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Buying your freehold and/or lease extension?

They are never quite sure what length of time is reasonable or acceptable in the market but in real terms you are looking for over 80 years before you really need to take any action regarding your lease.  Is it therefore worth considering buying the freehold?

Many leaseholders don’t appreciate that they can actually speak to their freeholder and ask whether he would be interested in selling the freehold.  You may be surprised that they would be happy to sell the freehold for a set figure.

However, if they don’t then you are entitled to collective enfranchisement with your other leaseholders in the building.

Why should I buy my freehold?

With purchasing the freehold of the property it will put you in charge of all of the outgoings.  Yes, it can be daunting taking over the management of a building and it is not for everyone.  However, it means that you will be in control of the cost thereafter.  There is no reason why you cannot employ your own managing agent in respect of a property and get them to manage it on your behalf.  You may find a local managing agent that you can work with and who will be able to help you reduce your overall costs in respect of the building so that you can keep your day to day expenses as low as is possible.

We can help with your building insurance and are able to provide you with a quote at any time.  Don’t be frightened of calling us on (01273) 827090 to discuss any requirements you may have.

Do I need to keep my existing managing agent if I buy the freehold?

No, you don’t have to keep your existing managing agent you can actually change at any point.  What you should consider is looking at what your managing agent does.  You may be happy with him already and you have no issues with them but it is the costs that are a concern.  Why not speak to them and discuss how you can reduce this.  One of the main areas is the building insurance.  You will often find that freeholders will add huge amounts to the insurance to earn money from it.  You can ask your managing agent at any point the exact amount of commission that they earn as well.  This has been law for some considerable time and there is no reason why you can’t ask for this.

We have found over the years with managing agents that they don’t like to disclose the amount that they earn from the commissions that they receive.  This is because lessees suddenly realise that the insurance has been inflated in order to produce them additional income. Obviously they are a business and have to earn money but if they already collect management fees and supervision fees of works then they are actually earning their money.

Why not ask them what their commission is on the insurance.  You will find that they will then inform you that they have to use the commission to deal with an insurance claim.  This is often an excuse that we receive via lessees when getting a quote. However, if there are no claims then there is no work to be carried out.

They also are already being paid management fees to manage the building which would include the insurance.

Don’t be frightened of tackling a managing agent or alternatively asking questions.  It is your legal right to do so.

Should I extend my lease before purchasing the freehold?

It is totally a matter for you and we suspect it would boil down to the question of cost.  The lease extension may cost some considerable amount of money but purchasing the freehold even more.  However, you might find that when you speak to the other lessees they are also interested in purchasing the freehold so overall it would be cheaper for you. If you own the freehold then you are in total control of who manages the building and what can be done although you have to adhere to the contents of the lease at all times.

Do I need to use a solicitor for the purchase of a freehold when dealing with enfranchisement?

Absolutely yes you would need a solicitor to deal with not only the purchase of the freehold but also the legal documentation in serving the relevant notices for any form of enfranchisement.

We would suggest that you speak to your local solicitor in this regard.

I am unhappy with my managing agent but my freeholder won’t do anything what do you suggest?

You can always look at a right to manage.  We have done lots of articles on this site to explain to leaseholders what a right to manage is and how this will help you.  It is a no fault system so you can automatically have the management transferred over to yourself so that you can deal with it.

I have problems with my managing agents regarding the service charges do I have any rights?

There are rights for leaseholders to deal with service charges and these are all laid out by law.

Your lease will also set out obligations that the landlord has to adhere to with the contents of your service charges.

You have a right to ask for the first tier Tribunal (The tribunal that deals with service charges) to determine whether you are liable to pay service charges for service, repairs, maintenance, improvements, insurance or management.  You may make a request before or after you have paid the service charge. If the Tribunal determines that the service charge is payable then they may determine the following:-

  1. Who should pay the service charge and who it should be paid to.
  2. The amount
  3. The date it should be paid
  4. How it should be paid

When you seek a determination from the First Tier Tribunal you will have to pay an application fee and the matter proceeds to a hearing. The total fee payable depends on the application but it doesn’t normally exceed £500.00.

The first Tier Tribunal does have power to award costs not exceeding £500.00 against any party but only on the basis that the application is frivolous, repracious or abuse of process.

There are various other rights that you have laid out and you should consult a solicitor who specialises in landlord and tenant to help you.

The freeholder and/or managing agent are writing to me demanding monies but I don’t feel the demand looks correct is there a requirement to have this laid out properly?

Yes, you are entitled to have a written summary of all of the costs which make up the service charge from the freeholder/managing agent.  These will consist and be laid out as follows:-

  1. They will cover the last twelve months used period for making up the accounts relating to service charge ending no later than the date of your request.
  2. They will cover the twelve month period ending on the date of your request where the accounts are not made up to a twelve month period
  3. The summary must be with you within one month of your request or six months at the end of the period to which the summary relates to

The freeholder has to lay out any ground rent demand in a very specific way and specific wording. It has to notes on for leaseholders as well as notes on for freeholders on exactly what you can and cannot do.  These are absolutely critical.

I have received a Section 20 Notice from my managing agent to proceed with work can I object to it?

Yes, you can object to any Section 20 Notices but the best thing to do is to communicate with your managing agent on why you do not believe the work should take place.  They will serve this in various forms and please see our articles on our site in this regard.

However, they will first serve a Notice of Intention on all of the leaseholders.  The notice must be in prescribed form.

The notice must state what works that they are intending to do and give at least 30 days from the end of the notice and that they will invite nominations from contractors to give estimates.

Estimates will then be obtained and served on the lessee.  There are various processes in this regard which the managing agents/freeholders have to go through.  If they do not they are not entitled to charge the money that is due.

