you require a mortgage, your lender will value the property of the basis of the length of the lease regardless of whether it has a share in the freehold. The share of the freehold has no real material value other than the cost to the current owner to acquire it.

The vendor can't hang on to the share in the freehold, if they are selling the flat.

Yes, this would be something that should come out during the course of the conveyancing process and if you are therefore forced to withdraw from the transaction as a result of what he/she finds, then your only loss would be your solicitors costs. That said, personally I would find out exactly what the situation is currently, to save any potential loss further down the line.

The two leasehold flats, should pay a formal service charge to the joint freeholders (I say should, this won't necessarily be the case) and they should certainly pay a ground rent anually to the freeholders.

Keep us updated.

[Shadow62]

Re the BTL aspect. If furnished I believe you can take 10% if income tax free against wear and tear. Not on unfurnished

[Cheib]

I own a couple of flats under this arrangement....there are mostly good points but there are some issues. It would be normal for there to be a Freehold Company which if you bought the flat as share of freehold you would become director of too.

With the flats I own they are in houses that are divided into three and four flats with each flat enjoying an equal share of freehold. The management companies are run on an informal basis where ground rents are not paid or indeed formal service charge, we pay bills as and when necessary. This works very well and is the cheapest way to do things as long as everyone else in the building is a good citizen and gets on with things. Things can get complicated when bib bills come in though....most building need a proper general works type refurb every ten years or so where all the windows need painting, roof seen to, common parts tidied up etc.....you're looking at a bill of several thousand pounds per flat if as I do you own somewhere in London and it needs scaffold etc

Some freehold companies build up a sinking fund through formal quarterly or annual service charges which are a good way round this but then you start having top get a lot more formal with the financial affairs....accountants etc are needed.

[Wings]

Other than a cooker and/or a washing machine I always let unfurnished, thereby removing future repairs and H&S fire legislation etc.

Most of my problems with tenants, repairs etc., are with leasehold flats, and with more and more social housing moving into flats, I would avoid buying a freehold flat. These arrangements are OK when every flat owner is working together, but once differences of opinion and fall out between owners, then resolving the same can be a nightmare.

[Cheib]

Wings said:

Most of my problems with tenants, repairs etc., are with leasehold flats, and with more and more social housing moving into flats, I would avoid buying a freehold flat. These arrangements are OK when every flat owner is working together, but once differences of opinion and fall out between owners, then resolving the same can be a nightmare.

Depends on the area/price point. If you're buying in decent parts of London there's little or no chance of local authorities/social housing taking over. It's also relatively easy to get lease's changed/updated so the Freehold company with all the leaseholders on side could change the lease to avoid letting to local authorities/social housing.

I agree that it is a potential minefield. One of the places I own we had an issue with one of the neighbours which has resulted in them not paying the building insurance for a couple of years.....going to have to appoint a debt collection agency to sort it out.

[Toilet Duck]

Thanks for all the replies, much appreciated

n1ckm said:

The vendor can't hang on to the share in the freehold, if they are selling the flat.

I've been asking more questions etc and have put an offer in to test the water - it was declined. The estate agent informed me that if the vendor gets the full asking price then the share of the freehold is included, but they are willing to drop the asking price by £3000 and retain the share of the freehold. They seem adamant that the vendor can keep their share of the freehold????

Thanks again

[n1ckm]

I think you need to speak to your solicitor.

It is unusual for a seller who owns a share in the freehold to retain it when they sell. The articles of association of the freehold company (assuming that the freehold is held in a company and each leasee has a share in the company) may not allow the seller to retain his share if he's not an owner.

If they do, then I don't know why he would want to as there's no real advantage in the short term, other than a share in the ground rent that would come payable or longer term a share in the premium that you would have to pay to extend your lease. But it's being offered with a long lease, so there's no advantage there.

Sounds as though he's playing silly b*ggers to me !

Whereabouts is the property ?

[Toilet Duck]

n1ckm said:

I think you need to speak to your solicitor.

It is unusual for a seller who owns a share in the freehold to retain it when they sell. The articles of association of the freehold company (assuming that the freehold is held in a company and each leasee has a share in the company) may not allow the seller to retain his share if he's not an owner.

If they do, then I don't know why he would want to as there's no real advantage in the short term, other than a share in the ground rent that would come payable or longer term a share in the premium that you would have to pay to extend your lease. But it's being offered with a long lease, so there's no advantage there.

Sounds as though he's playing silly b*ggers to me !

Whereabouts is the property ?

I can't understand it either. The lease is around 160 years, so if the vendor can keep the share of the freehold they are never going to cash in when someone needs to extend the lease from them, anyone involved in the sale of this property now will probably be dead by the time the lease gets renewed. Also, if they are able to sell the flat but keep the share of the freehold, won't they have to pay a share of the buildings insurance every year?

[n1ckm]

Quite possibly !