Email to a friend 
Print this page
Apartment purchase - share transfer or flying freehold?
This article was written by Lindsey Power.
Prior to the introduction of “Loi (1991) sur la copropriété des immeubles bâti” (the flying freehold law), the only way to purchase a flat in Jersey was via the transfer of a block of shares in a property owning company. Now you can use a flying freehold. This article looks in detail at the pros and cons of each approach.
Share Transfer
The company is the owner of the land upon which the property containing flats is built and the company has the ability to change its Articles of Association (constitution) to allow for the shares in the company to be divided into blocks which give exclusive rights of occupation to the specific flat or apartment described within the Articles of Association of the Company. The Articles of Association are the internal rule book of the company setting out the responsibilities of the company to its shareholders and vice versa, the procedures for the transfer of shares, for the convening of meetings, the appointment and removal of officers of the company and arbitration procedures (in the event of dispute).
You can become a member of a company by the purchase of a block of shares giving exclusive rights of occupation to a flat. The evidence of ownership is the issue of a share certificate in the name of the property owning company which identifies the purchaser of the shares, the particular block of shares purchased and the date of the transfer.The share certificate is usually signed by two directors of the company under the seal of the company.
If you have to borrow to purchase the shares then your lending institution will take possession of the share certificate together with a stock transfer form as part of its security for the loan and which allows the bank to transfer the shares to a third party if you should default on repayments and the bank is forced to take possession of the shares.The bank will also ask you to sign a security interest agreement which is a document whereby you acknowledge your indebtedness to the bank, you agree to maintain the property and the flat, you agree to make sure that the property is fully insured and that the bank’s interest is noted on the policy of insurance and you agree that the property holding company can be informed of the bank’s interest in the shares. All of these procedures effectively prevent you from transferring the shares to a third party without repaying the lending bank.
The company is owned by its shareholders and managed by its directors.In the case of property holding companies the shareholders and directors may be one and the same.The company, in the guise of its shareholders collectively, is responsible for the maintenance, repair, upkeep, decoration and insurance of all parts of the property which are not attached to a specific block of shares – usually the exterior of the building and the internal communal areas of the property.The company is also responsible for the payment of the Parish foncier rate levied on the property.The foncier rate is payable by the owner of the property whereas the occupiers rate is payable by the occupier of the property.The owners of the individual blocks of shares in the company are responsible for the maintenance, repair, upkeep, decoration and insurance (contents) of the interior of the flats including the Parish occupiers rate and utility services enjoyed by the flat.
The outgoings of the company (buildings insurance, annual return, maintenance, decoration and repair, Parish foncier rate) are payable by the shareholders in the proportions set out within the Articles of Association.They may vary in accordance with the size of the flat or whether or not the flat also enjoys a car parking space or garden area.Generally the larger the flat the larger proportionate share may be applied to the block of shares.Some companies chose to pay the outgoings as and when they arise, ie after receiving a bill, the cost is divided in accordance with the Articles of Association and the shareholders are requested to pay their proportionate share.However, this method does not provide for future extraordinary expenditure such as the redecoration of the exterior of the property which could cost several thousand pounds.These days it is preferable if the annual costs are estimated in advance and a service charge applied so that the shareholders pay their share of outgoings into a company bank account thereby building up a fund which can be available in the event of unforeseen circumstances.
All companies in Jersey are incorporated subject to the provisions of the Companies (Jersey) Law 1991 as amended and property holding companies are not exempt from the provisions which include:-
1. The re-registration of the Company by the filing of an Annual Return giving the full names, address and number of shares held by each shareholder in the company. The annual return provides details of the shareholders as at the 1st January in each year and is filed before 28th February. Failure to file the Annual Return will leave the company liable to fines and, possibly, the eventual striking off of the company from the Companies Register.
2. The maintenance of a Register of Directors of the Company giving the full name (and any former names), residential address, date of birth, nationality and occupation of each Director.
