Wise To Sell The Freehold Of A New Flat Conversion

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    Wise To Sell The Freehold Of A New Flat Conversion

    I have converted an end terrace in the south-east into two, two bedroom flats, to be sold. The building was stripped back into a shell with no roof, effectively resulting in a new build. The building is currently owned as a freehold by a company. I have not created individual leases yet but will grant these to each buyer at the point of sale. Additionally, I would like to offer the sale of each flat with a share of freehold and completely remove my involvement with any management and future maintenance of the building. I have accepted an offer for the first flat and the buyer has offered to purchase the share of freehold too. The second flat is still on the market.

    I am getting conflicting advice on how this sale should go through. On the one hand, I'm being told that you cannot transfer a share of the freehold of one flat to the new buyer (future leasholder), until the other is also sold and that the leasholder agreement will need a trigger mechanism to allow for this. However, this would alter the mortgage value and terms that the buyer of the first flat would need to apply for (will a mortgage lender pass a loan based on a future grant of a 'share of freehold'?). Whilst on the other hand, I'm being advised not to sell the freehold at all and only grant 99 or 125 year leases and collect the ground rent (as well as manage the building insurance, maintenance, etc.)?

    Could anyone with experience in these small conversions advise on the best plan forward? I suppose the questions at the heart of this decisions are:

    - Is it worth retaining the freehold for such a small conversion?
    - Is there any benefit in the freeholder granting a 99 year lease over a 125 year lease?
    - What is the maximum acceptable annual ground rent which can be charged per leaseholder (I understand lenders don't like unfair amounts and terms)?
    - How do I accurately determine the actual value of the freehold? (I've used a couple of online calculators to determine what the freehold (as a share of for each flat) is worth. But I'm struggling to find a surveyor who can value the freehold without charging a fortune and me being confident in his valuation.)
    - If I sell the share of freehold to each flat, or only one of the two is interested in it's purchase, what is the process/legal setup for this?

    #2
    You should consider setting up a company to own the freehold, and sell shares in it to the leaseholders. In the past it would actually be set up as limited by guarantee, and the lease would require leaseholders to become members. One advantage of a company, is the articles can say how conflicts between the leaseholders as to its running can be resolved.

    There is very strong pressure towards zero ground rents, but if you are going that way, make sure that the lease covers the freeholder's management costs (e.g. company administration costs).

    I believe there is a feeling that anything that results in ground rents that at any time exceed either of 0.1% of the leasehold value or, in present money, £250 are excessive.

    For two flats, share of freehold can be implemented either by making the leaseholders (or you and one of them) tenants in common of the freehold, or by creating a company, that owns the freehold, of which the leaseholders are members.

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      #3
      In our, 1971, case, the company was limited by guarantee and transfer from the developer to the leaseholders only happened when all the flats had been sold. The lease requires membership, and the articles restrict membership. However, this was for 30 flats, not 2.

      Tenants in common is most common for small developments, but has the difficulty that, by default, only all the leaseholders acting together, can enforce covenants, which generally means it is impossible to enforce them, as you need the agreement of the leaseholder against which you are taking action!

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