When it comes to property ownership, understanding the distinctions between freehold and leasehold is essential for making informed decisions. Commonly, flats tend to be leasehold whilst houses tend to be freehold. There is however a niche type of property which are flats that are freehold in tenure. In this article, we will explore the key aspects of freehold flats, from their benefits to potential challenges, and provide essential legal and financial insights.
Whether you are a first-time buyer or an experienced property investor, we hope this article will offer some guidance into freehold flats.
So what is a freehold flat? Before we look at explaining what a freehold flat is, we think it will be easier for you to remind yourself of what a standard leasehold property looks like first.
A leasehold interest is a type of long term renting arrangement where the owner of the leasehold interest can occupy the property for a fixed length of time (Term). For this to be the case, and for you to be the tenant, there should also be a landlord. This landlord or the freeholder owns the land upon which the property is built. As part of granting such a lease, the lease very clearly defines what the landlord does and likewise the tenant for the general operation and maintenance of the building as a whole for the duration of the lease. This therefore means that regardless of who owns a leasehold property (in the case of more than one leasehold property being present in the building), the maintenance aspects will be carried out and covenants will continue to be complied with and enforced.
Now looking at freehold flats, through the lens of someone who has a good understanding of how leasehold properties operate, you should now start seeing the possible issues. Lets discuss these in a bit more detail.
Disadvantages of Freehold Flats
Technically speaking, a block of flats operate not based on Gentlemen’s agreements but rather as a result of covenants. Although covenants pass with the land when a property changes hands in a leasehold setting, positive covenants found on freehold flats do not. In other words, new freehold flat owners cannot be forced to comply with obligations such as those in relation to maintenance of primary structures within the building. This of course creates a significant risk to both flat owners and also any mortgage lenders who lend funds as the building could fall into substantial disrepair and there will be little you or anyone could do to rectify, if an offending flat owner decides not to take part in remedial work.
By extension of the above, considering it is a flat after all, there is most likely going to be certain common parts in the building used by more than one flat owner but owned by anyone. Since these common parts tends to be ownerless for the most part, there is significant ambiguity as to whose responsibility it is to maintain these.
Lastly, the same applies to insurance. Where there are two or more flats in a building, the likelihood of an insurer paying out in the event of an insurance claim is significantly diminished, when each flat is individually insured. The reason for this is because in insuring a property in this manner creates significant grey areas as to whose property/insurance company is liable to pay out.
Are there any advantages of Freehold Flats?
Well, depending on how you wish to look at these, then there may be some. For instance, since you own the freehold, you do not have to any pay ground rent. The same applies to service charge. Since you own your part of the property, the idea is that you maintain your property as you should, when you decide to do so and therefore at a complete cost to you. You therefore do not need to contribute towards overall costs of maintain the building (which however is a significant problem in technical terms as explained above).
Are there any Legal Considerations?
There are largely three ways to deal with these problems. The most desired solution is to grant leases against all the properties in a building and have each flat owner, own a share of the freehold. This solution however is quite difficult to implement and have all flat owners to agree to due to the significant legal costs involved in doing so.
A more common way of dealing with ensuring covenants are enforceable is by agreeing a building wide Mutual Deed of Covenant. The idea here is that it is an obligation by each flat owner that they ensure any new buyers they sell a flat to, will sign and enter into a Deed of Covenant with the other flat owners, agreeing to carrying out their part of the responsibilities in maintaining their flat and by extension, the entire building. This is not an ideal, fail safe way of ensuring the building is maintained properly but more of a ‘some solution is better than nothing’ concept.
As to insuring the building, we have seen arrangements where one of the flat owners has been nominated to remain in charge of organising and obtaining a block insurance policy. Again, although this concept might work in practice, we need to consider the practicalities of this. What happens if one or more flat owners choose not to contribute towards the bock insurance policy? If so, who is going to pay for the insurance and will all flat owners (including those who do contribute) suffer as a result?
Financial Aspects
No doubt you have seen various freehold properties having been marketed by estate agents suggesting freehold flats cost more and far better investments since they are exclusive by attracting only cash buyers. Well, exclusive maybe but better investments than any other properties? We would argue that this may be poetic license.
The reason why most freehold flats can only be purchase by cash buyers is due to the simple reason that they are not considered adequate security by most mortgage lenders for reasons we have already discussed above.
This is not to say that all mortgage lenders take the same view but fundamentally, this should be an important consideration for any buyer before proceeding with a property of this nature, both if reliant on mortgage finance for the initial purchase and/or for any future sale to those using mortgage finance.
In conclusion
In conclusion, freehold flats present a unique blend of advantages and challenges that potential buyers must carefully consider. The allure of having no ground rent and full autonomy over their flat can be compelling. However, these benefits come with significant responsibilities, such as maintaining the building and navigating the complexities of maintenance, shared areas and insurance.
Legal considerations also play a crucial role, with covenants and mutual agreements being essential to ensure the property’s upkeep and mitigate potential disputes. Financially, the challenges in obtaining mortgages for freehold flats underscore the need for thorough planning and consultation with expert conveyancers and financial advisors.
Despite these hurdles, freehold flats can be a viable investment for those who understand and are prepared for the associated responsibilities. By weighing the benefits against the potential difficulties, prospective buyers can make informed decisions that align with their long-term property goals.