I have obtained a quote from you for the insurance and it is substantially cheaper than what the freeholder is charging me.  What do I do next?  The best thing to do is to discuss this with your managing agent and why it is so much more expensive.  They will normally come up with a list of excuses which is what we have often found.  They will list out additional items of cover that they have within their existing insurance. However, some of the items being covered may not be required.  No insurance policies can be on a like for like basis.  These do not exist.  Insurance companies will always differ in their policy amounts but we can always try and tailor the quote that you require to as close as is possible.

If they still do not wish to transfer over then you can challenge the insurance to the First Tier Tribunal.  If the saving is substantial which we often find is the case, then you may find the Tribunal will agree with you and force the freeholder to either change the insurance or reduce the premiums payable.  Don’t be frightened to challenge the insurance with the freeholder.  It is often a huge cashcalc for freeholders and/or managing agents and there is no reason why you can’t have the benefit of the reduction for the whole building.

Obviously be aware that they will do everything in their power to ensure that you don’t change the insurance otherwise they will lose the income however our advice is to be tenacious and let them know that you are not prepared to let it drop.  If they are charging huge amounts more on the insurance then what else are they charging more on?

Please don’t hesitate to contact us on (01273) 827090 if you require a quote.  We also deal with solicitors that specialise in this area.

Collective Enfranchisement

What is the legislation under where you can buy your freehold?

The legislation that outlines this is the Leasehold Reform Housing and Urban Development Act 1993 (as amended). This has the legal right for the leaseholders of a building, or part of a building to join together and buy the freehold of that building from their freeholder and/or landlord. We will lay out here a brief summary of what is required by the leaseholders to carry out a collective enfranchisement.

What is the qualification for an enfranchisement?

You have to look towards the qualification as a leaseholder first before you can even go beyond this. A leaseholder has to have the following:-

  1. To qualify as a leaseholder you must have a long lease. Which is defined as a lease of at least 21 years when first granted. In the event that you do not that you wish to extend it then please look at our article on lease extensions.
  2. A shared ownership lease is a long lease of the owner who has “staircase” up to 100%
  3. A leaseholder who will not be a qualifying leaseholder if they own more than two flats within the building. They would not be a qualifying leaseholder of any flat.
  4. A leaseholder is as somebody who owns a property on a lease, particularly 99, 125 or 999 years. The length of the lease decreased year by year until It runs out. A leaseholder is also called a tenant, but this should not be confused with short term agreements. It is essential to be familiar and understand the terms of your lease because this sets out the rights and obligations.

What is the qualification of the building?

The building

1) The building must be a self-contained building, or part of a building. If part of the building it must constitute a vertical division of the building. With services either independent of that part or could be provided without significant interruption to remaining parts. In effect it is self-contained.

2) There must be at least two flats within the building and at least two thirds of the flats must be owned by the qualifying leaseholder.

3) No more than 25% of the internal floor area, excluding, areas to be in non-residential use i.e. shops or offices.

4) At least half of the flats in the building must participate and those flat owners must be qualifying leaseholders.

Are there any exceptions to the right to the buy the freehold?

There will be no right of the leaseholders to buy the building where they are as follows:-

1) A conversion into four or few flats and

It is not purpose built

The same person has owned the freehold since before the conversion took place

And they or an adult member of their family has lived there for the past twelve months

There are some other buildings that have exceptions but these are unusual such as a building within a cathedral or a cathedral precinct

National Trust property

Crown properties

Although they may still allow this on a base by base cases.

The freeholder includes any operational railway bridge or tunnel or track.

The above would all be excluded from the collective enfranchisement.

What property is included within the claim?

The freehold of the premises in which the qualifying leaseholders are contained i.e. the block or building. This is important.

The freehold of the premises purchased will also include any “appurtenant” property. Which means premises belonging to or usually enjoyed with the flat. Such as garage, outhouses, gardens or yards or gardens and premises. The property which has a qualifying leaseholder is entitled to use the terms of the lease in common with other occupiers of other premises. This would include such things as communal gardens, driveways, sports facilities such as a gymnasium. Please note that the freeholder does have the option of granting equivalent rights over such common areas rather than transferring the freehold.

What is the procedure?

It is important that when you come to collective enfranchisement that you understand what the procedure is and that you have a professional advisor that helps you. The procedure is complicated but it is as follows:-

