Gavin Renault, Mourant du Feu & Jeune’s property practice area manager, examines the advantages and disadvantages of share transfer and flying freehold transactions

Prior to 1983, the majority of sales and purchases of freehold stand alone properties were completed by way of a contract passed before the Royal Court.

Apartments could only be transferred to a different owner by the sale of a block of shares in a property holding company and only where there was no mortgage taken against the shares. It was not possible at this time to sell the freehold of an apartment.

Two very important changes in the law transformed the way people buy certain types of property, in particular apartments. The first piece of legislation was the Security Interests (Jersey) Law 1983 and the second the Loi sur La Copropriété des Immeubles Bâtis 1991, the ‘flying freehold law’. The introduction of these pieces of legislation enabled apartments to be mortgaged.

Share transfer

A block of apartments has to be owned by a holding company. Each holding company needs tailored articles of association (the Articles) specific to their requirements.Blocks of shares in the holding company attach themselves to each unit within the block of apartments belonging to the holding company. Purchasers buy a block of shares in the holding company which entitles them to the exclusive occupation of the allocated unit. These rights are similar to freehold ownership, but are limited by the rules and regulations contained in the Articles. Completion is usually achieved by the execution of a share vending agreement, the issue of a new share certificate and the entry of the purchasers’ name into the register of members, and can take place on any day of the week.

Flying freehold

The Flying Freehold Law was introduced for the purpose of enabling co-ownership of buildings which are to be divided into separate dwellings, enabling apartments to be sold on a freehold basis as opposed to share transfer. It also became possible to mortgage flying freehold apartments in a similar way to stand alone freehold properties. In essence, the legislation allows outright freehold ownership but, again, these rights are limited by the rules and regulations contained in the declaration of co-ownership (the Declaration) of an Association. The Association is the body which notionally becomes the owner of the whole of the property.

The Declaration is the document which has to be registered in the Royal Court, prior to the sale of the first unit, and sets out how ownership of the property has been divided and determines the Destination (future use) of the private units and the common parts, as well as the conditions of their enjoyment. Completion is effected by a contract passed before the Royal Court on a Friday.

Pros and cons Housing qualifications: With share transfer transactions, the sale of shares is not generally governed by the Housing Law. The Housing Law merely controls the rights of occupation and, accordingly, share transfer units are generally available for purchase by non-qualified persons. The sale of a flying freehold unit is governed by the Housing Law and any purchaser must possess the relevant Housing qualifications. Bequeathing property: There is an advantage with a flying freehold unit in that an apartment can be left by a Will of Real Estate to an unqualified person who would be permitted to live in the apartment.

The bequest of shares, relating to a share transfer unit, is different, in that the rights of a beneficiary to occupy the apartment are governed by the Housing Law. There are also certain rules limiting what can be left in a Will of Personal Estate.

Stamp duty: Stamp duty is payable on flying freehold transactions and, at present, no similar duty applies to share transfer transactions. However, it is anticipated that the Taxation (Land Transactions) (Jersey) Law, the ‘LTT Law’, will come into effect on 1 January 2010. This is essentially a tax which will apply to share transfers in the same way as stamp duty on flying freehold/ freehold transactions.

It should be noted that first-time buyers in respect of share transfer transactions will be entitled to the same concessions that apply to first-time buyers in freehold/flying freehold transactions. Administration charges: With a flying freehold there is no company layer to the ownership structure. Share transfer companies have a company layer which is more expensive to administer by way of submissions of annual returns, accounts and maintaining statutory records. Under the Flying Freehold Law an Association is also obliged to maintain records, but the law is less burdensome. A holding company will have a company secretary and an Association will have an association representative who carry out similar roles and may levy a charge for the service they provide.

Proof of ownership: If a purchaser buys a flying freehold unit, his title is registered in the Public Registry. With share transfer, a share certificate is provided as evidence of purchase along with the entry of the purchaser’s name into the register of members. Share certificates and registers are not public documents and can be lost or misplaced.

Holding company: If you are an individual contemplating setting up either of these structures, you do not need to incorporate a holding company in order to set up a flying freehold association. In the case of share transfer, the subject property has to be transferred by the individual into the name of the holding company, which can prove to be an expensive exercise.

Favourable structures: Once the first sale has been completed in a flying freehold association, the vendor loses outright control of that vehicle, as the Flying Freehold Law limits his votes to a maximum of 50 per cent. In share transfer companies, the Articles can be structured more favourably for the developer or specific shareholders.

Matrimonial breakdown: From a Housing perspective, a spouse with a 1(1)N Category qualification, following a matrimonial break up, can remain in the flying freehold unit alone. However, this is not the case with a share transfer unit, unless the spouse obtains special consent from the Population Office.

Conclusion

There is no definitive answer as to which is the best route to take. Ultimately, a prospective purchaser is unlikely to have much choice as it is the owner of the property who will decide. The introduction of the LTT Law will take away some of the incentive to use share transfer, though developers will be keen to be selling to as wide a market as possible. Where individuals or developers are contemplating building a multiunit development, they should seek legal advice at the outset of the transaction, prior to the purchase, in order to determine the best structure to employ. This could save a considerable amount of money in the long run.