Leasehold / Freehold Information Sheet
** This is not meant to describe or give a full interpretation of the law, nor does it cover every case. **
Legal Tenure of Property. Freehold, Leasehold, Share of Freehold, Lease Extensions & purchasing freehold.
Freehold – 99.9% of houses are freehold – meaning they own the land and building.
Leasehold – For example, if there are 10 flats on a piece of land, not everyone can own this land. So, someone else owns the land (Freeholder) and the leaseholder will pay Ground Rent. The rent you pay to the freehold for being on this land is normally £250 per year, or thereabouts, and you have a lease which could be granted for any length of time: 99 years or 90 years or 150 years or 125 years or 523 years.
Peppercorn – Sometimes the Ground Rent is peppercorn. This is the lowest legal monetary amount payable in the UK, which equates to less than a penny and therefore is never payable.
Lease Extension – As a leasehold, you are protected in law and as long as you have owned the property for two years, you are normally entitled to extend your lease.
(There are exceptions, for example, if’s a commercial/business lease or charitable housing trust & the flat is part of the function of that charity.) (Leasehold Reform Housing and Urban Development Act 1993).
The legal statutory right is to add 90 years to what’s left on the existing lease, at a ‘Peppercorn Rent’ (meaning no ground rent is payable). E.g. if you had 70 years remaining on the lease, your new lease would be 160 years.
Leasehold – 79 Years or less. This is a magic number for leasehold properties. Every year below 79 years, the cost of the lease extension increases dramatically for each year below this number. This is due to the Marriage Value.
Marriage Value is payable where the unexpired term of the lease is less than 80 years and therefore Marriage Value is shared 50/50 between the freeholder and the leaseholders.
The freeholder is entitled to charge a calculated premium to do this, based on a set formula. The formal procedure is started by The Leaseholders formal notice.
Mortgages. Most mortgage lenders will not lend of leasehold flats with 55 years or less, remaining on the lease.
Note – Sometimes freeholders will encourage leaseholders or leaseholders think they will save money by negotiating outside the statutory Act, but then there are no rules. The freeholder could refuse to extend, ask for any premium, increase ground rent, add clauses, etc.
Point to Note – When I extended a lease, I followed the statutory route but wanted a 999 year lease and the freeholder agreed from the outset, with a peppercorn ground rent.
Once the formal process starts, when your solicitor issues the formal notice to the freeholder, the clock starts ticking. Freeholders love to drag this process out because if your solicitor misses the deadline or you default in the process. The whole process has to be started again. Don’t be afraid to go to the First Tier Tribunal.
You will be liable for the Freeholders reasonable professional fees. (Section 60 of the Act)
If a lease extension is applied for, this will be suspended if the other leaseholders make an application to buy the freehold, So you all have Share of Freehold (Collective Enfranchisement Procedure). If they are already in the process of buying the freehold, you cannot apply for a lease extension.
TOP TIP – Speak to the other leaseholders in the block, prior to taking action. Make a note of everyone’s name/Tel and email. Together you’re stronger.
Starting the Process – Your solicitor will serve the initial formal notice – Section 42 Notice.
However, before starting the process, instruct the Surveyor first. Once the Surveyor/valuer has a copy of the lease, viewed the property and you have the report. The solicitor will need this to issue the Section 42 Notice.
You need a Surveyor – who specialises in leasehold extensions.
The Surveyor/ Valuer will give you a ‘Best and Worst’ case valuation.
Advising on the amount for the offer to be made in the Notice
Responding to Freeholders Counter notice
Negotiation and settlement of the price, other terms & representation at the Tribunal
You need a Solicitor – Who specialises in leasehold extensions.
Prepare information for application
Service of Notice on the competent landlord (normally freeholder)
Respond to Freeholders requests for information to support claim
Conveyance of the new lease
Top Tip – One of my clients blamed his solicitor for not issuing the notice to The first Tier Tribunal and missed the deadline. That meant after one year, he had to start the whole process off again. My advice is find out the deadlines and keep an eye on it. If the solicitor is on holiday, who is going to deal with whilst they are away.You are entitled to obtain details of the name and address of your landlord/freeholder under rights provided in the Landlord and Tenant Act 1985.The Freeholder (Landlord) is required to respond within 28 days of receiving the formal notice.