  1. At least half of the flats in the building, being the qualifying leaseholders, join together and instruct a solicitor and surveyor to act for them. This is not a legal requirement but it is totally advisable as this is an extremely complex process and it is important to have a property valuation.
  2. Just so you are aware a solicitor is a legally qualified person who is professionally regulated by the Solicitors Regulation Authority or the Law Society.
  3. The surveyor uses a formula within the 1993 Act, and their own expertise, to calculate the likely premium (price) to put in the formal application to the freeholder. This is the sum that the leaseholders pay in exchange for the property.
  4. The solicitor will then advise on the best way how to buy the freehold. This is via a Company set up for the purpose and all participating leaseholders would then be members of that company. Every building is completely different and your solicitor would advise you the best way to do this.
  5. You will also find that the solicitor will advise you to draw up a “participation agreement” between the leaseholders. Which is a binding document setting out the terms of the purchase. subject to the agreement for the leaseholder to provide a contribution towards the premium and to pay towards the cost associated with the process. A participation is a contract between all leaseholders participating together in a joint purchase of a freehold and provides a legal basis for the action. It may, on first consideration, seem a little drastic to bind everything to a procedure but it is in the majority of cases a sensible course of action.
  6. The legislation within the enfranchisement Act does not provide any guidance on how participants should act together. It simply assumes a purchase through formal procedures of the 1993 Act. The acquisition may be through open market negotiation or formal rules. However, a participation agreement is absolutely critical. The solicitor serves a formal application on the freeholder known as the Section 13 Notice stating the premium proposed to the extent of the property to be purchased and any other terms.
  7. The freeholder has two months to come back and serve any form of counter notice stating whether they accept the leaseholder’s right to buy. You must appreciate that not all freeholders will be happy to sell their freehold. A right to buy is a right granted to tenants in local authority owned property to buy a lease of the flat or freehold of their house. This is also the case in enfranchisement. The freeholder may agree to the terms proposed including the price. But if the freeholder disputes the leaseholder’s right to buy the freehold then the leaseholders may have to apply to the County Court for a Declaration of their entitlement. It all depends on whether he feels that the figure is correct or the term.
  8. If a freeholder serves a counter notice and accepts the leaseholder’s right to buy the freehold but disputes the terms, normally the figure i.e. (premium) then the parties have a further two months to negotiate. If the negotiation does not come to fruition they have a further two months to negotiate. If an agreement cannot be reached within this period then there is a “window” of four months within which either party can apply to the first tier Tribunal to rule on the terms. This would then have additional costs involved.
  9. The parties can continue to negotiate during the four month “window” even if one of them has applied to a Tribunal and the agreement cannot be reached a Tribunal hearing will still go ahead.
  10. The Tribunal will make a ruling after hearing evidence from both parties. This normally will include valuation evidence from their surveyor/valuers as most disagreements are normally on the premium.
  11. Once the terms have been agreed or a Tribunal has made a ruling the parties are required into a contract within a specific time limit. These are laid out within the agreement or set out by the Tribunal. A party can apply to the County Court to force any party to enter into the contract if these time limits are not met.
  12. What are the cost of these?
  13. It is important that leaseholders understand that they are required to pay the freeholders reasonable legal and surveyors costs as well as their own. These parties place their own costs in Tribunal proceedings if it gets that far. The Tribunal does however have jurisdiction to rule on reasonable of the landlord’s costs.
  14. You should ensure that you have correct and proper professional advice before starting these type of transactions. Not only will you need a solicitor but also a valuer/surveyor in respect of the purchase. It is so important to get the right advisor and specifically valuers who have local knowledge in the market.

Lease extension – Absentee landlords

We have already dealt with in a previous article most of the details in relation to a lease extension and the qualifying parts and what to do.  We are now dealing with how preparing the tenants notice and what happens if there is an absentee landlord.

Preparing a tenants notice

The tenants notice does trigger legal procedures for buying a new lease and you are liable for the landlord’s reasonable costs from the date it is received.  It is therefore extremely important that you read our previous article on the costs.  The notice has to be accurate and contain no mistakes because although you can apply to the County Court to have it corrected there is a cost involved in doing this and it could avoid a huge expense.  If the tenants notice is incomplete it will not be valid and a competent landlord can reject it.  We will therefore always advise you to instruct a solicitor in this regard.

Please see our previous article in relation to what a competent landlord is.

You can also register the tenants notice with the Land Registry.  This ensures it protects you from the landlord then trying to sell the freehold.  It does not preclude them from selling the freehold but it lets anybody know that you are applying for your lease in the interim.

When you serve the notice this also fixes the “valuation date” as the date of the notice.  The valuation date is when any figures which affect the price and we could change it are set.  For example the number of years left on the lease and the present value of the flat.  It is therefore important that however long it takes to negotiate or decide on the price the price will be based on the figures that apply on that date that you serve the tenants notice.  We will always advise you to instruct a solicitor to prepare and serve such a tenants notice to ensure that it is correct.

What does the tenants notice include:-

The tenant notice must include the following:-

  • Full name and address of the flat
  • Enough information about the flat to identify the property that the application relates to
  • Details of the lease, including the start date and the number of years it was granted
  • The premium you are proposing for a new lease and other amounts you are proposing to pay if there are immediate leases involved
  • The terms you are proposing for the new lease
  • The names and representatives you have appointed
  • The date by which the landlord must give the counter notice, which must be at least two months from the date of the tenants notice.

You obviously need to appreciate that the premium quoted in the notice may not be the price that is actually agreed between you and the landlord.  You may find that a Tribunal may make a decision or negotiation with the landlord may be that the figure is more than has been stated.  The premium you propose must be a genuine opening offer.  It is not be quoted as a very low figure in order to reduce this as it may invalidate the notice.

What if I have an absentee landlord?

What is an absentee landlord? It is a landlord that you cannot get hold of in relation to the property and has not managed the property for many years.  You have to do all reasonable efforts to try and find them. In the event that you do not you have to do the following:-

  1. If the landlord is a company that is in receivership, you can serve the tenants notice on the receiver. If the landlord is an individual who is bankrupt you can serve the notice on the “trustee in bankruptcy” both the receiver and trustee are acting as the landlord for the time being, and under the 1993 Landlord and Tenant Act they must serve a counter notice and grant a new lease.
  2. If you cannot find the landlord, you cannot serve the tenants notice. In this case you can apply to the County Court for what is known as “vesting order” to extend the lease.  What is a vesting order?

Simply put it is a court order that passes the legal title in lieu of a legal conveyance.  It is an equitable remedy and therefore by its nature discretionary and the results from finding by a court of the way of passing one property to another.  This can be an expensive way of doing it.  If the court is satisfied that you are eligible for a new lease, it will grant the lease to you in the landlord’s absence.  The courts usually refer the case to the tribunal to decide how much the premium should be.  However, there is a specific application that you would need to make under the first tier Tribunal.  We would suggest in this instance that you speak to your solicitor dealing with this.

What are the subsequent procedures?

Once you have served the tenants notice the landlord can ask for evidence that you own your flat and how long you have owned it for.  The landlord has a period of at least 21 days from the date you serve the notice in which to ask for this evidence.  It is important therefore that you provide this evidence within 21 days.  If you do not then you can be prevented from having a lease extension and the landlord may serve you a default notice and ask the court to order for you to provide it.  The landlord also has the right to inspect the flat to carry out a valuation must they must give you at least three written days’ notice.

