Freehold 101: Everything You Need To Know About Freehold Properties

 

There has never been a livelier time for real estate investment than today. Quick exchanges between buyers and sellers, rising market costs, plus the hunt for stability have all contributed to the need for one’s own property. The market is both exciting and lucrative, but only if you know how to navigate the waters.

The real moneymakers in the real estate business are those who do their homework and do it well. They study the market intensely, carefully watch the location, go through its history, and find the quirks that make it tick. They work with the local government to see if there are any new developments in the pipeline. They know everything they have to know about the area.

Joining the fray is a very tempting idea, but you will have to know the basics first. In this piece, we’ll get to know all about the basics of real estate and, in particular, freehold properties. We shall also tackle the different types of freeholds and the things you should look out for to help you get ahead.

A History Of Property Ownership

In order to appreciate the current state of land ownership in the UK, we must take a look at how it all started. The system of renting out and leasing properties was established back in the 11th century as a relic from the English property law, which was part of the Anglo-Saxon or Old English Law. One important feature of this set of rules is clash between the “folk-right” and the “privilege”. The former stipulates that the law had to be “declared and applied by the people themselves in their communities”, and this regulated the older laws of real property. The first idea of the “freeholder”, or the full and outright ownership of land, was floated and used in 1089.

Medieval

At the time, however, royal power has taken root and directly affected, broke, or modified folk-right laws. This led to the creation of the privileged land-tenure, which eventually evolved into the royal feudal system that dominated throughout the medieval period.

As it were, the feudal law focused on the royal families getting as much land as they could. At the time when land ownership meant power, normal families or the commonfolk could only dream of having their own piece of land, even if it was theirs from folk-right. Royal families, however, had to deal with the problem of how to take care of the lands. It was then that the concept of “leasing” was put into use, wherein the landowners allowed commonfolk to stay on their lands providing that they work for it. The lessors would then pay the owners “in-kind”, which may mean either part or all the spoils of the land or services for the owners.

1920s

Relationships between landlord and tenant were purely contractual in nature. Once the contract has expired, or should the landlord find enough reasons to terminate the contract, the landlord may recover the property instantly with no backlash. Other landlords would “force” their tenants out of their lands by raising rental costs to such a degree that the tenants would not be able to pay anymore. The power skewed entirely for the ruling class.

The 1920s saw a change in this system, as various legislation and/or rental acts were enacted for the benefit of the lessors. Some of the changes included restrictions for the landlords to evict tenants without due process or reason, and security of tenure. As such, landlords felt the crunch of falling profits compared to their year-on-year earnings. Because of this, they started to open up to the idea of long-term leases, with many closing deals on 99 to 125 years of lease for their properties. This was to ensure continuity for their business, without entirely losing the ownership of their properties. These laws and acts were the basis of the modern-day leasehold system.

1950s

As England moved towards greater economy and stability, more and more properties were being constructed all over. The 1950s saw a boom in the construction of self-contained, residential housing units, also known as flats or apartments. These smaller, functional units led to the increase of leasehold ownerships, as in that period this was the only means to subdivide and sell properties in a multi-occupancy building. The previously reigning freehold ownership does not hold water to this type of property, since the old freehold property laws state that boundaries for each real estate should appear visibly on a map. Of course, this cannot be made with the case of flats stacking one on top of the other, sharing the same land space.

As time progressed more revisions towards the property laws were made, most especially during the Swingin’ Sixties when England jumped from a very conservative, stiff-upper lipped veteran of two World Wars into one of the world’s main capitals that was the center of excitement. Despite this upbeat outlook, elderly tenants were being evicted left and right as their leases expired on them. Further law changes were made, but these traumatizing events left many older leaseowners out on the streets, homeless. It’s no wonder that many of today’s older generation is wary of buying leasehold properties.

This is why freehold ownership is still a preferred option of land ownership. Historically, there are less issues to be dealt with, as the land is yours perpetually. However, there are still some things you should know about when it comes to freehold types: flying freehold, creeping freehold, virtual freehold, and commonhold.

 

What Is A Flying Freehold?

Let us make one thing clear first: a flying freehold isn’t about a literal “flying” property.

It’s not this, we swear.

It’s not this, we swear.

Simply put, it is an area within a freehold ownership which is above another part of the same building in a different freehold ownership. Illustrated, it would look like this:

A more accurate representation of a flying freehold.

Note that not all flying freeholds are literally mid-air. Sometimes, it could be a simple balcony over a part of someone else’s freehold, or it could be over a shared area like a unit above a passageway or a garage. Another example would be a cellar which spreads out under the neighbor’s property or a terraced or semi-detached house where the dividing line does not go straight down the middle so part of one owner’s bedroom is directly above a neighbor’s lounge.

Most of the time, the “flying” part of the properties you’ll encounter while real estate hunting would not be a significant part of the building. New house or flat constructions see to it that units could be properly divided, in case of some real estate changes in the future. However, there are still some properties that occasionally have larger “flying” areas. These are usually encountered in an old building, where sections of which are split up.

