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Buying Your Freehold
With the recent financial problems with Peverel Group a number of questions have been asked as to how a Leaseholder can take control of individual Freeholds.
The following article covers a range of situations and is offered as is.
Buying your freehold
Falling house prices coupled with low mortgage interest rates mean that now is an ideal time to consider buying your property’s freehold. “Property values have dropped over the last 18 months so it’s cheaper to do this now,” says Richard Osborne-Young, partner with property consultancy King Sturge.
There are certainly advantages to holding the freehold to your property. “If you own the freehold you have control over the property,” says Fiona McIntosh, property lawyer at Cripps Harries Hall. “For example if any repairs are required the tenants can control who the work is carried out by, when it is done and the costs.”
Another key advantage is that a lease is a wasting asset, potentially reducing the value of your property as the term shortens. Buying the freehold removes this problem.
The disadvantage is cost, although this will generally be offset by the advantages and the enhanced property value a freehold will give you.
How to buy your freehold
Although there are still some leasehold houses in the UK, for instance former staff cottages on country estates, the commonest instance is where flat owners get together to buy the freehold of their building. This process, known as collective enfranchisement, is allowed under the Leasehold Reform Housing and Urban Development Act 1993.
First you need to check you qualify. You must have a lease which, when granted, was for at least 21 years; it can’t be a business lease; and you can’t own three or more flats in the building.
There are also conditions relating to the building. It won’t qualify if it is made up of four or fewer flats and the freeholder lives there; if more than a quarter of the floor space is used for non-residential purposes; or if it is part of an operational railway.
Neither do you need agreement from every flat owner in the building. As long as at least 50 per cent of the flats in the building want to buy the freehold, you can make a claim. Further, if any reluctant flat owners later change their minds, or new people move into the building, they can be added to the freehold.
To kick off the process you must serve a notice of claim on the freeholder, proposing a price for the freehold. The landlord can either accept this price and the sale will proceed, or, more commonly, reject the offer by serving a counter-notice that sets the price they want for the freehold.
Where there is a disagreement on price, negotiations then start. Where an agreement can’t be met, you can go to a leasehold valuation tribunal, which will set the price.
If you want to buy the freehold on a house, the situation is slightly different. Again, notices are served to indicate you want to buy the freehold, but you don’t have to specify a price.
Professional advice is essential. Mr Osborne-Young says: “Although the process is relatively straightforward, it can take time and the notices must be served in accordance with legislation. Similarly, a qualified surveyor can advise on the price and negotiate with the freeholder. You can do it yourself but without the appropriate knowledge it could be costly.”
With both flats and houses, you may find the landlord is prepared to sell the freehold voluntarily. This will cut out the need to prepare notices but it is still prudent to seek professional advice.
There are two sets of costs involved when you buy a freehold. First there is the cost of the professional advice. “For collective enfranchisement the legal costs run into £1,000s although these will be split between the participating flat owners,” say Ms McIntosh.
Surveyor’s costs will depend on the complexity of the case. In both instances though, it’s worth getting estimates from several companies before choosing.
You’ll also be expected to pay the costs of the landlord, providing they are reasonable. The exception to this is if you end up at a tribunal to determine the value of the freehold.
Calculating the price you’ll pay for the actual freehold is more tricky. “The valuation principles are complex and take into account factors such as the building’s investment value to the freeholder, the ground rent and any compensation for loss in value of other property owned by the freeholder as a result of the sale of the freehold,” says Katherine Simpson, partner in the residential estate group at Pemberton Greenish. “But as a general principle, as the existing lease gets shorter, the more you’ll have to pay.”
Many people look to remortgage to finance the purchase of the freehold, with lenders viewing a freehold property as better security than a leasehold one. Ms Simpson adds: “Lenders may consider extending an existing loan or securing a first charge to cover the cost of the freehold acquisition. Normal lending rules do apply though and they will take into consideration whether there is sufficient equity in the property before allowing you to remortgage.”
Is it the best option?
In some cases it’s not such a smart move to buy the freehold. Mr Osborne-Young says that this can be the case where the leaseholder is elderly and has no beneficiaries. “If the remaining term is of sufficient length to cover the most optimistic view of life expectancy, there’s little point in spending the money,” he explains.
Further, it may be an easier option to simply extend the leasehold on your flat.
“It can be difficult to get agreement with other flat owners in the buildings, especially where flats are changing hands regularly or there are a lot of rented flats with the owners living elsewhere,” says Ms McIntosh.
Legislation allows you to apply for an additional 90 years to be added to your lease. As well as reducing the ground rent to nothing, you can also make other changes to your lease, for instance, allowing pets or altering rules on decoration.
Again it’ll cost you and Ms McIntosh recommends checking the term of your existing lease. “The calculation takes into account the number of years remaining on your lease. If this figure is greater than 80 you will pay significantly less than if it was less than 80 so if you’re approaching this point, act now,” she explains, adding that the process could take up to six months, longer if there are any disputes.
Although not as attractive as owning your freehold outright, it can make your property worth more than a similar property with a shorter lease. And, when property prices do increase, having a larger stake will mean you’ll benefit more too.
The Leasehold Advisory Service is a public body funded by the government to provide free legal advice on leases. Its website is at www.lease-advice.org.uk and its telephone number is 020 7374 5380.
The Association of Leasehold Enfranchisement Practitioners is a professional association for solicitors, surveyors and other advisers involved in leasehold enfranchisement. It can provide advice and its website is at www.alep.org.uk and its telephone number is 0845 225 2277.