If your landlord wishes to be really difficult then after serving the tenants notice they can ask for you to pay a deposit.  This may be 10% of the premium you propose in your tenants notice or up to £250.00 whichever is the greatest amount.

What is the landlords counter notice?

The landlord now has to serve a counter notice to your notice, the date will be outlined within your notice and his must contain the following:-

  1. Admit your right to a new lease and expect your terms (or propose new terms of his own)
  2. Not admit your right and give the landlord reasons for this. The County Court will then decide on whether you have a right to a new lease.
  3. Claim the landlord has a right to develop. The landlord can refuse to grant the new lease if they can prove to a court that they intend to demolish and redevelop the building.  This only applies to applications where the remaining period of the lease is less than 5 years from the date of the tenants notice.
  4. When the landlord has served the counter notice and you and the landlord cannot agree on a price or some of the aspects of the sale of the new lease there is a negotiation of normally anywhere between two and six months. This is normally carried out by your own valuer/surveyor and he should liaise with you.  If after the first two months of the negotiation period you or your landlord can apply at any time to a Tribunal for an independent decision on the issue.  If they then decide to apply to a Tribunal your professional providers must have all the documents needed for this.

It would then go to the Tribunal and they would make a decision.

If the landlord does not serve a counter notice by the date stated in your notice you can apply to the court for a vesting order (please see above) The application is not for a court order requiring the landlord to serve the counter notice but effectively takes the matter out of the landlords hands by asking the court to grant a new lease.  The court has the right to grant a new vesting order on the terms proposed in your counter notice.  If you decide to a court for a vesting order it has to be done within six months of the date you should have received the counter notice.  Whilst this can be expensive it is your rights to do so and could actually work to your advantage.

What happens if I wish to sell my property?

Once a notice has been served by a tenant then you can assign any right of this notice with the lease.  It basically means that you can serve a notice and then sell the flat with the benefits of the application.  The person who buys the flat will be able to go ahead with the application immediately without having the need for it to be owned for a period of two years.  This will often help in cases when there are not many years left on the current lease and this represents mortgage difficulties for anybody considering buying the flat.  Please see our previous article.

What happens if I die before I buy the new Lease?

In this event your personal representatives can make an application for up to two years from the grant of probate letters of letters of Administration and will have the right to buy a new lease.

What are the normal terms of a new lease?

There are some statutory terms of the lease that you should be aware of and these are as follows:-

  1. A peppercorn ground rent (that is no ground rent at all) will be charged for the whole of the term and this will be a 90 year extension plus how long is left on your current lease.
  2. The new lease must be on the same terms as the existing one, apart from minor modifications and certain exclusions and additions that are allowed by law.

These are:-

  1. Modifications – to take out any alterations to the flat or the building since the existing lease was granted for example to gas lighting, cold stores and correct a problem with the lease.
  2. Exclusions – since the 1993 provides rights to continuously renew the lease, any existing clauses relating to a new lease or ending it early, or the landlords right to buy the flat if you decide to sell it should be excluded.
  3. Additions – a requirement not to grant a sublease which is long enough to give the subtenant the right to a new lease under the Act. You should always get legal advice on the above.

In Summary what are the procedures and the time limits:-

We can summarise these as follows:-

  1. You serve an information under Section 41 of the 1983 Act
  2. The landlord must respond within 28 days
  3. You serve the tenants notice under Section 42 of the Act
  4. The “valuation” date will be fixed as the date you serve the tenants notice.
  5. The landlord can ask for extra information, but they must do so within 21 days of receiving the tenants notice
  6. You have 21 days to provide any information the landlord has asked for
  7. The landlord must serve a counter notice by the date stated in the tenants notice. This date must be at least two months from the date you serve the tenants notice.
  8. If the landlord does not serve the counter notice by the date stated in the tenants notice you can apply to the court for a vesting order within six months
  9. After the landlord serve the counter notice, you or the landlord can apply to a Tribunal for an independent decision. You must do this sooner than the two months from but within six months of, the date of the counter notice served
  10. The fee for applying for a Tribunal can be varied as well as the hearing fee but these need to be paid
  11. The Tribunal decision becomes final after 28 days. If you do not agree with the Tribunals decision you can appeal to the upper Tribunal before the decision becomes final, but only if you have the Tribunals permission.
  12. After the Tribunals decision becomes final, you and the landlord have two months to enter into a new lease.
  13. If you and the landlord have not entered a new lease within two months of the Tribunals decision, final, you have a further two months to apply to the court for a court order to meet their obligations.

During the whole of the process if at any point you would like a quote for the insurance of the building to see whether your landlord is charging you more than he should then please don’t hesitate to contact us.

Lease extensions and collective enfranchisements

You are considering doing a Lease extension or collective enfranchisement. But what happens to the service charge disputes if any.

What are service charges?

These are charges payable by the leaseholder to the landlord for services the landlord is obliged to carry out under the terms of the lease. They can be different amounts on a year to year basis depending on the cost the landlord incurs. These are sent by way of demands on a year to year basis but can be disputed.

What are the examples of service charges?

These include maintenance, wear and tear and repair and sometimes improvements of properties. Yet improvements are rare. They deal with the main structure, roof, foundations, window frames, guttering, communal drains, pipes, common areas and also the insurance of the building together with the cost of the management on a day to day basis. Whilst this is not an exhaustive list its laid out within the contents of the leaseholders lease itself.

When are they payable?

The lease will always lay out exactly when the service charges are due. It is often payable either yearly quarterly or twice yearly but does depend on the lease itself. The quarter days are December, March, June and September. Most modern leases now allow for service charges to be payable in advance. With the landlord incurring any costs and based on estimates which we will come on to later. Some older leases do ask that they’re paid in arrears but these are unusual.

