An absent freeholder may initially seem like a blessing. No maintenance to pay, no ground rent, no service charges, no freeholder to answer to.
Usually the freeholder is also responsible to arrange the buildings insurance too – so no buildings insurance to pay either.
In fact, the reality of a missing or absent freeholder is far from a blessing.
An absent freeholder may well affect whether or not you can obtain a mortgage for the property, making it more difficult to buy or sell a leasehold property.
Maintenance issues will still need to be addressed. If there is nobody at the helm, who is going to arrange for the gutters to be repaired, the walls & communal area’s to be painted? If you are not paying a monthly or annual service charge then these maintenance jobs will mount up and at some point will still need to be carried out. So, don’t go spending the equivalent of the money you would have paid a freeholder as chances are, you’ll have to produce the funds at some point in the future.
Insurance can also be a problem with a missing freeholder. Under the terms of the lease, usually the freeholder arranges the buildings insurance cover and the leaseholders pay a proportionate amount towards the cost.
An example of an insurance problem with an absent freeholder involved
A block of 4 flats, the freehold is owned by Mr Smith who has sold the lease to each of the flats. Having sold the leases, Mr Smith has gone ‘off radar’ and nobody has heard from him for the last 6 years.
A fire destroys the block of flats making them uninhabitable and they need complete restoration at a cost of £100,000 each.
The leaseholders (or their tenants) have to move out of the property – who will pay for alternative accommodation?
If the flats were let, who will pay for the loss of rent? – remember, a leaseholder may have obtained a ‘buy to let’ mortgage and may depend on the rental income to service the mortgage.
Most importantly of course, who will pay for the repair and renovation works to the flats at £100,000 each?
When this situation arises there is no easy answer. In most circumstances the freeholder is responsible to insure the property but if he can’t be traced, then it is down to the freeholders to resolve the issue. From the leaseholders point of view, they may have purchased their flat for £400,000 and clearly have a significant amount of capital at risk. They still have to pay their mortgage, they need to pay to live elsewhere and there is no way their flat is going to be rebuilt unless they can find £100,000 per flat to carry out the works.
If the freehold of the property was subject to a mortgage which was not being paid then the lender may repossess the freehold and then become responsible for the insurance, maintenance and repairs etc. If there was no finance on the property then unless the leaseholders can collectively find the money for the repairs then it is more than likely the money they have invested will be all but lost.
A very much publicised fire in a block of flats in Sheerness resulted in the burnt out shell of a freehold property being sold with a reserve of £5,000 – the property included the freehold title to 7 badly fire damaged flats. The freehold actually sold at auction, on the day, for £34,000. There is no information available as to what happened to the leaseholders of the 7 flats although we hope those individuals injured in the fire are well on the road to recovery. Click here for a link to one of the most recent articles relating to the entire property sold at auction
Insurance for property with an absent freeholder
Despite a general insurance market reluctance, insurance for property with an absent landlord / missing freeholder is available. We can provide insurance for these properties, either covering an individual flat or for the for a block policy. It is always preferable to take out a policy in joint names with the other owners of the flats for several very good reasons.
For example, you may own the top floor flat and have insurance cover in your own name for your own flat. The person(s) in the flats below may not have insured their flats and in the event of a catastrophic loss, the property may need to be completely gutted to enable repairs to be carried out.
Without insurance for the other flats the reinstatement of your top floor flat may be impossible, leaving you with a valid insurance policy but no way of rebuilding your property. In this situation it is likely the insurers would settle the claim for the cost of rebuilding or the market value, whichever the less. A significant disadvantage of an individually owned flats insurance is the loss of value if there is a claim and the property cannot be rebuilt. Indemnity insurance for loss of market value is not currently available.
Using this example, if the insurer settles for £100,000 but you can’t rebuild the flat as the other flats in the block need rebuilding work at the same time and the market value is £400,000, this leaves you £300,000 out of pocket.
There is always some risk of effecting a policy for a single flat and it is worth, in every situation, investigating whether a block policy can be effected so that all the flat owners have peace of mind that they will have a policy they can rely on.