Freehold Insurance – Is it worth buying the freehold?

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Unfair service charges for leaseholders are rife. In England and Wales, there are powerful laws that give leaseholders rights. Leaseholders can force the freeholder to sell and buy the freehold in order to take over the management of the block of flats and have more control over their costs.

Is it worth buying my freehold?

It is now a lot easier for leaseholders to be able to buy their freehold and essentially be in control of their own costs.

It is a legal process known as collective enfranchisement. This gives leaseholders/ flat owner the right to get together and purchase the freehold for a fair market price. The government brought in the law in 1993. It was then updated by the Commonhold and Leasehold Reform Act of 2002.

Right to Manage

Once a Right to Manage notice has expired you need to insure the property immediately. Is this something that you are considering doing? If you are, please see our article on Right to Manage. It is so important that you understand when the premiums are payable. We can insure the building immediately with payment for the policy within the first 14 days. It is best to talk to all the lessees involved to ensure that you have available funds. It isn’t advisable to wait until the freeholder has provided a closing statement and transferred funds. The reason being that this can take some considerable time.

Are you considering enfranchisement?

When you are purchasing a freehold. The insurance should be in place from exchange of contracts even under enfranchisement. You will then on completion be dealing with the insurance on a day to day basis. We can insure the property for you and make sure that you get the best possible cover at the lowest price. Again we can provide a policy that can start immediately with payment received within 14 days.

What is collective enfranchisement?

It is a right subject to certain qualifications within a building for the owners of the flats in the building to join to buy the freehold.

Providing at least 50% of the flats in the building who are qualifying tenants participate and a building qualifies the landlord cannot refuse. The procedure if quite complex and the correct notice needs to be served on the landlord, so it is important that you employ a specialist solicitor. We have a company that we can give you details of that provide free seminars for this.

There is a formula in the 1993 Act which is used to calculate the amount the leaseholders will have to pay to buy the freehold and this is known as the premium. Again, the formula is complex, and a specialist surveyor should be needed to provide an estimate of the premium for participating leaseholders.

The leaseholders must decide how they will acquire and hold the freehold and this is normally via a company.

What is the basic outline of the process?

Checking eligibility of the tenants in the building.

Organising the enfranchisement

Choosing the nominee purchaser

Selecting and instructing professional advisors including solicitors and surveyors

Assessing the purchase price

Serving the initial notice

Preparing for the subsequent procedures.

The above will not necessarily be in the same order and in most cases several issues will proceed together. It is important however that all the steps are taken and that no critical areas neglected. Once the initial notice has been served, the procedure is running, and the nominee purchaser is likely to be subject to demand for information and to deadlines. A default at any stage could endanger the action. It is so important therefore that you take legal advice in this regard.

Why not read further information on this on our Enfranchisement page. Click here.

Here are 8 great reasons for buying your freehold.

  • Your assets stop deteriorating – your lease is diminishing asset. As your lease gets shorter its value decreases, you can preserve, and often considerably increase, the value of your flat by jointly buying the freehold in your block.
  • You can extend your lease. If you choose to buy the freehold, you do not need to pay a fee to extend your lease and can grant yourself a very long extension often 999 years.
  • You will pay no ground rent – Your lease will be at a peppercorn rent which is in effect free.
  • Enfranchisement increases the value of your home. In addition to a new 999-year lease extension and paying no ground rent prospective buys are more attractive to flats where they can own their own freehold.
  • Control the management of your block. Buying the freehold enables the participating leaseholders to take direct control of maintenance and management of their building. This avoids the need to be overpriced for service charge. Creating the chance to improve the quality of management services by removing the need for external management companies. Service charge disputes are one of the main reasons why tenants often decide to go ahead with enfranchising.
  • Avoid restrictions on your lease. As a leaseholder you are bound by various conditions over repairs and paired ownership. Which can be frustrating having paid out on a home. As a freeholder you can update unfair or badly drafted leases.
  • Re – Mortgaging may become easier as many lenders prefer the additional security of freehold over leasehold properties.
  • Enfranchisement providers a more secure family inheritance.

Please don’t hesitate to ask us for our solicitors details who provide free seminars.

What information do I need to get a quote?

You will need some very basic information in order for us to give you a quote such as:-

  • The declared value of the property
  • How would you like to pay
  • Any claims history you may have
  • What type of property it is
  • The tenancy type i.e. whether the leaseholders live there or someone rents the flats on a short or long term basis
  • What type of cover you are looking for we can go through this with you
  • Who the policy should be in the name of
  • If any mortgage providers need noting

What type of building insurance do I need?

This is not home insurance that you will need. This is due to the fact that all leaseholders will be responsible for insurance. Home insurance wouldn’t be appropriate or have the right type of cover. You should ensure as you insure the freehold property that you have the right buildings cover to include communal areas. If buying the property in a company name the registered office would need noting on the policy.

Are lease extensions cheaper?

It can cost a substantial amount of money for a lease extension. Often, mortgage companies and insurers will look at the length of lease especially if they are 80 years or less. Leaseholders will always pay a ground rent during the term unless they purchase the freehold. By buying the freehold they can usually extend the lease for a longer-term, possibly up to 999 years for free. The only outlay would be legal costs.

It is important to realize how flats with a share of the freehold differ from a freehold house. Flat or property owners with a share of the freehold own their freehold jointly with other leaseholders in the building.

Freedom from the freeholder

There are often stories where freeholders charge hundreds of thousands for either work or lease extensions. Leaseholders can go to a Leasehold Valuation Tribunal to challenge unfair charges but it does cost a substantial amount of money. Once bought, the new freeholders are free to make their own choices to reduce costs. This will include contractors and freehold insurance policies. Leaseholders have so much more control when they own a share of the freehold.

Can owning a share of the freehold add value to a flat?

Yes, the gain could be substantial if there is a short lease. A short lease could also put buyers off as it is very difficult to get a mortgage on a property that has a lease less than 80 years. It is advised to ask a solicitor to look into the costs involved in doing so before committing to it. Also, see our Right to Manage article.

How much does buying the freehold cost?

The bulk of the cost will be the cost of negotiations and surveyors together with the actual value of the freehold itself. A property valuation will need to be done by a surveyor. There may then be a Tribunal if the landlord does not wish to sell. There could also be legal fees, valuation fees, stamp duty, and freeholder fees. However, it could add a substantial amount to the value of the freehold property.

Summary

The benefits of buying the freehold can outweigh the initial costs involved. We would suggest seeking the advice of a solicitor before making any commitment. Once the exchange has completed, either buying the freehold or taking the right to manage. The insurance with the existing insurance company will need to be canceled and a new policy set up. In that case, we can provide a quote and place on risk quickly and easily. Request a call back if you would like a quote.

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