3. The maintenance of a Register of Secretaries of the Company giving the full name (and any former names), address and date of birth of the Company Secretary.
4. The preparation of income and expenditure accounts of the Company which should be placed before a meeting of the shareholders on an annual basis for their approval.
The Law is specific in these matters and problems can arise if companies fail to comply. For instance when you sell your shares it is one of the duties of the lawyers looking after the interests of the purchaser to inspect the statutory records of the company to ensure that all is in order. Those lawyers may have to give professional undertakings to the purchasers’ bankers to that effect and if they are not in order then delays in sales can occur while the records are corrected.
Smaller companies are usually administered by the members themselves, with perhaps one member taking on the responsibility of Company Secretary. The alternative is to appoint professional management.
Flying freehold
The rule of freehold ownership is that you own the land and everything constructed on that land and therefore flats could not be conveyed as real property. In 1991 the “Loi (1991) sur la copropriété des immeubles bâti” (the flying freehold law) was introduced allowing flats to be treated in similar manner to houses.A block of flying freehold flats is incorporated into an Association of co-owners when it has a minimum of two co-owners. That Association also has a constitution similar to the share transfer Articles of Association, which is called a Declaration of Co-Ownership. The declaration describes the property as a whole and breaks down that description into individual “lots” – the flats together with parking space(s), store rooms, garden area etc – and the percentage of the collective outgoings to which the owner of the lot is responsible.The Declaration further sets out how lots may be transferred, the fact that each co-owner is a member of the “Association” and has collective responsibility for the maintenance, decoration, upkeep and repair of the exterior and communal areas of the property in a similar manner to share transfer properties. Instead of a Company Secretary, the Association appoints a Managing Agent to administer the affairs of the Association. The Managing Agent may be one of the co-owners or, particularly in larger developments, professional property managers.
Whilst the administration procedures of the Association are not as strict as those for a company, the Declaration of Co-Ownership does provide that the Association should hold a meeting every year to approve the income and expenditure statements and to discuss any extraordinary expenditure.
The collective costs of the Association are payable in a similar manner to those of companies.
A lot is purchased by the passing of a contract before the Royal Court which attracts stamp duty (see below) and because flying freehold property is treated in the same way as real property the banks can secure charges against the particular lots which again attracts stamp duty.
When you borrow to purchase a lot your lending institution will ask you to sign a promissory note acknowledging your indebtedness which is registered in the Public Registry as a formal charge over the lot and you will not be able to sell that lot on without the bank being repaid and the charge formally cancelled.
The following table provides a brief list of the main differences between share transfer and flying freehold purchases:-
|
|
SHARE TRANSFER |
FLYING FREEHOLD
|
|
Who can buy? |
Anyone |
Anyone with appropriate Housing qualifications |
|
Who can occupy |
Anyone with the appropriate Housing qualifications |
Anyone with the appropriate Housing qualifications |
|
Legal fees |
Please contact us to discuss |
Please contact us to discuss |
|
Searches |
£239.50 (as at 1.1.06) |
£239.50 (as at 1.1.06) |
|
Company Search |
£5.00 |
n/a |
|
Stamp Duty on borrowing |
n/a |
0.5% of amount borrowed (discount is available for First Time Buyers purchasing for £250,000 or less |
|
Stamp duty on contract of purchase |
n/a |
Payable on a sliding scale (again a discount is available for First Time Buyers purchasing for £250,000 or less). Please contact us to discuss |
|
Administration |
Company Secretary (resident), professional management, accountants |
Managing Agent – resident or professional property managers |
|
Re-registration |
Annual Return £150 per annum |
n/a |
THIS ARTICLE IS FOR INFORMATION PURPOSES ONLY AND NOT BY WAY OF LEGAL ADVICE. PROFESSIONAL LEGAL ADVICE SHOULD BE SOUGHT BEFORE ANY ACTION IS TAKEN.