Collective Enfranchisement

Collective Enfranchisement (buying the freehold of your building)

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 – what happens with the service charge disputes?

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

What is Enfranchisement?

How to Gather Information and Deal with the Initial Notice

The Information Required

Where to find that Information

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 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 insurance 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 flat block will need to be insured again. 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.

Mark Harrington
Managing Director
iInsure365