Estimated costs and final accounts. As mentioned above the lease may state that the landlord estimates what he is going to spend in the coming year and bases the service charge on that estimate. This is known as good management. If this is the case, most notices need the landlord to produce an end of year statement of account. Of what he has actually spent and supply this to the leaseholder. Sometimes the lease requires that this accounts audited or certified by an accountant or other professional.

If the end of year accounts show that the landlord has spent more than anticipated. The lease would allow him to recover the shortfall via a balancing charge. If he has spent less than the estimated they may state that a credit for the overpayment will be carried forward to a leaseholder for the next year. They may transfer this into a reserve fund.

What are reserve funds?

These are sinking funds some leases allow for the landlord to get a contribution towards this via the service charge. The purpose is to build up a fund to pay for future large scale works such as repainting, redecorating the whole of the building and replacing window frames etc. The leaseholders will not face a large one off bill when necessary work comes along as they have a reserve fund contribution to pay for it.

Do the service charges need to be reasonable?

Yes, they do need to be reasonable. The Landlord and Tenant Act 1995 as amended states that the service charges are only recoverable from a landlord so far as the costs have been reasonably incurred. It also states that they are only recoverable if works carried out for the charge of a reasonable standard.

A Leaseholder can challenge the reasonable sum of the service charge if it does not comply with the above and by the appropriate tribunal which in England is the first tier Tribunal.

What happens if you want to extend your lease or do collective enfranchisement with disputed arrears? If you have decided to extend your lease or join together with other flat owners in the building to purchase your freehold. Then you need to understand that paying any outstanding service charge on completion may be a task that might not have crossed your minds when you initially instructed any form of professional

What would be of more concern is that unfair service charges in the past and expected in the future may well be a reason why flat owners exercise their right to compare on the sale of the freehold using the law and this could be a problem.

Lease extensions and service charge disputes

When using the law to compel the extension of a lease a flat owner is not entitled to enter into a new lease if in addition to the payment of a premium and the ground rent and the landlord’s reasonable costs. He does not settle any other sums due and payable in respect of his existing lease. This is something that a lot of leaseholders don’t take into account.

These provisions of the law allow the landlord to recover any outstanding amounts on the day of completion which includes payments for service charge, repairs, maintenance and insurance as long as these are recoverable under the existing Lease. This is something that people don’t take into account.

The law unfortunately also gives little guidance on how to deal with circumstances with the amount payable for the service charges in dispute. You will often find that petitioners will often advise the flat owner to offer the landlord with a reasonable security to the alleged outstanding sums to try and resolve this. The law does not make clear what a reasonable security is. Most solicitors will try and take a practical view by putting the following sorts of options to a landlord they might be able to ensure that the matter completes:-

a) Pay the likely maximum sum which could be payable and deposit this in a joint account or with the leaseholders solicitors until such time as any dispute can be resolved. Whist this is a good plan it also can be cumbersome have you have to look towards the terms of the contract and how it is going to be resolved.

b) Pay all the alleged sums due to the landlord on the strict condition that reserving your right to challenge the reasonableness of these in the first tier tribunal or any county court. There is no guarantee that the landlord will agree to this but it obviously depends on the dispute

c) If the options above can’t be agreed the flat owner may be advised to make an application immediately to the County Court for an order compelling the landlord the complete the lease extension. If the landlord is unreasonable and uncooperative they risk being penalised in cost. Yet, it may be worthwhile even considering making an application before the lease extension for a certificate of reasonableness from the first tier Tribunal.

What happens on a freehold purchase in service charge disputes?

After the lease extension the flat owners given some peace of mind at the very fact that the landlord continues to maintain the building and therefore it would be easy to communicate with him to try and resolve any disputed service charge.

This is not always the case afforded to flat owners who have collectively purchased the freehold, after which, the landlord would have moved on and tracing him may be difficult. It is thus so important that any possible disputes are considered from the outset of the claim and a plan put in place well ahead of completion to try and organize what to do with these disputed arrears.

When it comes to a freehold purchase where the laws used to compel the sale. The law allows the freeholder to recover any outstanding payments of service charge, maintenance rpeairs and insurance by way of a security over the property until all the outstanding debts settled. This isn’t perfect when purchasing a freehold. But, this protection also relates to non-participating flats and if for example the non-participant fails to keep up with the service chare payments the freeholder is likely to request any outstanding balances are settled before completion or notices registered with the Land Registry against the freehold interest. You would need to take this into account when purchasing the freehold. If you are participating in the purchase of the freehold you need to bear this in mind and have to pay their service charges up to date. You may still be required to settle these and any outstanding service charge owned by non-participating flats so it is important that you ensure that you are aware of what is involved

Unfortunately, legislation does not address circumstances where service charge payments are in dispute in collective enfranchisement claims. If the flat owners find the service charge unreasonable they may consider making an application to a Tribunal to determine the disputed invoice. In parallel to the collective enfranchisement claim so that these can be resolved beforehand.

Some of the legislation is helpful in how to deal with service charge disputes during enfranchisement claims and some guidance has been provided by the Tribunal.

It was decided in a recent case that where the terms and/or price payable for the freehold is not agreed a Tribunal can combine the service charge dispute with the price dispute and determine both issues together at the same time. This allows the leaseholders to know what their price would be. But, if the terms are already agreed then the flat owners will need to consider making an application to the County Court. Asking for the court to transfer the freehold to them i.e. a vesting order in the event that the freeholder does not.

Please see our previous articles on this

Unfortunately, there is no simple solution when it comes to service charge disputes that are alive during the process of the purchase of a freehold or extending a lease. You need to find out as early as possible of any disputes and notify your professional advisors to discuss the best way to deal with this. You would need to ensure that you include within your budget any service charge payments that may be due on completion.

