Understanding Residential Flat Schemes

The need for new housing continues to be prevalent, as shown in many of the recent election manifestos. Existing houses and commercial properties are regularly being converted by developers into residential flats.

It is easy to see why properties are developed in this way, however, getting the structure right for your business is less so. There are a few ways that flat schemes can be set up and it is important to know how at the outset as this will likely dictate your business model and cash flow into your company. Whether you are an experienced developer or a first timer this note can assist you with your decision.

The structure of lease schemes can include the following:-

1. Retention of the freehold reversion and management by the Landlord

You may elect to proceed down this route if want to keep control of the building during the Lease term. Keeping hold of the freehold reversion can provide a steady stream of income through the payments of ground rents by tenants. These ground rents can only be of limited value as a number of mortgage lenders only accept these where the annual payment is no more than 0.1% of the premium paid for the grant of the Lease. Limitations are also in place for the increase of these ground rents during the Lease term.

Additional value can also include premiums being payable by tenants where they need to extend the term of their Lease. A balance will need to be struck to keep hold of this additional value but not to the detriment of the marketability of the flats by granting an attractive term. For example, if a lease is granted for 125 years (with some mortgage lenders requiring at least this amount for a new lease), the Lease is unlikely to need extending for at least another 40 years.

Keeping hold of the freehold will include the management and up-keep of the building which can include administration of the service charges, insurance and maintenance of any common parts to name a few. You will therefore need to decide whether your business has the infrastructure in place to deal with this administration.

The freehold of the building can still be sold at a later date, however, this may be dictated by the Landlord and Tenant Act 1987 depending on the nature of the building and whether the qualifications are met. This is outside the scope of this note and further information can be provided upon request.

2. Retention of the freehold reversion with the management of the building being delegated to a third party management company

Proceeding in this manner can provide you with the benefits of the above scheme without the accompanying administrative burden. The costs of outsourcing a managing agent to deal with this on your behalf can be costly, however, this may work better for your business model and future requirements.

3. Setting up of a management company to be owned by the flat owners with the freehold reversion being transferred to such company from the Landlord upon completion of the last flat sale.

This scheme requires a management company to be incorporated (usually limited by guarantee) whereby the Lease includes provisions for the freehold of the building to be transferred to the Management Company after completion of the sale for the last flat. A designated owner of each flat is then appointed as a director of the Management Company and the developer director then resigns, leaving the control with the flat owners.

Whilst this scheme does not provide as much revenue over time for the developer, it does allow them to relinquish all control of the development once the premiums for the leases have been paid. No further involvement with administration of the development will be required and the developer can simply move on to their next project. It also improves the marketability of the flats to potential buyers as they will have a say in the management decisions for the building.

If you would like to discuss a Bespoke or Commercial Property issue or require additional information about lease schemes and the wide range of work that we undertake, please contact Reece Chapman, Solicitor on 01908 660966 or via email at reece.chapman@franklins-sols.co.uk. Further information on the services we offer can also be found on our Commercial Property page.