PLEASE NOTE – Make sure you know where the finance is coming from for the new lease. Once you start, you commit to the professional fees incurred, on both sides.
Selling – Sometimes homeowners do not have the funds available. If the process is started you can transfer the ‘right to extend the lease’ to a new buyer. (That means the buyer does not have to wait the two years). Alternatively, if the lease is say £10k and the agent sells the property with a long extended lease for £220,000, on completion of the sale, you receive £210k and the freeholder receives the £10k – from the proceeds of sale. The lease extension and conveyancing can run side by side, however, the lease extension will take slightly longer so, this process needs to begin prior to marketing.
Commonhold – (Share of Freehold) – Sometimes some or all of the leaseholders gets together in the block and suggest building the freehold, buying the land. Normally, a company is set up which owns the freehold and each flat owner, then owns shares in the company. For example, if there are 10 flats, you’ll have a tenth ownership in the company. A tenth share of the land / freehold. Best case £27,175 and worst case £44,250.
Using my surveyor’s valuation, my surveyor suggested the price would be £38,125.
In a recent enfranchisement I did, my surveyor valued the freehold and the price in the initial offer notice was £27,173. The freeholder’s surveyor in their counter notice was £90,000. A really big difference and enough for many lessors to bulk at and put them off.
As with a lease extension, there is a set formula for working out the price.
The process is similar to a lease extension, you’ll need a surveyor and solicitor. (See above)
Normally a company is formed, e.g. ‘St Johns Road Management (Bournemouth) Limited’ to hold the freehold and wholly owned by the participating Lessors, but not always. I own a share of freehold in a block of 3 flats and the freehold is owning in the names of the individuals, this can present its own challenges and potential risks. A solicitor, managing agent or accountant can establish a company and produce Articles of Association to reflect the purpose of the company and voting rights.
Provided at least 50% of the flats in the building, who are qualifying lessors, are participating then the freeholder cannot refuse to sell. There are exceptions and your solicitor will advise whether you can buy the freehold based on the individual cases. You need to have a working group, everyone’s contact information and collective newsletter, what’s App or Email / process to update everyone. Everyone needs to sign a participation agreement which your solicitor can organise. The relevant Act is the Leasehold Reform Housing & Urban Development Act 1993 (as amended).
Marriage Value is applicable when buying the freehold
The compensation element is to reflect any loss of potential development value attributable to the freeholders’ interest. This might typically include, for example, the value of developable loft space or any external areas where additional habitable accommodation.
Sometimes the two surveyors are at stalemate during negotiations. Normally in the latter stages of negotiation, it’s important to understand the reason behind the stalemate and look where possible to compromise to keep the process moving.
When I bought the freehold with the other residents, for us all to have Share of Freehold, one area for discrepancy was a large outside space. As lessors we were using this area for our bins. This space was not allocated to any lease and was owned by the freeholder.
Our surveyor made the argument, this area is being used as the bin storage area. The freeholder’s surveyor was arguing, it could park two cars and had a commercial value.
Both arguments were correct. I stepped in and parked a car in the space clearly showing only one car would fit and measured the size of the space comparing it to national car parking spaces.
The freeholder’s surveyor conceded, it could only be used for one car. I asked my surveyor to concede the freeholders surveyor had a valid point and the bins could be stored elsewhere and let’s work out the commercial value of one parking space, which was £3,000 – £5,000.
Another area is the loft spaces. There was potential to redevelop the loft and add rooms. The freeholder is entitled to ‘Potential development loss’. This space was worked out at £3,000 as a commercial value.
The final price was £3,000 for the loft, £3,000 for the car parking space and price £39,270.
Total price to buy the freehold £45,270.
I was really happy with this, given the freeholder surveyor initially valued at £90,000!
Instructing a Specialist Consultant – We act as a consultant and charge £625+vat (£750 Incl. Vat) per leaseholder.
For this, we will organise the surveyor and solicitor and consult throughout the process, acting in your interests, step by step, until completion.
Thank You for reading and hopefully provides you with useful information to use as a guide.
Written by James Scollard, Founder & Owner of CLIFFTONS Estate Agents.
Tel: 01202 789699, Web: www.clifftons.com, Email: [email protected]
Posted: 15th November 2017