Creating a new leasehold title from splitting a freehold title

05/09/2019
Creating a leasehold title from splitting a freehold title as a freeholder presents ways of making a greater income from a building or parcel of land. 

That said, you need to prepare carefully and take appropriate professional advice because this is a complex area with many regulations and invariably you'll need to consult with experienced solicitors, surveyors and lenders in order to do so.

This article considers:



Looking at creating leasehold flats from your house or block?

We have all the services you need to make your plans a success, ranging from experienced property lawyers to draft new leases to RICS surveyors to draw up compliant plans to independent mortgage brokers to help you find the most fitting mortgage products/lenders to structural engineers to assist with plans for building alterations.

* CQS Solicitors – RICS Surveyors – Independent Mortgage Brokers - Structural Engineers



    1

    Why split a freehold title in the first place?

You'd split a freehold title to a building and/or land because you stand to make more money out of creating leasehold titles, all other things being equal.

Let's say you have a freehold house and you develop it into two self-contained flats, i.e. dividing a property in two (let's assume for simplicity that you've correctly obtained planning permission and complied with building control regulations ).

By doing so, you'll have given yourself the following opportunities, among others:
  • you can keep the freehold yourself and can sell the two leasehold titles thus creating cash;
  • you can opt to become a share of freeholder, sell one of the leasehold titles (cash) and retain one yourself (although you can't create and own both the share of freehold and leasehold title in the same name); you can award yourself a very long lease (up to 999 years maximum) and remortgage your leasehold title for cash (you might opt to sell a share of freehold title to someone else as well as the other leasehold title as another opportunity).
  • you might even opt to create the leasehold titles then sell both these and the freehold title and you might even opt to retain a portion of the plot of land the house is built on.
  • if you opt to remain the freeholder (or even a share of freeholder), you can look to receive yearly ground rent payments and these latter can even be subject to increasing periodically if this has been written into the lease)

Communal areas

When you are a freeholder and you've sold leasehold titles, you should bear in mind that any areas that you've retained or that are not specifically included in a particular lease are your responsibility to maintain. Depending on the scale, this might mean that you delegate the work of the upkeep of communal areas to a managing agent.

Managing a large flat block is of itself a complex business and as such can be also be an extra source of income (from service charges that the leaseholders must pay) or a drain on finance, if managed badly.


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    2

    What methods are used to create new leasehold titles?

Essentially these two methods describe the same legal activity going on but the second is usually for a larger scale.
    1
    Transfer of Part
This is where you have an existing freehold title - and retain it - but you choose to sell off part of it to someone else.

You cannot sell a part of your freehold title to yourself


Let's say you own a large house and, in one part, you create a self-contained flat, in compliance with planning permission and building regulations. To create the separate title, you'll have to obtain Land Registry-compliant plans - because the legal boundaries of the new property etc. will have to be officially recorded - and then your solicitor can create the new leasehold title and register it with the land registry.

The basic principles described aren't greatly different from the creation of any other kind of leasehold title or titles but is not the primary focus here - you should read the following article if you're particularly interested in this area - What is a transfer of part of registered title?

Demised?

You often read about demised premises in connection with conveyancing. It actually just means that the property is a leasehold title.

    2
    Splitting an existing freehold title into one/many leaseholds
We've made a slightly arbitrary distinction here, but let's assume that this one is where perhaps several leasehold titles are created from the one freehold block i.e. splitting freehold title to leasehold flats.

Everything you have to do in terms of complying with regulations described increases in complexity when there are more leasehold titles.


    3

    What are likely lender considerations for splitting a freehold title?

If you've any sort of existing mortgage to pay off on your property, you must contact your lender and get consent for any title split/creation of leaseholds before you take things further.

You lender's consent depends on how much equity there is in the part of the land they retain a mortgage over. Your lender will therefore want to ensure that they will retain a valuable and marketable title to the remaining property following the title split.

Deed of Release

Lenders normally grant consent via a Deed of Release - this document effectively evidences that your lender has released you from its charge over the part of the property being sold.

You need to instruct a solicitor to draw up the Deed of Release if the application for the title split is approved by the lender and this will be sealed by the lender. Consent of any second or subsequent mortgagee must also be obtained.

Why might a lender object to you splitting title?

If your lender takes the view that your proposed title split is going to reduce the value of the part of the property being sold significantly then they are unlikely to give you consent.

