Freehold Flats

What is a freehold flat?

Flats, which includes apartments and maisonettes, are usually let on long leases (of 99, 125 or 999 years typically). A freehold flat, in the simplest terms, is one which is not let. The owner simply owns the freehold of part of the building that the flat is in. There are a few different "types" however:

Freehold includes the whole of the building and the other flats are let on long leases - If the freehold title includes the whole of the building (and any grounds) and the rest of the flats in the block are let on long leases, this is ok because the owner of the freehold, as landlord, can enforce the tenant covenants in the leases (and the tenants can enforce the landlord covenants from the lease against the landlord). Unlike freehold covenants, positive covenants contained in leases are enforceable by and against the landlord and tenant for the time being. You will know if the rest of the flats are on long leases because those leases will be detailed in the Charges Register;
Freehold includes the whole of the building and none, or not all, of the other flats are let on long leases - this is simply means that the owner owns the whole block, or more than one flat in the block. This is sometimes called a "multi-unit freehold block". there is nothing wrong with that in principle, however if just one of the flats is to be sold (or mortgaged) then a lease will need to be created for it, with the freehold reversion remaining part of the existing freehold title. Otherwise, once the freehold of that part of the building is separated from the rest the ability to enforce positive covenants is lost;
Freehold includes only the flat itself and it is subject to a lease - this may well be a Tyneside lease (or crossover lease);
Freehold only includes the flat itself (or it includes more than just the flat but not the whole building) and there is no long lease granted out of the title - this is the type of freehold to be concerned about.

What are the issues?

Whilst at first glance it might seem beneficial to own the freehold, because the owner is not answerable to a landlord and there is no diminishing lease term to worry about, however the reality is that it is, or can be, quite a serious problem, because of a lack of, or inability to enforce, positive covenants between flat owners. A block of flats relies on the cooperation of all the flat owners to function most effectively (this is more the case for larger blocks with communal parts but does still apply to any size, even a house converted into 2 flats). Positive covenants are required to enforce that cooperation. These include:

covenants by each leaseholder to maintain and repair their property;
covenants to contribute to the maintenance and repair costs of any common parts (including the structure, roof and foundations);
covenants to insure their property, or else to contribute to the cost of an insurance policy for the whole building;
covenants by the landlord to carry our repairs and maintenance (and potentially to insure) subject to the leaseholders paying their contributions; and
a covenant by the landlord to enforce covenants against leaseholders who fail to comply (for the benefit of the other leaseholders).

Positive covenants do not "run with the land", which is to say that if a landowner enters into a covenant with another landowner, then sells their property, the purchaser may be bound by restrictive covenants (covenants to not do something, such as not to build or not to cause a nuisance) that the previous owner entered into but he will not be bound by positive covenants, such as those listed above. Positive covenants in leases are treated differently, because of the common law doctrine of "privity of estate" and for leases granted on or after 01 January 1996, the Landlord and Tenant (Covenants) Act 1995. Both of these results in the same thing, which is that the current landlord and the current tenant are bound by and have the benefit of the covenants (both positive and negative) in the lease whilst they are the landlord and the tenant.

So, if the flat is a freehold flat, the owner cannot be forced to repair and insure, or contribute to repair and insurance costs, and cannot force the owners of the other flats to do likewise. Although initially the flat owners may agree to a set of rules which they follow voluntarily for their mutual benefit, there is a real risk of the arrangement collapsing should just one fail to comply. As a result of the risk, almost no institutional lenders will lend on freehold flats.

What are the possible remedies?

Creating a lease for the property might seem like an obvious solution, but it wouldn't help unless the freehold of the whole building was in common ownership. If the seller currently owns the freehold of the building then they should grant a lease of the flat to the purchaser rather than transferring the freehold. Use the search box on the right to find out more about granting new leases. If the freeholds of the flats are owned by different people then having the seller grant a lease to the buyer and retain the freehold doesn't help because the positive covenants would still only be enforceable between the seller and the buyer, not the owners of the other flats in the block, so it would still have all of the issues associated with freehold flats.

