By Simon Tye, Legal Adviser
Where leaseholders of flats wish to buy the freehold of the building, or where they already own it, they should consider carefully the basis on which they wish to hold the title to the freehold. This can affect the future management and maintenance of the building.
Many leaseholders in blocks, or converted buildings, will hold the freehold via a company of which all the participating leaseholders will be members. Decisions can then be taken under the rules of company law, by the directors or by majority of shareholders.
Where the building contains only a few flats it is not always appropriate to form a company to share the freehold, as for so few leaseholders this can be prove cumbersome, especially if there are only two leaseholders in the building.
The alternative, where there are four or fewer leaseholders sharing the freehold, is to own it jointly on the title deeds. Where this happens it is advisable to enter into a Declaration of Trust which will set out, in a binding document, the relationship and obligations between the co-owners.
The problems that we often hear at LEASE, where there is a share of the freehold on the title deeds without a declaration of trust, include:
- The joint owners cannot agree on maintenance work needed on the building, or some do not want to spend any money. There is therefore stalemate and nothing gets done. Although the co-owners will still also be leaseholders, they cannot force the freeholder to comply with the lease, because this would need all joint owners to agree.
- One joint owner wishes to sell their flat but another will not co-operate transferring the freehold over to include the name of the new owner. Alternatively, the joint owner who sells fails to transfer his share of freehold to the new owner.
- A joint owner needs to extend their lease to be able to sell the flat. The other owner(s) will not co-operate in agreeing to extend the lease or wish to charge a premium for the owner to do so. Because the joint owners are the freeholder, they could, of course, extend their own leases to 999 years at no charge to themselves, if they wanted to.
A Declaration of Trust is not a cure-all, but it can help resolve the above problems.
The Declaration of Trust can include the following:
- Provide that the joint owners hold the property as Tenants in Common so that in event of the death of one of their number, their interest in the freehold would not automatically pass to the other freeholders but would form part of their estate and pass under their will or by the intestacy rules.
- That the share of freehold relating to each flat is transferred when each flat is sold and that the other joint owners agree to co-operate in transferring the freehold on sale.
- If this has not already been agreed when the leaseholders bought the freehold in a participation agreement, an agreement to extend each other’s leases at no premium or for a charge if they wish to.
- A provision for alternative dispute resolution, or to refer matters of disagreement on maintenance ,repair and management to a third party surveyor or arbitrator and to agree to be bound by their decision
As mentioned above, the Declaration of Trust could be entered into when the leaseholders buy the freehold together or even when they already own it. However it is likely to be better to do it on purchase, as it may be easier to obtain agreement at this stage than later, when ownership is established and the parties may have become entrenched.
It is advisable to use a solicitor who specialises in this area to draft the declaration of trust.