When it comes to property investment, few topics cause more confusion among landlords and investors. So what is the problem with a freehold flat? This case study explores how one of our clients found themselves restricted by their freehold structure when seeking mortgage finance, and how a carefully considered restructuring resolved the issue.
Our client, an experienced property investor, owned a converted building comprising five individual flats. Years earlier, the building — formerly a commercial property — had been redeveloped into residential units. Two of these flats had been sold on long leases, while three were retained under the freehold title and operated as buy-to-let investments.
The ownership was held through a limited company, with three brothers sharing the business equally. As time passed, two of the brothers decided to sell their interests, while the remaining brother wished to retain ownership of the property portfolio.
To acquire full control, the remaining brother agreed to buy out his siblings by purchasing their shares in the company that held the freehold. This approach was fiscally efficient — triggering only stamp duty on the share transaction rather than on the underlying property assets.
However, complications arose when he sought to refinance the portfolio to fund the purchase. Most mortgage lenders were unwilling to lend against a freehold that included multiple flats, particularly when some of those flats had already been sold to third parties.
Lenders typically view this type of freehold as complex security. The issue is that the freeholder, despite owning part of the building, does not have sole control, because other leaseholders are independent owners. This creates uncertainty for lenders regarding enforcement rights and resale value in the event of default.
The issue wasn’t financial — it was structural. The freehold ownership of multiple flats, where some have been sold under leases, restricts the ability to raise mortgage finance directly on the freehold title. Few lenders are willing to lend against a mixed tenure building because of the inherent complexity of the title structure.
Moreover, creating new loans against individual flats within the same entity that owns the freehold adds further difficulty — the same company cannot legally be both the freeholder and leaseholder of the same premises.
Our specialist advisers identified that the only practical route to refinancing was through restructuring the ownership. We recommended the creation of long leases for the three retained flats and the formation of a new subsidiary company to hold these leases.
The freehold remained in the original holding company, while the newly created subsidiary acquired the leasehold titles for each flat. Because the new company was wholly owned by the holding company, stamp duty was not applicable thanks to group relief.
The lender reviewed the proposed structure and confirmed its eligibility. Unlike the original freehold, the leasehold titles provided clear and acceptable security for mortgage finance. This structure not only facilitated the immediate refinance but also laid the groundwork for easier transactions and refinancing in the future.
Following the restructuring, the client successfully refinanced the three retained flats, raising the necessary funds to buy out his siblings. The new ownership structure also simplified the security for lenders, ensuring that any future borrowing would be more straightforward and conventional.
The process did require additional legal and administrative work, including the drafting of new leases and the incorporation of a subsidiary company. Nevertheless, the long-term benefits — enhanced borrowing capacity, reduced tax exposure, and lender-friendly security — proved well worth the effort.
This case highlights an important lesson for property investors: freehold ownership of flats can present significant financing challenges. While owning both the freehold and leaseholds in a building may seem advantageous, it can inadvertently limit mortgage options and complicate refinancing.
Where separate leasehold interests exist, lenders prefer to secure their loans against a defined lease title rather than the overarching freehold. As such, creating a structure that separates the freehold and leasehold interests — even within a group of related companies — is often essential.
In answer to the question, what is the problem with a freehold flat? — the issue lies not with the ownership itself but with how it affects your ability to borrow. Freehold flats can seem attractive and secure, but for investors seeking to refinance or expand their portfolio, they often present unanticipated barriers.
With the right legal, tax, and mortgage guidance, however, these challenges can be overcome. As shown in this case study, thoughtful restructuring allows property investors to protect their assets, optimise their finance options, and ensure flexibility for future investment opportunities.
At Private Finance, we specialise in delivering comprehensive mortgage and insurance solutions tailored to complex ownership structures — turning potential obstacles into pathways for growth.
Call 0800 980 8777 or book your mortgage appointment here.
Disclaimer:
The information presented in our case studies is intended for illustrative and marketing purposes only. Some case studies may be based on multiple enquiries or hypothetical scenarios to demonstrate typical processes or outcomes. Not all case studies represent completed business transactions, and the inclusion of a case study does not imply that the business was successfully concluded.