Why don’t you contact us to discuss your insurance requirements? As you may find that we can reduce your insurance payments to such a large extent that it will help you pay for any service charge arrears

How to Organize for an Enfranchisement

You have established that there are enough tenants to qualify the building. What do you do now?

Enter into a participation agreement

Providing the participating tenants have agreed to proceed with no exceptions. All participating tenants should enter into a formal participation agreement. The agreement will govern the relationship between all tenants. This is prior to and during the collective enfranchisement procedure for the building. It includes items such as rights of voting, negotiation and agreement of terms. Most importantly, it covers the individual tenants’ financial contribution. This facilitates in future that there are no difficulties between parties.

 
This can be particularly important where there are large blocks involved as disputes can cause difficulty or delays. A prior agreement makes future disputes easier to resolve. It could also be useful to record an agreement on what happens after acquiring the freehold. For example, the new freeholder would grant lease extensions to all participating tenants in the purchase. This is often the main reason why leaseholders choose to purchase the freehold.
 
In small blocks or where the amounts are small, it may be possible to dispense of an agreement by everybody paying their share up front. If you have a structure in place then tenants have to agree means of finance to move on to the next stage.
 

What do you do next? Choosing the nominee purchaser

The nominee is the person named in the initial notice, who acquires the freehold and becomes the new landlord. The participating tenants must decide on who the nominee purchaser is at an early stage. He or she must conduct the business at the later stage of the process and on completion will be responsible for the management of the building.
 
A nominee purchaser can be a person or one of the tenants, or a corporate person, a trust and more than likely a company formed by the tenants for the purpose. There are currently no controls for the qualification and selection of a nominee purchaser. In addition, tenants are free to choose whoever or whatever agency they wish.
 
The most common format is a company wholly owned by the tenants. If this is the case the company must be established before it can be submitted on the initial notice. There are various companies that will be able to help you with this. Companies House is also a helpful tool. They can advise on how to establish a company. As well as producing Articles of Association that reflect the purpose of the company and govern voting rights and controls of shares.
 
Leaseholders may find it useful to establish a cost fund or fighting fund to cover the initial steps. These will be the valuation, the information gathering and arranging of the nominee purchaser. These are all applicable in the early stages.

Do I need a professional advisor?

Is it believed to be critical for the presenting and serving of an initial notice. It is important to appoint either a valuer and/or a solicitor to help with the various stages of enfranchisement.
 
The valuer will provide as follows:-
(a) Providing valuation advice to fully appraise the tenants on the possible outcome of negotiations.
(b) Advise on the offer amount for the initial notice.
(c) Respond to landlords counter-notice.
(d) Negotiation and settlement of the price.
(e) Advice on the structural repair and condition and implication of future maintenance costs and service charges.
(f) Advice on future management.

 

Why do we need a solicitor?

a) Preparation of the information for the action
b) Setting up the company
c) Service of the initial notice
d) Response to landlords request for substantiation of a claim
e) The conveyance of title
f) Amendment of the terms of the leases after enfranchisement

 

Assessing the purchase price

An initial valuation of the property by a qualified valuer or surveyor is strongly recommended. This is to provide the enfranchising leaseholders with an idea of the final purchase price prior to commencing the action
 
There is a formula based within the 1993 Act which a surveyor will use to give an estimate of the premium payable. The participating leaseholders will have to jointly pay to buy the freehold.
 
No valuation will be 100% accurate. It can be virtually impossible for a valuer to provide an exact valuation of the eventual settlement figure. However, the valuer should be able to give the best and worst case scenarios. Using local knowledge and anticipating areas of claims and counterclaims when doing so.
 
There is no such thing as a fixed price for a freehold. Leaseholders should be aware from the beginning that prices can range to avoid future surprises.
 
When considering the likely purchase price the leaseholders should consider the freeholders’ costs as well. Leaseholders will share the cost of the freehold as well as the freeholder’s reasonable legal and valuation costs.
 

Summary

It is so important to ensure that the participating tenants have the correct legal advisors as well as valuers with local knowledge that can help you.

What is Enfranchisement?

It is the right, subject to qualification, for owners of flats in a block to buy their freehold. People often apply for enfranchisement to try and reduce their costs and take control of what they spend on the building long term. The relevant Act is the Leasehold Reform Housing and Development Act 1993 (as amended).
 

What has to happen to consider enfranchisement?

50% of the leaseholders have to meet the qualification criteria before considering going ahead. Once this is the case the qualifying tenants can participate. Unfortunately, the procedure is quite complex and it is vital to serve the correct notice on the landlord. So it is always advisable to use a specialist solicitor and surveyor when undertaking this process.
 

Checking Eligibility

The first action must be to check that the building qualifies and that there are enough qualifying tenants to be able to proceed. You need to check as follows:-
 
a) The flat contains at least two flats.
b) Qualifying tenants own at least two-thirds of the flats. Qualifying tenants are leaseholders that have a lease in excess of 21 years when first granted. This will cover most leases which are often between 99 to 125 years when they are first granted.
There are other leases which come within a definition of a qualifying tenant although these are a lot less common. These are as follows:-
a) A shorter lease which contains a clause providing a right of perpetual renewal.
b) A lease terminable on death or marriage or unknown date often called the Prince of Wales clause.
c) The continuation of a long lease under local Government Housing Act 1989 following the expiry of the original term.
d) A shared ownership lease where the tenants share 100 per cent.
e) A lease granted under the right to buy or right to acquire or on rent to mortgage.
 

Are there any exceptions to the above?

Yes, these are as follows:-
 
a) The landlord is a charitable housing trust that provides the flat as part of the charity function
b) The tenant owns more than two flats within the building. This is either jointly with others or solely in their own name. Please note where this applies these flats will be discounted from the two thirds.
c) The tenant has a business or a commercial lease.
 

Does the building have any restrictions when it comes to commercial use?

