THINKING OF EXTENDING YOUR LEASE OR BUYING THE FREEHOLD? Tue 31 Jul 2018

If there are less than 80 years remaining on your lease its value may fall more rapidly as the cost of extension or purchase of the freehold rises.
If there are less than 80 years remaining on your lease its value may fall more rapidly as the cost of extension or purchase of the freehold rises.

THINKING OF EXTENDING YOUR LEASE OR BUYING THE FREEHOLD?


If there are less than 80 years remaining on your lease its value may fall more rapidly as the cost of extension or purchase of the freehold rises. A short lease can also reduce your chances of selling, obtaining a mortgage and/or re-mortgaging.
 
The difference in value between a property with a lease in excess of 80 years and one with a share of freehold may be  minimal – it’s more a question  of saleability.
 
The Leasehold Reform, Housing and Urban Development Act 1993 enables leaseholders to collectively acquire a share of their freehold - known as enfranchisement - provided at least 50% of the lessees in the property want to do so and any commercial space in the building forms no more than 25% of the total.  There is no statutory obligation on lessees seeking to acquire their freehold to ask all qualifying neighbours to participate. 
 
On the other hand, freeholders who wish to sell their freehold interest in a block of flats must serve a Section 5 Notice under the Landlord and Tenant Act 1987 on leasehold flat owners giving them the opportunity to acquire the freehold of their flat i.e. ‘Right of First Refusal’.  Leaseholders need to balance the cost of acquisition and added responsibilities against the potential increase in value, saving in ground rent, cost of  obtaining permission to carry out future building works and lease extensions as well as possible reduced service charges.
 
If over 50% of leaseholders wish to buy, the freeholder must be notified within the time limits of the Notice, typically 2 months.
Statutory lease extensions remove the requirement to pay ground rent.
 
The cost for purchase  or extension will depend on the number of years left on the lease, annual ground rent, value of improvements carried out at the property paid by the leaseholder and external factors such as the expected rate of return on investments.
Calculations can be complex but  subject to negotiation or possibly a decision by a tribunal.
Unless only likely to cost a few thousand pounds, it’s usually best to employ a surveyor with appropriate local knowledge and experience of relevant rules to provide an accurate assessment of value.
Informal extensions may include an unreasonably high ground rent which could make the lease more expensive to extend in future.
 
Once the process begins there’s a legal obligation to pay legal, valuation and the freeholder’s reasonable costs.
The lessees become the freeholders of the building after the sale has completed but former freeholders are entitled to compensation irrespective of whether they’ve proved difficult to communicate with or acted unprofessionally.
 
If your aim is  to  gain control of the  running of the building, buying the freehold  may not necessarily  be a good idea. Only some of the leaseholders would be responsible for repairs which could lead to more disputes unless  independent managing agents with a mandate to adjudicate are appointed. For instance, some lessees may want to extend, redevelop or refurbish whereas others could be happy to keep the building almost as it is. Relations can be compromised with lessees who have not participated in the process, especially if external investors with an alternative agenda have helped to fund the purchase.
Rising management fees could also make obtaining mortgages more difficult  as lenders take service charges into account when calculating borrowers’ ability to pay. Rather than buying the freehold, you could be better advised to  ask a solicitor to serve a Section 42 Notice on the landlord and extend the  lease by 90 years. On balance, you may want your landlord as a common ‘enemy’ rather than fall out with lessee neighbours!
 
In our experience, it is usually  preferable to have all flat owners on an equal footing, either as joint freeholders or lessees with extended leases. If lessees do not have the means or will to buy the freehold they might consider applying for a ‘Right to Manage’.
 
On the other hand, if you’re buying a flat and concerned about the length of the unexpired lease term, you can serve a  Notice under the relevant legislation in the current owner’s name, subject to their consent, so that you don’t have to wait 2 years to become eligible to apply.
 
Either way, obtaining independent professional advice at the earliest possible opportunity from Chartered Surveyors like Jeremy Leaf and Co as well as solicitors with appropriate experience of leasehold extension and/or purchase, is a must!
 
Jeremy Leaf
A former RICS Residential Chairman & Independent North London Estate Agency Owner
Summer 2018

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