One option is to get all of the flat owners to agree to enter into a deed of covenant with each other. The covenants in the deed would be similar to those you would find in a lease. The exact detail of how the block would be managed would need to be agreed by all flat owners first. These are the points that should be addressed:

will the flat owners each be responsible for the part of the structure that is included int their freehold title or will all the flat owners be jointly responsible for the building?
if the latter, will an annual or other periodic programme of maintenance works be put in place or will works be carried out on an "as and when required" basis?
will an annual service charge be collected or will contributions be collected only when specific costs are identified?
if yes to the above with the flat owners manage this between themselves or will a managing agent be appointed?
will there be a sinking fund?
will a management company be created in which the flat owners are the shareholders / members?
will each flat owner insure their property or will a policy be arranged that insures the whole building?
if the latter, who will decide on the choice of insurer?
how will the insurance proceeds be divided if the building is destroyed and cannot be repaired?
what will the requirements be on a change of ownership of any flat and how will they be enforced - will there be a fee payable?

Such arrangements may already be in place. If they are then copies of the most recent deeds entered into by all the flat owners should be obtained and checked (so as to ensure that all the current owners have entered into the same covenants) and the buyer should enter into a deed for the benefit of the other flat owners (the others do not need to sign as the right to enforce the covenants does run with the land, it is just the obligation to comply that does not pass to successors). It is imperative that the title to each property contains a restriction requiring a certificate (usually from the purchaser's conveyancer) that the purchaser has entered into a deed of covenant with the other flat owners, before a transfer can be registered. This makes sure that each new owner of each flat has to enter into the covenants. As with any restriction now, one of the standard forms will need to be used. Standard form L is suggested, specifically the following version:

"No disposition of the registered estate (other than a charge) by the proprietor of the registered estate or by the proprietor of any registered charge, not being a charge registered before the entry of this restriction, is to be registered without a certificate signed by a conveyancer that the provisions of {specify clause, paragraph or other particulars} of {date of parties to deed} have been complied with"

The deed referred to will be the deed that originally created the covenants and easements. Once all of the flat owners have entered into the original deed, any subsequent owner simply need to covenant to comply with the terms of the original deed. The original should be filed at HMLR against each title.

If there are currently no arrangements in place, or if they are not formalised, then the seller's conveyancer should seek to arrange for all of the flat owners to enter a deed which:

grants a right of way over any communal areas;
grants a right to use any communal facilities such as gardens or bin stores;
grants rights of access to the other parts of the building for the purpose of repair and maintenance;
if a management company is to be created, grants a similar right for the benefit of the company and its agents and workmen;
contains covenants either to contribute to the maintenance and repair costs of the building or else to maintain and repair their flat, depending on what is agreed;
contains covenants either to contribute to the insurance costs or else to insure;
if the maintenance, repair and insurance is to be dealt with either by the flat owners as a collective or by a management company or residents association, a covenant by the individuals or entity to carry out those functions;
covenants by the flat owners relating to nuisance, such as not to play music between certain hours, not to loiter etc; and
a covenant that on a change of ownership the seller will ensure that the new owner enters into a deed requiring them to comply with these covenants.

This sample letter may prove useful. It is important to remember that none of the flat owners can be forced into agreeing to any proposed arrangement and there is no real benefit to it unless all agree. Any current mortgagees of any of the properties will not be bound by the arrangements, should they take possession and sell.

Should all flat owners agree to enter into a deed this specimen deed of easement and covenants may be amended as appropriate.

What advice can I offer the client?

Where no positive covenants have been entered into between the flat owners, or where they are not enforceable because there is no restriction against each title, then should any substantial work be required to the building such a repairs to the foundations or a replacement roof, each flat owner is relying on the goodwill of the others to pay their share so the risk is that either the work does not get done and the property eventually deteriorates or else the cost will have to be borne by your client alone. Even if the right covenants exist and are enforceable, on or more of the flat owners may refuse to comply. If that happens, the person seeking to enforce the covenant may have to do so through formal legal proceedings, i.e. by suing the defaulter. This can be expensive (with no guarantee that legal costs can be recovered) and as with any litigation there is a risk that it might fail.

In a traditional landlord/tenant setting the landlord has much more powerful weapon in the event of a tenant not paying service charges or complying with other covenants, which is forfeiture. By exercising forfeiture the landlord can terminate the lease, take possession of the property and sell it to recover its loss. That option is not available in a freehold flat setting and is the main reason why most lenders will not lend on freehold flats and why they are less valuable than their leasehold counterparts (assuming a reasonable remaining lease term).