If more than 25% of the internal floor area of the building is for commercial use then the building does not qualify. The commercial restriction excludes common parts of the building. It could be shops or offices etc. Garages and parking spaces specifically used by flats in the building are classed as residential.
 

Does a residential landlord have an exemption?

There is no right of collective enfranchisement where:-
 
a) The building is a conversion into four or fewer flats and
b) Is not a personal block and
c) The same person has owned the freehold since before the conversion of the building into flats and he or an adult member of the family has lived there in the past twelve months.
 

Are there any other exceptions?

Yes, buildings such as a cathedral within a precinct or National Trust properties. Or where the freehold includes any track of operational railway including a bridge or tunnel or retaining wall to a railway track. Also, Crown properties which are mainly owned by the Government.
 

Summary

It is really important when starting the process of Enfranchisement to employ a solicitor. They are there to deal with all of the legal requirements with qualifying tenants. If this is wrong at any point then it can invalidate a notice and it is therefore very important to do it correctly.

How to Gather Information and Deal with the Initial Notice

There is one important first step for leaseholders who are considering serving a notice on the freeholder. The leaseholders have to gather information on the people in the building and whether they will be qualifying tenants
 
The leaseholders need to do this to ensure that the initial notice is correct and valid. Also to respond to any challenges from the landlord following the service of the initial notice.
 
The initial notice must be correctly served on the freeholder. It must include the correct information on the interest of the participating tenants.
 
There have been some cases where freeholder’s interest may be one or more different ownerships i.e. severed or flying freeholds. This does not in itself form any obstacle to enfranchisement. It just means tenants should be aware that they have to have the deed to the freehold of the property.
 

The Information Required

The leaseholders need to have certain information as follows:-
 
a) The full identity of the freeholder where it is a personal company name and address
 
b) Details of any intervening or head leases and identify the names and address of the relevant lessees.
 
c) Full names and addresses of the leaseholders of the building and details of their leases.
 
d) Details of any flats let through the landlord and let on a periodic tenancy
 

Where to find that Information

The leaseholders will already know some of this information. Obtaining the remaining information is as follows:-
 
1) There are landlord and tenant legislation, enabling leaseholders to obtain details of the name and address of the landlord. The Landlord and Tenant Act 1985 gives this right. The freeholder must provide the information within 21 days of the request. It is an offence to not comply with this. The ground rent demand should also have the same details on.
 
2) Land Registry. The applying party has the entitlement to inspect the register and obtain copies of the entries relating to the freehold. The entry will provide the name and address of the registered owner. It will also provide details of any other interest of the freehold such as other freeholders, head lessees and mortgages. There is a small fee for copies of these registers. The land registry holds the registers. You can also obtain details of any leaseholders through this information as well.
 
3) Information Notice. Under Section 11 of the 1993 Act, you could serve the landlord with an interest in the property, requiring details of that interest.
 
The leaseholders can, therefore, request from the landlord certain details. These are details of any other freeholders, any intermediate leases, including the name and address of the lessees and the terms of the lease. The information notices can require sight of certain relevant documentation such as service charge. The recipient of these such notices has to respond within 28days.
Is there a right to take part?
 
There is no right to take part or right of invitation to join the freehold purchase. However, participating tenants may find it useful to ensure that all tenants are aware of their proposals. At present, though, there is no legal obligation to do so.
 

The initial notice

The initial notice triggers the statutory procedure for purchasing the freehold. The nominee purchaser is then liable for the freeholder’s reasonable costs from the date that the freeholder receives the notice. It is therefore absolutely critical that the notice is complete and contains no inaccuracies. These may need a correction via an application to the county court. This can be costly and could lead to a rejection of the notice.
 
There is protection for enfranchising tenants. They have the right to register the initial notice with the Land Registry. This provides protection for the company against the landlords’ sale of the freehold. Since any purchase of the freehold would subsequently be to the registration of the initial notice. The procedure will, therefore, be able to continue as though a new owner had originally received the notice.
 
The service of the initial notice also features the valuation date as the same date as the initial notice. The valuation date is the date upon which the variables affecting the price of the freehold are set. For example, the number of years left on the leases, the present value of the flat and their assured future value. Therefore however long the negotiation or the determination of the price. The valuation factors apply to the day of the service of the initial notice.
 
It is advisable to instruct a solicitor for the preparation of the service of an initial notice as they can be extremely problematical.
 

What if I have an absentee landlord?

If after all reasonable efforts the leaseholders cannot find the freeholder this should not prove to be an obstacle. There are other ways to find this information. However, these are all extremely complex and leaseholders should employ a solicitor to look into this. There are various options, the details of which would take too long in this article to outline.
 

Preparing for the subsequent procedures that need to take place

The landlord has the right to ask for evidence of the participating people and titles to their flat on receipt of the initial notice. It is a simple task of producing the official land registry entries providing they are all registered. The landlord has a period of 21 days after giving the initial notice in which to request the information. It must also be provided within 21 days of the request. In the event that a leaseholder is not registered the notice would be withdrawn with the costs payable to the freeholder. This is why it is so important to employ a solicitor who knows what they are doing as a specialist in this area.
 
Where the initial notice is withdrawn a new notice cannot be served again for another 12 months beginning on the date of the withdrawal. The landlord has the right to inspect the property. This includes the participating tenants’ flats subject to ten days’ notice to the occupier.
 

Can the landlord serve a counter-notice?

A landlord must serve his counter-notice by the date specified in the initial notice. This must be to either agree to the leaseholders’ purchase of the freehold and accept the terms or not agree to the right and give reasons why they do not. The freeholder can deny the right of enfranchisement due to having redevelopment plans or lease back proposals.
 

Redevelopment

The freeholder is not obliged to sell the freehold in the case of redevelopment. This is if plans to demolish and redevelop the whole or a substantial part of the building can be proven to the court. This can only apply where two-thirds of the leases in the building are due to terminate within a period of five years from the date of the service of the initial notice.
 