The challenge usually begins when, as mentioned, the dividing lines of a property do not go straight down the middle. Often, we see this in mid-terraced houses which have units that are shared in terms of space in another unit’s area. These types of units are quite notorious for being unsatisfactory, mainly due to the inability of the freeholders to enforce positive agreements with each other. All sorts of legal problems come up when it comes to maintenance or renovations, especially if the other freehold owner does not want to cooperate with upkeep suggestions. For whatever reason, your neighbors may refuse access to the area in question, or protest your plans for the maintenance, which would allow the property to fall in disrepair. 

How Do I Know If It’s For Me?

Should you decide on purchasing a flying freehold, consider the subject of flying freehold insurance. This is easily provided for by big insurance companies, and typically does not cost more than a few hundred pounds. The indemnity insurance covers you financially for any losses that may happen in possible disputes for your flying freehold. However, it will not rectify any legal defect. For instance, a part of your flying freehold wall is falling apart. It is possible for the insurance to force the other owner to help you carry out the repairs. However, the fact remains that part of your property will always be prone to falling apart.

Also, look into how the insurance will be able to meet your needs. The inability to enforce the unit’s upkeep may affect the property and its marketability in the future. Real property owners and agents may be caught unaware about the flying freehold issue until such time they decide to sell the property. It is then that they realize the need for insurance, as buyers are very careful about their involvement in a “problematic” property.

Still, our real property common law principle states that a freehold “includes everything down to the center of the earth and up to the sky, to such height as is reasonably necessary for the ordinary use and enjoyment of the property”. As such, you may strike a deal with the landowners for proper division of property, including airspace.

What Is A Creeping Freehold?

At the other end of the spectrum, we have the creeping freehold.

In contrast to the flying freehold, the creeping freehold extends under the property of another owner. Oftentimes, it supports another part of the freehold property (in fact, in many instances, a flying freehold), but could be used in conjunction with the other owner. In the example we stated above, the creeping freehold may be the garage or passageway itself.

How Do I Know If It’s For Me?

The same laws apply for creeping freehold properties. If you see units like these which interest you, be sure to check the insurance coverage as well.

As with flying freeholds, problems arise in selling and/or buying properties with a creeping freehold when it comes to remortgaging it. Numerous rules surround mortgage lenders when it comes to clauses that are acceptable for them, and, sadly, some lenders will choose not to lend immediately after knowing that there’s a creeping freehold. The same holds true for flying freeholds. However, they may lend if the “creeping” part of the building does not surpass a certain proportion of the total area of the property.

There’s no “fixed” rate, so you may put this up for discussion with your lender. They would usually ask that the matter be disclosed to them in advance, before they shell out any amount to you. For your own security and cost-efficiency, be sure to open this up with your proposed broker before you get caught up in all the processing fees that surround buying a property. Most of these fees are non-refundable, so it’s better that you lay your cards out first before going headlong into purchasing negotiations.

Despite all these negative connotations concerning flying and creeping freeholds, there is a sliver of light. There have been some legislative changes for both flying and creeping freeholds. In June 2011, the Law Commission published several recommendations in order for the legislature to modernize and simplify the law when it comes to real estate discussions. This would remove anomalies, inconsistencies, and unnecessary complications where they exist. This comes as very good news for the people most concerned and affected by the current system, such as private homeowners, businessmen, organizations, land developers, mortgage lenders, and other professional advisers. This, essentially, makes dealing with such properties easier to manage.

The project is now just awaiting response from the government regarding their recommendations, which is made up of three major parts: (1) easements (“a right enjoyed by one landowner over the land of another”), (2) covenants (“promises, usually contained in a deed, made in relation to land, which may either be positive or restrictive”), and (3) profits à prendre (“gives the holder the right to remove products of natural growth from another’s land”.

Some of the reforms that the Law Commission mentioned are as follows:

  • make it possible for the benefit and burden of positive obligations to be enforced by and against subsequent owners;
  • simplify and make clearer the rules relating to the acquisition of easements by prescription (or long use of land) and implication, as well as the termination of easements by abandonment;
  • give greater flexibility to developers to establish the webs of rights and obligations that allow modern estates to function;
  • facilitate the creation of easements that allow a substantial use of land by the benefiting owner (for example, rights to park a car);
  • expand the jurisdiction of the Lands Chamber of the Upper Tribunal to allow for the discharge and modification of easements and profits created post-reform.

These are discussed at length and in detail on the Law Commission website.

What About The Virtual Freehold? Does This Exist?

Strictly speaking, no, virtual freeholds do not exist in tangible form.

It is more of a term used to appease cautious buyers of long leasehold properties who are wary of going into the leasehold market. Owning a share of a freehold will be able to grant you a new 999-year lease. In essence, this is worth as much as a freehold interest in your property, hence the term “virtual”. This type of freehold is given to an owner over time, since ownership of the property increases its value as security for your mortgage loan.

What Is A Commonhold?

In 2002, the Commonhold and Leasehold Reform Act introduced an alternative to leaseholding, known as the commonhold. It is stated that land is considered as commonhold if “1) the freehold estate in the land is registered as a freehold estate in commonhold land, 2) the land is specified in the memorandum of association of a commonhold association as the land in relation to which the association is to exercise functions, and 3) a commonhold community statement makes provision for rights and duties of the commonhold association and unit-holders (whether or not the statement has come into force).” Unlike the above-mentioned freehold types, commonhold agreements include shared ownership of and responsibility for common areas and services.

