Is buying a leasehold property complicated?
Sue from Swaffham
Buying a house questions and answers
I am buying a leasehold property which is in a block of apartments. The seller says all will be converted to freehold once all properties are sold. Is this straightforward?
If you are purchasing a leasehold flat, it would not be in your interest to purchase the flat as a freehold due to the implications that can arise.
However, do not confuse freehold flats with owning a share of the freehold interest, which is probably what your current freeholder means. If it is a small development of apartments, the lessees can purchase the freehold together from the freeholder but individually still own the leasehold flats. In these circumstances, the lessees can, as a group, decide on the future of their building and their flats.
For instance, they can decide to grant 999 year leases to themselves and they can decide on the maintenance of the building, how it is run and have more control. If it is a large development, the lessees will group together as a company and hold shares in the company who own the freehold. It is recommended to form a company unless the block of apartments have fewer than 4 participants. Normally it would be a company limited by shares.
It is unusual for a flat to be freehold because one flat freeholder would not be able to enforce maintenance provisions against the other flat owners for the building and common parts, whereas a lessee is bound by the covenants in the lease and must observe and comply with all the covenants for maintenance and financial responsibilities.
Lenders do not, as a rule, lend on freehold flats and therefore, if you come to sell the property, your audience for selling the property will be limited. However, a lender will lend on a leasehold property with a freehold interest as you will have a share of the freehold along with the other lessees and can enforce the covenants upon each other, or the lease can be subject to forfeiture as mentioned in the clauses of the lease.
Is it straightforward for the freeholder to sell the freehold interest after completion of the sale of the flats?
There are rules to follow:
The freeholder must at first offer the freehold interest to the lessees before he offers it to an investment company on the open market.
There must be at least 50% of the lessees willing to purchase the freehold interest.
It is also recommended that a declaration of trust is entered into, which can incorporate provisions if one of the freeholders should die and can incorporate a provision for alternative dispute resolution.
Sue Denford, Jefferies Essex LLP
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Erl on 12/01/2021