When reporting to a client you may use or adapt the following, or else if you are a subscriber, you could use our title checking & reporting tool which you can select from the virtual conveyancer menu on the left.

The property is a “freehold flat”. Flats are normally “leasehold” which means that rather than owning the property outright, you would have a long tenancy (usually starting at 99 or perhaps 999 years) after which the property would revert to the freeholder. At first, it might seem that owning the freehold would be better than owning a leasehold interest as it would mean that you wouldn’t have the issue of a diminishing lease term and it is true that that is an advantage, however the problem is that where your property is a flat in a block, as well as looking after you own property you are dependent on the owners of the other flats and shared parts of the development looking after their properties to ensure that yours is protected from nuisance and damage and that any shared areas remain in good condition. For example, the whole of the building needs to be insured against fire or flood or subsidence and you need to make sure the roof and foundations are maintained and if necessary, repaired.

Where the flats in the block are let on long leases, those leases will contain obligations, called covenants, by the leaseholders, in favour of the freeholder, or landlord, to maintain their properties and to contribute financially to the upkeep and insurance of the shared parts of the building and the development. In return the landlord will covenant to carry our repairs, insure the building and enforce the obligations against other flat owners if necessary. Covenants contained in leases are binding on the leaseholder/landlord for the time being, so if a flat is sold the purchaser is automatically obliged to comply. Likewise if the freehold is sold by the landlord, the new landlord is bound. Where either a leaseholder or landlord fails to comply with the covenants in the lease there are powerful remedies available – a leaseholder may lose the property altogether and a landlord may be forced to pay compensation or to sell the freehold.

In contrast, positive covenants (that is to say, covenants to do something such as repair or contribute to the cost of repairs) not contained in leases are not enforceable against future owners, so as the flats are sold by the original owners the new owners are not bound by any of the original covenants.

INSERT IF NO POSITIVE COVENANTS EXIST:

[In this case there are no positive covenants by the flat owners. Each flat owner therefore must rely entirely on the goodwill of the others to behave in a neighbourly manner, to insure their properties and to contribute to the cost should any repairs be required.]

ELSE INSERT IF THERE ARE POSITIVE COVENANTS BUT NO RESTRICTIONS:

[Although there is an arrangement whereby each new flat owner is expected to enter into a deed of covenant with the other flat owners, there is no mechanism to enforce this. We would hope to see a restriction against the title to each property requiring each new owner to enter into a deed of covenant before being registered as the owner, but no such restrictions exist.]

ELSE INSERT IF THERE ARE POSITIVE COVENANTS AND RESTRICTIONS:

[In this case there is an arrangement in place whereby each incoming flat owner is required to enter into a set of positive covenants which mirror those you would expect to find in a lease and it is underpinned by restrictions on the title to each property which mean each new flat owner has to enter into the covenants before being registered as the owner. This is useful however should any flat owner default, the only way to force them to comply would be through litigation, i.e. the other flat owners would have to sue.

Litigation can be expensive (with no guarantee of recovering legal cost) and there is a risk that it will fail. In a traditional landlord/tenant arrangement the landlord would not have to rely on litigation and could instead exercise (or threaten) forfeiture, where the lease comes to a premature end and the property reverts to the landlord, who can sell it to recover loss There is no equivalent to this very powerful deterrent in a freehold flat setting, so that whilst the positive covenants are enforceable in this block in principle, the practical reality may be quite different.]

The problem of being unable to enforce positive covenants is considered so serious that none of the major high street mortgage lenders will lend on freehold flats. This not only means that you would likely never be able to mortgage this property but also that you may have difficulty selling it and the fact that you would be limited to cash buyers would likely have a negative impact on value.

In summary, the property you are proposing to buy would not be considered suitable security for most mortgage lenders and would have a limited resale market which could adversely affect value especially in a slow property market. If you choose to proceed, I recommend that before you do, you advise your valuer (assuming you have had a professional valuation) that the property is a freehold flat with no scheme of enforceable covenants and ask whether that affects the original valuation.