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There are many different challenging situations you will encounter in the world of property one of which is the subject of a flying freehold. As we will cover in this article, the issue of flying freeholds is relatively straightforward in theory but in practice it can impact borrowings as well as the market value of a property.
Definition of a flying freehold
The best way to describe a flying freehold, which is an English legal term, is a property freehold which overhangs or underlies a neighbouring freehold property. As is common, the vast majority freeholds are vertical so you have one property next to another with no overhang. However, there are a number of examples of a flying freehold which include: –
• A room overhanging a shared passageway
• A balcony which extends over a neighbours freehold property
• An extension which overhangs a room/area on a neighbouring freehold property
Many people define a flying freehold as a defective property title but these go back to laws instigated hundreds of years ago. As these are legally binding in reality there is no way of erasing the problem of a flying freehold without simply buying the property next door.
Solving the problem with covenants
As we will cover in a few moments, the existence of a flying freehold can have an impact on those looking to raise mortgage finance. You tend to find that the easier solution is the creation of a covenant between the two neighbouring property owners. This creates a legally binding obligation for each to provide support and protection for the other. So for example, in the unlikely scenario where two rooms overlap each other from neighbouring properties each would be obliged to maintain the upkeep of their area. This simply ensures that the assets of the other party are maintained and not impacted by issues such as water damage, damage supporting beams and other structural issues.
As each party has protection this does to a certain extent offer a degree of insurance when looking to raise finance. However, it must be noted that not all mortgage lenders will accommodate this type of scenario.
Positive and negative covenants
Yet another anomaly in the world of property relates to the issue of positive and negative covenants. If we look at for example a negative covenant, which may effectively restrict the ability to overhang an extension above a neighbour’s freehold property, this is binding on all future purchasers. However, if two neighbours agree their own positive covenant which ensures that each will agree to maintain areas/rooms impacted/involved in a flying freehold, these are not legally binding on future owners.
As a consequence, when a property is sold it will be up to the new owners to arrange their own covenant to protect their property. In simple terms this means that each party agrees to reinstate their property to the previous good condition in the event of damage. Many experts will advise you to take out defective title indemnity insurance in relation to a flying freehold as a further degree of protection going forward. As you are probably beginning to understand, the existence of a flying freehold is not ideal!
Raising mortgage funding with a flying freehold
Mortgage lenders are risk averse by their very nature and as a consequence you may find it difficult to obtain funding using a flying freehold as security. Even though we have already discussed a number of legal options to “protect” parties involved in flying freeholds there is one major issue to consider. In the event that the holder of a flying freehold needed to carry out work on a part of their property they may need to encroach on their neighbours land. This might involve access to carry out repairs, ferry through materials or indeed the erection of scaffolding for complicated work. What happens if the neighbour refuses access?
Unfortunately, unless there is a covenant/legal arrangement in place they are well within their rights to refuse entry onto their land. In effect, encroaching onto the property in any shape or form, without permission, is legally classed as trespass. Obviously, there are many different actions which can be taken regarding trespass and there could be significant financial penalties.
While it would be wrong to suggest that all mortgage lenders will dismiss applications involving flying freeholds, this tends to be a specialist area of the market. The problem revolves around using the freehold of a property as security on a mortgage. If this involves a flying freehold there may be issues with this value going forward if it was difficult to maintain its upkeep or there were any legal issues with the neighbour. The alternative would be the use of additional assets as security against the mortgage which would likely result in a more traditional funding agreement.
The best way to think of a flying freehold and its perceived value is the potential for this value to change. If a flying freehold was above example a neighbour’s bathroom and the bathroom fell into disrepair, impacting the structural integrity of the flying freehold this would obviously impact the value of the property/freehold. If there is the potential for any dispute over the value of the freehold, used to secure a mortgage, this would immediately ring alarm bells with mortgage lenders.
Flying freeholds are an English issue relating to laws introduced and amended literally hundreds of years ago. While there are ways and means around flying freeholds, including covenants between neighbours, there would be additional costs to incur. As we touched on above, negative covenants remain unbroken even if the ownership of the properties changes. Positive covenant, such as those required to address flying freeholds need to be agreed between property owners. So, as soon as one of the properties is sold the old legal covenant comes to an end and a new one is required. If both parties were unable to agree the terms of a new covenant there is no legal obligation to have one in place. The consequences could be huge!
When it comes to flying freeholds it is essential that you take legal advice every step of the way. While there are ways and means around potential mortgage lending restrictions it is advisable to approach such issues with your eyes wide open. It is also worth noting that if you were to sell the property in the future then a potential buyer may also have problems raising funds.
Not all mortgage lenders will accommodate lending for flying freeholds and you may need to seek the services of specialist lenders. In a perfect world you would avoid flying freeholds like the plague but unfortunately we don’t live in a perfect world.