Buying your Freehold: The Four Pillars of Leasehold Wisdom
At the forefront of many leaseholders’ minds is the imagined nirvana of buying the freehold of their block of flats, taking control of management and day to day running of the building. The right to buy the freehold, referred to as a collective enfranchisement claim, is set out in now long standing legislation introduced in 1993 snappily entitled the Leasehold Reform, Housing and Urban Development Act 1993.
Although complex in nature and providing traps for the unwary, the Act gives valuable rights to long leaseholders of flats acting together to buy the headlease and freehold of their building; and once acquired, grant themselves a 999 year lease of each flat.
The price and transfer terms are agreed by negotiation or, where required, determined by the First-tier Tribunal, and the process typically takes 12 months. So far so good.
However, once the freehold dream is realised unprepared leaseholders may enter a world of management problems, service charge issues and increasing tension with their neighbours. The freehold dream has turned into a freehold tribulation.
The good news is these hurdles may be surmounted by careful planning, taking proper advice and some soul searching on your reasons for taking the plunge.
Consider your motivation for buying the freehold.
Are you living in a building which suffers from poor management, historic neglect or apathy by the freeholder towards the amenity of the block? For many individuals buying a property will be the largest investment they make in their life. Ensuring such long term value is preserved is good motivation for seeking to oust a feckless freeholder and take charge of the management reins.
Consider too the inconvenient truth that a lease is a wasting asset. If your lease term is close to 80 years, time is of the essence. Below this threshold, the marriage value released on extending the lease (i.e. the increase in its value following completion of the lease extension) is deemed under the Act to be split 50/50 between leaseholder and landlord. This means it becomes far more expensive for a leaseholder to extend her lease. Once the freehold is acquired, the participants in the collective claim are free to grant themselves long leases or indeed vary any other term in their lease. The ticking time bomb of a dwindling term is defused.
Communication is key
Once you have established your reasons for enfranchising, the next step is to identify one or two lead participants to steer the claim and galvanise fellow flat owners to join ranks; at least 50% of the flats in the block must do so.
Practical steps such as sending an exploratory email to a tenants’ organisation is one means by which to achieve this – but that is just the beginning. It is not uncommon for lead participants to experience an initial flurry of interest in the project only to find enthusiasm wanes as time elapses and the complexities are revealed. Ensuring participants are kept informed of day to day matters, key stages of the claim and the progress made by professional advisers is central to keeping the claim alive.
Planning is all
Before a claim is made the participants will enter into a participation agreement, the contract regulating both the process itself and the steps after completion.
But that requires careful planning long before your solicitor starts drafting. Consider, for example, how you will fund the exercise. In a building with a flat subject to a short lease, unless that leaseholder joins the claim, the participants will need to fund the cost of the freehold interest in the flat. Depending on the values involved, this may require external funding or “white knight” investors to step in. Thought must be given to the structure of that investment and how to document it.
There are also strict time limits for completing a freehold purchase once terms have been agreed (broadly, four months). The finances should be in place well in advance of that date. Reflect on the aims and objectives of each participant. Are there parts of the building that they wish to develop such as an extension to a garden flat or loft conversion, or is there an unworkable lease term that requires change? These objectives should be enshrined in the participation agreement to avoid future argument.
As the old adage goes, time is money.
The more organised a group the more cost effective the exercise. Providing professional advisers with key information is vital. Examples might be:
- Names and contact details for all participants. This is particularly important in blocks of flats of 10 or more where matters are necessarily more complex.
- Providing copies of title deeds and licences to alter. Value added by improvements to flats may be deducted from the purchase price and licences are therefore an important part of a leaseholder’s armoury.
- Copies of latest ground rent and service charge demands together with contact details for any managing agents. The notice acquiring the freehold must be served on the correct parties and these documents can prove essential reading to avoid any mishaps.
- Details of any areas of the building that are used informally. An example might be an established and long standing use of basement vaults. The right to buy the freehold extends to not only the building itself but common parts and it is therefore essential to establish what lies where.
- Details of any day to day issues in the building. This will steer your solicitor when drafting the new 999 year leases of the flats. This is a golden opportunity to deal with any defects under the existing leases.