Leaseback

Where the freeholder owns a flat, or flats in the building, they have the option of taking a selection on the flat of a 999-year lease.
 
Where there is a lease back the value of the flat is deducted from the calculation. If an agreement cannot be reached for whatever reason then either party can apply to the Tribunal for an independent determination. You must ask your professional advisors on all relevant documentation that needs to deal with such an application.
 
If the freeholder fails to serve a counter-notice by the date specified in the initial notice, the participator may apply to the county court for a vesting order. This is an order allowing them to acquire the freehold on the terms of the initial notice. If the Court is satisfied with the right of transfer it will grant the order. The leaseholders must make the application to the Court within six months of receiving the counter-notice.
 

Strict procedures and time limits

There are very strict procedures and time limits as follows:-
 
1) Leaseholder to serve Section 11 information notice
 
2) Freeholder must respond within 28 days, leaseholders must make arrangements for a nominee purchaser and if forming a company register at Companies House. Participating tenants serve a section 13 initial notice. The valuation date is the date of the Section 13 notice.
 
3) Freeholder may request evidence of title of participating leaseholders but must do within 21 days.
 
4) The nominee purchaser must respond as requested within 21 days.
 
5) Freeholder must serve counter-notice by the specific date in the notice. This date must be at least two months from the date of the service of the initial notice. Where the freeholder failed to serve such a notice the nominee purchaser can apply to the court within six months for a vesting order
 
6) If the counter-notice disputes the qualification the purchaser must apply to the court within two months to argue their case.
 
7) If terms are not agreed after service of the counter-notice either party may apply to a Tribunal. This must be at least two months from and within six months, of the date of the service of the counter-notice. The Tribunal then lays out the details thereafter.
 

Summary

This type of law is so complicated. It is absolutely critical to employ some form of professional to advise and assist throughout the transaction. At least have a local valuer and/or solicitor that specialises in the right to manage and collective enfranchisement.

Valuation of a freehold subject to long leases

The valuation of a freehold of a block of flats with long leases is based on the investment value. 

In order to value an investment for enfranchisement purposes and to achieve such an income for so many years there has to be a calculation. It is best illustrated in an example as follows:-

1. Calculate the term

The calculation for the term in ground rent would be £50 x 10 flats = £500.00 per annum for the block

Multiply the ground rent figure by the year’s purchase. This is calculated by the valuer or more usually taken from the valuation table. To obtain the years purchase multiplier the valuer must make an assumption on a yield rate. In this example the valuation table showed the yield as 8% for the years figure. The years purchase of lease 68 years at 8% = 12.433 so £500.00 x 12.433 = £6,216.00.

2. Calculate the reversion

The current value of the flats say £105,000.00 x 10 flats = £1.5M (leaseholders present interest)

It is the nature of leasehold properties for the value to decrease as the lease shortens. So a long lease is generally worth much more on the open market than a short term lease. In general enfranchisement will increase the value of the individual flat. The amount of this improvement will be heavily dependent upon the length of the unexpired term before extension. There are no hard and fast rules as to how much the value will increase by. It is always an estimate based on local comparisons within the market.

The lease will affect the value of each individual flat but the freehold valuation must consider its current state. In effect the valuer has to assess the unimproved value of the flat not the improved value.

When calculating the reversion the valuer must do so based on the sale value for when the current term expires. For this purpose it must be assumed that the most favourable leases will be granted for a maximum of 999 years.

The example below states the acquisition of the freehold will produce an increase in the value of each flat of 10%. Meaning a future value of each flat of £165,000.00.

Improved value: £165,000.00 x 10 = £1.65M

Again, take the multiplier from the tables to provide an investment value. What is the promise of the future £1.6M worth in today’s market? Then multiply, the present value of £1.00 to the same yield rate of 8% as of previously.

Present value £1.00 deferred 68 years at 8% is 0.00534. So £1.6M x 0.00534 = £8,811.00.

 

What is the investment value of the freehold?

The investment of the freehold i.e. the freehold interest is therefore represented by the sum value of the term and the reversion £6,216.00 plus £8,811.00 = £15,027.00.

That is the sum that the interest is likely to achieve in an open market sale.

 

Marriage Value

This represents the increased value of the flats following completion of the enfranchisement. The market value increases as the enfranchised leaseholders have the ability to grant themselves longer leases. The potential profit only arises from owning part of the freehold. All parties share the freehold equally as dictated by the legislation.

Legislation stipulates to ignore the marriage value of any flat held by a prospective member. Taking the figures from the previous example above the approved value of the property at £1,650,000.00.

From this subtract the leaseholds current value £1.5M and the freeholders interest of £15,027.00 and in any case the marriage value is £134,973.00.

Take a 50/50 split between the freeholder and the enfranchising leaseholders. The leaseholders would have to pay half the price i.e. £67,486.00 in addition to the freeholder’s interest.

You will see in this example that the marriage value can considerably exceed the value of the freeholder’s interest. The calculation depends upon the estimated increase in the value of the flats. So logically, the lower increase the lower the marriage value will be. This is where the input of a local valuer and local knowledge is of paramount importance.

 

Completing the valuation of a freehold

Using the examples above the potential valuation, assuming no extra costs arise from the additional freeholders interest or injurious affection would be the sum of the freeholders interest £15,027.00 plus the marriage value £67,486.00

Possible purchase price £82,513.00 or approximately £8,250.00 per flat.

 

Summary

The example freehold valuation assumes that all leaseholders are both qualifying and participating. The examples provided are solely to demonstrate general work and practice valuation. They are not for the application of individual circumstances. It is extremely important that you get a local professional valuer to help you in advising on the cost of purchasing the freehold.

Is it worth buying the freehold as a leaseholder?

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 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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