I Bought the Flying Freehold for Cash. Now My Buyer’s Lender Will Not Accept It

A homeowner bought a property for cash despite part of a bedroom extending above an alleyway that did not form part of the property’s title. An indemnity policy was obtained and the purchase completed. The problem returned when the owner tried to sell.

The buyer required a mortgage, and the buyer’s lender would not accept the indemnity policy as a sufficient solution. The owner was then told that the council, which apparently owned the alleyway, was considering whether to dispose of the land.

Nothing about the physical property had changed. The difference was that the cash purchaser had become a seller whose buyer depended on mortgage finance.

Why the cash purchase was different

A cash buyer does not need to satisfy a mortgage lender’s conveyancing requirements. The buyer and conveyancer must still investigate the title and consider whether the property is suitable, but there is no lender deciding whether the property represents acceptable mortgage security.

That can make a difficult title appear easier to manage. If the purchaser is prepared to accept the risk, the transaction may proceed with an indemnity policy or another limited solution.

The position changes when the property is sold to a mortgage funded buyer. The buyer’s conveyancer will usually also represent the mortgage lender and must follow that lender’s instructions.

The lender may ask:

• what proportion of the property forms the flying freehold;
• who owns the land or structure beneath it;
• whether the title contains rights of support and shelter;
• whether there is a right to enter the adjoining land for inspection and repair;
• whether repair and maintenance obligations are enforceable;
• whether a deed is required; and
• whether indemnity insurance is acceptable.

A solution accepted by a cash purchaser is not necessarily a solution that every mortgage lender must accept.

What is the flying freehold in this case?

The property reportedly included a bedroom extending above an alleyway. The alleyway itself was not believed to be included within the owner’s title.

This is a typical flying freehold arrangement. Part of one freehold property extends over land or a structure owned by somebody else.

The physical arrangement creates several legal questions:

• What supports the bedroom above the alleyway?
• Does the owner have an enforceable right of support?
• Who must maintain the walls, roof and supporting structure?
• Can the homeowner enter the alleyway to inspect or repair the flying part?
• Can those rights be exercised against future owners of the alleyway?
• Who pays if structural work becomes necessary?

The fact that the bedroom has remained in place without difficulty does not answer these questions. The problem is usually not whether the structure is currently standing. It is whether the legal arrangements will work when repairs, enforcement or a mortgage sale become necessary.

Why did the indemnity policy not solve the problem?

Flying freehold indemnity insurance can be useful, but its effect is limited by its wording. It does not normally create the missing property rights.

An insurance policy cannot itself:

• grant a right of support;
• give the homeowner physical access to the alleyway;
• require the adjoining owner to maintain the supporting structure;
• create a contribution arrangement for repair costs;
• prevent a structural dispute; or
• compel every mortgage lender to accept the title.

The policy may instead cover specified financial loss arising from an identified title defect. The buyer’s lender may decide that financial cover is insufficient where the practical rights needed to maintain its security are absent.

This is why a statement that an indemnity policy was obtained should be followed by several questions:

• What precise defect did the policy cover?
• Who was insured?
• Was cover extended to future owners and mortgage lenders?
• What exclusions and conditions applied?
• Was the policy intended to meet the requirements of any particular lender?
• Was the buyer warned that another lender might refuse it?

Why one lender may accept insurance and another may not

Mortgage lender requirements are not uniform. A lender’s position may depend on the extent of the flying freehold, the rights already contained in the deeds, the surveyor’s comments and the particular risk presented by the property.

Some lenders may accept an appropriate indemnity policy where the affected area is limited and the physical arrangement is satisfactory. Others may require express rights or a deed involving the adjoining owner. A lender may decline the property if the flying element is too extensive or the title arrangements are considered inadequate.

Requirements also change over time. The relevant question is not simply whether lenders generally accept flying freeholds. It is what this buyer’s lender requires for this property and transaction.

The Lexsure Lender Archive flying freehold records show how recorded lender requirements have changed over time. The archive can also help establish what mortgage lenders were requiring when an earlier transaction completed.

Mortgageability affects marketability

A cash buyer may be able to accept a title problem that excludes some mortgage lenders. That does not mean the issue has no effect on the property’s value or future saleability.

Most sellers do not want to restrict themselves to buyers who can purchase without finance. If a title defect makes the property unacceptable to a proportion of mortgage lenders, the pool of realistic buyers may be reduced.

This is the connection between mortgageability and marketability. The property may remain legally transferable and physically usable, but it can become harder to sell at the expected price if buyers cannot obtain suitable finance.

The owner’s experience illustrates the point clearly. The indemnity policy allowed the cash purchase to proceed, but it did not guarantee access to the full mortgage market when the property was later sold.

What difference could the council’s ownership make?

The alleyway was reportedly owned by the council, which was considering whether to dispose of it.

If the property already benefits from properly drafted rights that bind successors, a change in ownership of the alleyway should not necessarily remove those rights.

