posted 18 August 2005 10:16 AM         

At present your flat will be mortgageable because you will be buying the freeehold of the whole building with the benfit of the ground rent etc from the other flat and most lenders will accept that situation. A few don't understand it because they think it is the same as a separate freehold flat.

What you could do is transfer a half share in the freehold of the whole building to the lessee of the other flat. If his lease says that the freeholder is responsible for insurance or external maintenance subject to a contribution by him, you will not be able to forget about it - you will still have a joint responsibility. You can't say to him that he should insure his flat and forget about and not bother to check if does. If he doesn't and there is serious damage to the building then your insurers and your mortgage lender would be very angry that you had not carried out your duty to check what he did - which you would have to do if the lease actually says there should be one policy for the whole building. Owning a property jointly makes both equally liable.

The other major problem with it is that if he doesn't pay his mortgage and the property is repossessed, his mortgage lender will be able to sell his lease (subject to a point I'll make below), but assuming he has disappeared over the horizon without trace, you are stuck with a jointly owned freehold and you need his signature if you want to sell it!

You can get round the last difficulty by setting up a company owned by you both to own the freehold. If he doesn't show up to company meetings then you can pass resolutions to do things and e.g. issue a share to an incoming lesee without his consent. Trouble with this is that there is an initial cost in setting up the company and you have to make sure that you keep up the annual returns to Companies House.

Another method is for you to set up a trust to regulate the way you jointly own the freehold. This could give you power to replace an absent trustee in certain circumstances to enable you transfer the freehold on a sale.

The final point you need to know is that a 60 year lease is scarcely mortgageable. Many lenders require at least 60 years left and even the most liberal want 50-55 years. A freeholder can in practice ask quite a large sum, usually four figures and sometimes five, to extend a 60 year lease.

For instance in my area, I have clients, one with a flat worth about £135000 with a 65 year lease with the freeholder wanting £4000 and another with a 70 year lease worth about £115000 with the freeholder wanting £10500 to extend. When he comes ot sell his flat he will probably ask you for a lease extension and you will then be in a strong position. At that point you could make it a condition that the wording of the lease is modernised and the ground rent increased. Unless he wants to sell it, he probably won't want to buy a half share now. He won't see any advanatge for him. If you ask what you think is a market value for a half share, bearing in mind the strong position you would be in, then he may then turn the tables on you when you want to sell and ask for some money back in return for his signature.

It will inevitably depend on your relationship with him in the long term as to whether you feel comfortable asking a large sum of money to extend his lease so he can sell it. You will need to think about whether you paid/are paying significantly over the odds for the freehold to take into account the future windfall profit. This is possible, but I suspect that most private purchasers would not be interested in paying more for a flat for some future advantage in the same way that a property company buying a block of 40 year old flats might do, knowing they could extract large sums on lease extensions. So there is a moral issue. You might be able to ask a lot in theory to extend the lease in the future, but is it fair if you didn't really pay a lot more because it was freehold? Also, you have to live with him upstairs!

I am slightly surprised that your solicitor has not gone into all this with you.

You will gather that I am a conveyancing solicitor - obviously I can't create solicitor/client relationship with you on this as I don't know all the circumstances - but I hope that the above is some help to you.