Additionally if you want to create a number of flats, your lender will want to ensure that the individual leases granted meet with their own prudential requirements. Among other things these will include you having drawn up Land Registry compliant drawings - more on this below.

If you've built new properties or flats from scratch your lender will also require a new build structural warranty (typically a National House Building Council's (NHBC) 10-year warranty, or if a conversion, a Professional Consultant's Certificate (PCC).

Most lenders will actually demand that you have your solicitor draw up a new lease for each of the flats to be registered at the Land Registry - they are particularly resistant to lending on freehold flats, mainly because of matters of communal responsibility with the latter, such as repairs to a roof, are not clear-cut.

Local authority and neighbours

As well as consulting your lender before pressing ahead, you'll also have to consider that your local authority can consider objections to your plans from your neighbours. Additionally if, for example, your land is in a conservation area, you'll need further consent from your authority before you can proceed.

Creating a leasehold title which you'll retain as freeholder? Not in the same name

The law stipulates that the Freeholder and any leaseholder of a property must be separate entities.

If you want to retain your freehold and leasehold titles, one solution is to keep the freehold title in your personal name and grant a lease into the name of a limited company (wholly owned by you as freeholder to retain control) or vice versa.



    4

    What are Land Registry Compliant Plans?

We've referred to these above and their importance both in terms of lender consent to your plans to create leasehold title/s and in terms of the Land Registry itself.

It's understandable that the Land Registry would wish to maintain exacting and physically accurate records of titles, particularly with regard to boundaries, as well as providing the right information for potential buyers etc. This reduces the potential for boundary disputes etc.

To illustrate quite how exacting these plans are, they should, among other things:
  • be to scale;
  • show a north point;
  • be between 1/250 and 1/500 scale normally;
  • use a 1/2500 scale for rural properties;
  • not involve imperial measurements (metric units only, and to 2 decimal places);
  • be identifiable on an Ordnance Survey map;
  • show the general location (roads, landmarks);
  • include any garages, gardens or grounds;
  • show access drives or pathways if relevant to boundaries;
  • identify different floor levels where appropriate;

    5

    What does your solicitor do?

Once you've obtained your lender's permission for your plans and you've drawn up Land Registry Compliant Plans (this after obtaining any necessary planning permission and building regulations assent) your solicitor draws up new leases for each of the flats to be registered.

These new leases and their terms have to be agreed with your lender and follow the Council of Mortgage Lenders instructions for leasehold properties. This can involve, for example, obtaining conveyancing property searches. Very importantly, any flat must be fully marketable and saleable as an independent unit in the future.

Restrictive Covenants

These come into play in two ways.

    1
    Pre-existing restrictive covenants you're already bound by
These are important because, depending on the nature of the restriction, they might discourage potential buyers of your lease/s. 

Let's say for example that your plot might be subject to smoke restrictions or might be in a designated conservation area. Any limits imposed on the freedoms of would-be leasehold purchasers is likely to retard saleability.

This area would also cover matters such as easements and rights of way  (and, for example, any rights to light ) peculiar to the plot.

    2
    Restrictive Covenants which you write into the new leases
You yourself can instruct your solicitor to write in restrictive covenants into the leases - you can do this to protect your interests better - however your lender might stipulate that your leases must contain certain ones, such as for example they might insist that any leaseholders can't themselves sublet.

This is also the case with any local authority restrictions - you might have to write restrictions in to be compliant with prevailing legislation.

Block-level Insurance Policies

If you're creating leasehold flats, don't forget that you'll be responsible for organising block-level buildings insurance policies as a freeholder.

Policies for insuring the actual contents internal to any flat remain the responsibility of individual leaseholders as they would with a freehold house owner.

 

Once the Land Registry is satisfied that you've created valid new leasehold titles and your solicitor has drawn up individual lease contracts, you can go ahead and sell your flats.


    6

    What are your obligations to your leaseholder/s as a new freeholder?

Beyond organising things like buildings insurance and maintaining the external and communal parts of your building (the costs of which you recoup through service charges and bills for major works from your leaseholder/s), you are also bound by legislation governing in particular:


Looking at creating leasehold flats from your house or block?

We have all the services you need to make your plans a success, ranging from experienced property lawyers to draft new leases to RICS surveyors to draw up compliant plans to independent mortgage brokers to help you find the most fitting mortgage products/lenders to structural engineers to assist with plans for building alterations.

* CQS Solicitors – RICS Surveyors – Independent Mortgage Brokers - Structural Engineers



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