Converting Freehold Properties into Leasehold: What You Need to Know

There are circumstances when it makes commercial sense to convert a property tenure from freehold to leasehold. These circumstances could include dividing a large house into flats or conversion of a commercial property under permitted development rights.

If you choose to go down this route you need to tread carefully. With the right legal advice it’s perfectly possible to arrive at a satisfactory outcome that saves you money and maximises the value of your investment. But there are many places where costly mistakes can be made.

Why Leasehold?

Where a building is divided into multiple homes there will inevitably be issues concerning maintenance, access, parking etc that affect all of the properties. Making all of the properties leasehold is the usual route to ensuring that these issues are managed and paid for on an equitable basis through management fees and service charges.

In England, very few lenders will offer mortgages on freehold apartments. This is due to concerns about poor maintenance or unauthorised alterations in one property affecting other apartments in the same building.


So if you want the apartments to be attractive to the wider market, leasehold conversion will be your best option.

Leasehold Options

If you don’t want to retain any responsibility for the properties after conversion one option is to sell the apartments as leasehold with a share of the freehold. Maintenance of common areas and other management issues will then become the responsibility of the leaseholders. Freehold reversion has a significant commercial value if the legal aspects are managed appropriately.

You may also need to borrow money secured against the properties to fund the conversion, which is likely to influence your plans.

On the other hand, you may want to retain a financial interest as an investment and offer short-term tenancies.  These decisions will be driven by your financial goals but it is essential that you take legal advice and make sure that lease agreements are worded carefully to protect your interests.

The maintenance and insurance obligations for the building need careful planning depending on your long term intentions and the size of the building. Rights of way, parking and communal arrangements must be documented accurately in all of the leases.


Land Registry and SDLT

Each of the new homes must be registered with the Land Registry. At this point the liability to pay Stamp Duty can be considerable depending on the entity to which ownership is being transferred. SDLT can be payable on the grant, assignment, variation or surrender of a lease – although there are options to minimise the liability including multiple dwellings relief.

Existing loans secured against the property can also affect how the conversion to leasehold should be handled to minimise tax liabilities. It’s not feasible to go into all of the intricacies of designing a tax efficient structure for the transactions and other potential issues here. Your best option is always to seek professional advice before you commit to a course of action or any serious expense.

Contact Powells Law on 01934 623501 or email helpforyourbusiness@powellslaw.com for more information.

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