If the required rights are missing or defective, the position may be more difficult. The current owner might need to negotiate a deed with the council. If the alleyway is sold, the necessary agreement may instead have to be obtained from the new owner.

The owner’s conveyancer should establish:

• whether the council owns the freehold of the alleyway;
• whether another title or statutory arrangement is involved;
• what rights are already granted in the property’s deeds;
• whether those rights bind future owners;
• whether disposal is actually proposed;
• whether the council is willing and legally able to grant the required rights; and
• whether the buyer’s lender would accept the resulting deed.

The fact that the council may dispose of the land is not itself a cure for the flying freehold. The critical question remains whether the homeowner has the legal rights required to use, support, maintain and repair the flying part.

Could contacting the council affect the insurance?

Indemnity policies commonly contain conditions restricting contact with a person who could enforce the underlying right or become involved in the defect.

Before approaching an adjoining owner, council or other interested party, a homeowner should ask the conveyancer to review the existing policy and confirm whether contact could prejudice cover.

In this case, contact with the council appears already to have occurred. That does not automatically establish that the policy has become ineffective. The precise communications, policy terms and insurer’s position would need to be examined.

The existing insurer may also need to be told about the sale, the lender’s objection or the proposed title solution.

What should the seller ask the current conveyancer?

The seller needs a precise explanation of what remains unacceptable. It is not enough to be told only that the lender has rejected the indemnity policy.

The seller should ask:

1. Which part of the property forms the flying freehold?
2. What proportion of the property is affected?
3. Who owns the alleyway and supporting structure?
4. Which rights of support, shelter, protection and access already exist?
5. Which necessary rights are missing?
6. What does the indemnity policy cover?
7. Why has the buyer’s lender rejected the policy?
8. Would the lender accept a deed granting additional rights?
9. Which parties would need to sign that deed?
10. Could negotiations affect the existing insurance?
11. Would another lender take a different view?
12. What effect will the proposed council disposal have?

The buyer’s conveyancer should also clarify whether the objection comes from the lender’s published instructions, a case specific referral, the valuer or the conveyancer’s inability to provide an unqualified Certificate of Title.

What should the cash buyer have been told originally?

The absence of a mortgage lender did not remove the original conveyancer’s duty to advise the purchaser.

The cash buyer may have needed to understand:

• that part of the property extended over land outside the title;
• the precise extent of the flying freehold;
• which rights existed and which were absent;
• the limitations of the indemnity policy;
• the practical consequences if repairs were needed;
• the possibility that a future mortgage lender could require more than insurance;
• the effect on a later sale or remortgage; and
• whether the issue should affect the price or decision to proceed.

A cash buyer may decide to accept a flying freehold after receiving clear advice. The WIB question is whether the purchaser understood that doing so could make a later mortgage funded sale more difficult.

The When I Bought flying freehold guide helps owners examine what the title documents, original Report on Title and historical lender requirements may reveal about the earlier purchase.

The purchase file may contain the answer

The original conveyancing file may contain:

• the registered title and plan;
• filed deeds describing the overlapping ownership;
• enquiries raised with the seller;
• correspondence with the council or adjoining owner;
• the flying freehold indemnity policy;
• the survey or valuation;
• the Report on Title; and
• written advice concerning resale and mortgageability.

The article Flying Freehold: What to Do If It Surfaces When Selling or Remortgaging explains how those records can help identify what was previously investigated and advised.

Our earlier article, Flying Freehold Problem: Why Lender Requirements Matter, considers how differing mortgage lender requirements can turn a longstanding physical arrangement into a transaction problem.

The related article Two Documents, One Transaction also demonstrates why the lender’s handbook instructions and its separate lending policy may both need to be considered where a flying freehold is involved.

What might resolve the current sale?

The available solution depends on the title and the buyer’s lender. Possibilities may include:

• demonstrating that adequate rights already exist;
• providing further evidence about the title and physical arrangement;
• obtaining confirmation or clarification from the lender;
• arranging an insurance policy acceptable to that lender;
• negotiating a deed granting rights of support, access and repair;
• altering the title arrangements with the relevant landowner; or
• the buyer obtaining finance from a lender whose requirements can be satisfied.

Changing lender should not be treated as a complete cure. Even if another lender accepts the title today, the same issue may return when the next owner tries to sell or remortgage.

The cash purchase was not the end of the risk

The indemnity policy enabled the original purchaser to accept the title risk. It did not guarantee that a future buyer’s lender would make the same decision.

That is the central lesson. A conveyancing solution should not be assessed only by asking whether it allows today’s transaction to complete. The purchaser also needs to understand whether the arrangement may affect the property’s future mortgageability, marketability and value.

This article provides general information and is not legal advice. Flying freehold requirements differ between mortgage lenders and depend on the title documents, the physical arrangement, the rights available and the circumstances of the particular transaction.