Why aren’t my lenders keen on me owning a long lease and the whole freehold?
Q: I have the opportunity to buy the whole freehold of my building. However, lenders are not keen on me owning both a long lease and the whole freehold (instead of sharing the freehold with the other leaseholder). Why is this the case?
I think the reason some lenders are less than keen is partly the liability for repairs (although they can in part be reclaimed from the other flat owner) and also the fact that the borrower effectively becomes their own landlord. Lenders like to see someone else they can enforce landlord covenants against if they had to take possession, rather than become responsible themselves. That means someone other than the borrower alone would need to own the freehold, whether that was the landlord and the other flat owner jointly, the landlord and another person (family member?), or a management company.
Anything that steps away from the preferred approach can raise questions for a lender. The situation that you describe shouldn’t necessarily be a no go for lenders although there’s certainly no guarantee that some won’t exhibit caution or shy away from lending in the future.
Lender responses have ranged from being happy with the structure in principle, to some that suggested that they would lend, but would need to take a charge over the freehold, as well as the leasehold. Others suggested they’d be OK but would want to see another name on the freehold, for example with a family member. Finally, some suggested that they would treat it as a freehold flat and not be able to lend unless there was a share of freehold or a management company.
The most often used (and perhaps the neatest) approach in this situation might be for the freehold to be purchased by a purpose formed management company, in which the leaseholders would be equal and only shareholders in a management company. It would create a “deadlock” in the event that there was disagreement about repairs etc, but a sole landlord cannot simply do anything they like, without consulting the other flat owner, anyway. A share in the company, rather than the freehold itself, would be transferred when one flat is sold. The management company papers on set up would need to specify that only a flat owner could own a share and that it would be transferred on sale. It would create some cost and administration, but would avoid the expense and trouble of varying the existing leases and would pose no problem at all for lenders.
It would make sense to also take legal advice on this point, to explore the options as well as understand the implications. It will also be important to understand the responsibilities that come with being the freeholder.
Answered by David Hollingworth
London & Country
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