How Do I Know It’s For Me?

One major thing you should consider in checking out commonholds is that these properties do not devalue in the same manner as leaseholds do towards the end of their lease terms. Other perks include not having to deal with landlords, common agreements between all unit-holders, and any disputes may be easily settled and charges more closely reflect costs needed for maintenance. On the other hand, unit-holders have greater responsibilities by way of managing a whole property. It is in these cases that one might want to check out freehold management companies to help them out.

Selling Your Freehold Property

Moving out of the country? Seeking other investment opportunities? Whatever your reason may be, as a freeholder you may find yourself selling your property. Sounds simple on paper, but it involves a lot of discussions, decisions, and executions before you can let go of your property. Make sure that you’re properly equipped with knowledge about the freehold selling process before you proceed.

In order to proceed, you must settle these things: 1) give the flat owners in your property the Right of First Refusal, 2) find out how much your freehold is worth, and 3) prepare to release the paperwork to the buyer.

As a freeholder, the law requires you to offer the property to your leaseholders or flat owners before you can offer it to anyone else. This is stipulated under Part 1 of the Landlord and Tenant Act 1987. If no one takes up your offer, freeholders may then put up the offer on the open market. Whatever comes out of these discussions will affect the second part of the selling process, which is to find out the worth of your freehold. This will be discussed further below.

Once you’ve settled initial discussions with your buyer, you must then prepare the paperwork to be release to him. Freeholders are usually asked to share further information about the property in order to close the sale. You may agree to a deposit payment at this point in order to move the transfer of ownership. Closing the deal will require you to submit the new registration paperwork to the Land Registry for the institution to recognize the new owner.

How Much Is My Freehold Worth?

To get your property’s accurate value, it is still recommended that you consult with a trusted local real estate agent who would know about several selling points.

First, count how many flats there are in the property. Next, do a quick survey and ask the flat owners if any of them would like to participate in the freehold purchase process. During this phase, which is also known as the “Collective Enfranchisement”, the flat owners should be made aware that the original freehold owner will be transferring ownership of all the flats of the building to another person. Because of this, the freehold share of all the units must be paid for, even if they chose not to participate in the freehold purchase process. Ideally, all of the flats should take part as this means that the freehold owner pays a lower price per flat.

Next, find the current market value of the flats in your property. Note that this amount should be the market value without a share of the freehold. You may check out comparative prices online, but it’s still best to ask your local real estate agent about it.

After that, find out how many years are left on the lease contracts of each flat and average them out. These are the trickier discussion points between the flat owners and the freehold owner. Lease contracts which have less than 80 years remaining raises the value for the freehold. However, this also increases the value for the flat itself, due to the fact that the transfer of freehold ownership would also extend the lease contract. This, known as the “Marriage Value”, must be shared equally (50:50) with the freeholder.

What about those flat owners who decide not to join purchase process, you ask? In these cases, the freeholder may ask for the “Hope Value” of the property. This value is an arbitrary cost that could be attached to a flat for the benefits that the leaseholder can get, such as not paying for the fees needed for extending the lease contract.

Finally, jot down the average ground rent, or the annual rent paid, per flat. Mind the graded ground rents, or rent prices that increase over time, however, as this can significantly increase the final valuation of the property.

To help you visualize this, here’s an example:

  • 10 flats in the building
  • 5 flats taking part in the Freehold Purchase process
  • £100 current average value of a flat
  • 80-89 years approximate length of lease left
  • £200 average ground rent per flat

A ballpark estimation of the freehold to be sold rings up to £24,980.00. Each flat that participated in the Collective Enfranchisement would cost £4,996.00. A caveat, however: Remember that this is an estimation only. A lot of other factors can affect the final valuation and final costs, such as the exact location of the property, the different length of leases left for each flat, or even specific clauses found on the ground rent contracts. It is still highly recommended that you reach out to professionals to get the final valuation for your property. Following a DIY valuation or failing to invest in professionals could cost you several thousands of pounds.

Freehold Sale can make these processes easier and simpler for you. Allow us to assist you in selling your freehold, to make it as worry-free as possible. Our many years’ experience in the industry has allowed us to execute these processes smoothly. Should you require expert knowledge, our team is easily available for consultation at any point during the sale. We may also recommend legal representatives from our partner firms, should you wish to pursue a clean sale.

 

Here is the everything again in a neat infographic.

Freehold 101: Everything You Need To Know About Freehold Properties [INFOGRAPHIC]

 

SOURCES:

https://en.wikipedia.org/wiki/Flying_freehold

http://www.lexology.com/library/detail.aspx?g=bb83c467-6a2d-4b74-8504-9feeea3b36f8

http://www.independent.co.uk/property/house-and-home/sam-dunn-the-house-were-buying-has-a-flying-freehold-ndash-whats-this-991301.html

http://www.conveyancing-warehouse.com/guides/flying-freehold.html

http://www.lendermonitor.com/flying-freehold/