Buy OR SELL Your Freehold
Leaseholders : Would you like to buy your freehold?
What is a Freehold interest?
A freehold interest is the permanent and absolute ownership of property or land. If you own the freehold, it means that you own the building and the land it stands on.
What is a Leasehold interest?
A leasehold interest is the right to own a property subject to lease terms for a fixed period of time. Often long leasehold interests are for 99 or 125 years. For example, many properties built in the 1970s, may have already lost about 40-50 years of their leasehold value.
Long leases also contain the rights and liabilities between a leaseholder and a freeholder. Leases are normally initially written by the freeholder so can sometimes be a little biased in their favour.
What is Enfranchisement?
This is the process where a leaseholder can compel a freeholder to sell the freehold to them. Sometimes, it is one individual leaseholder who buys (normally under the Leasehold Reform Act 1967). Sometimes, a number act collectively. If there is more than one leaseholder, there are rules that restricts who can buy the freehold.
What is Collective Enfranchisement?
Collective enfranchisement is the process whereby the leaseholders in a building form a group and buy the freehold interest of the whole building. Each flat owner then has a share of the freehold, enabling them to set rules such as how a service charge is calculated and who provides what services within the building. This right to do so is governed by the Leasehold Reform Housing & Urban Development Act 1993.
What are the advantages of collectively buying the freehold interest?
At the end of the process,
- Each flat owner has a share of the freehold. Together they own the freehold interest of the building. Often they will form a limited company to manage things like the service charge.
- The flat owners can collectively shop around for the contractors and service providers of their choice. Buying a freehold is a way to take back control.
- Leases can come with onerous conditions. For example, you may need the freeholder's permission to let the flat or have a pet. Buying the freehold interest puts the buyers in control.
- The flat owners in most cases no longer pay any ground rent.
- Buyers generally prefer flats with a share of the freehold interest over a leasehold interest. It can therefore increase the Market Value.
What are the qualifying criteria for collectively buying the freehold interest?
Generally, the requirements for a group of leaseholders to buy the freehold are:
- The building needs to contain at least two flats.
- No more than 25% of the freehold building can be used for non-residential purposes (e.g. shops/offices).
- At least two-thirds of the flats must be owned by leaseholders who own long leases (originally granted for at least 21 years).
- At least 50% of the total number of flats in the building must be owned by leaseholders who want to buy a share of the freehold – so you don’t need to have all owners on board but you do need to have at least half of the leaseholders involved. If there are only two flats in the building, then both leaseholders must want to buy the freehold.
What are the exemptions/exclusions to qualifying for buying the freehold interest?
- If the commercial elements accounts for more than 25% of the building.
- A building with a resident landlord which is converted into four flats or less may not qualify for collective enfranchisement.
- Other exceptions include properties belonging to the National Trust or within a cathedral precinct. Some Crown properties are also exempt from collective enfranchisement.
If our freeholder wants to sell, do they have to offer the interest to us first?
If a freeholder to a block of flats wants to sell a property in which there are leasehold interests, they must first offer the interest for sale to the leaseholders. This is a requirement under Section 5 of the Landlord & Tenant Act 1987. The right of first refusal must be offered.
What is a valuation for the purpose of a Collective Enfranchisement?
A valuation for the purpose of a Collective Enfranchisement is required whereby two or more leasehold flats are seeking to buy the freehold interest from the current freeholder subject to meeting the qualifying criteria.
Leaseholders are rarely able to informally agree a price with their freeholder. Many freeholders will be reluctant to sell but if qualifying criteria is met, will have no choice.
In most cases, whereby the premium cannot be informally agreed, a chartered surveyor (who is also an RICS registered valuer) will conduct a valuation for the purpose of a Collective Enfranchisement. This is of course a service that we provide.
If the freeholder agrees to collective enfranchisement in their Counter Notice but wishes to further negotiate on the premium, which is highly common, our Chartered Surveyors (who are also RICS Registered Valuers) have the necessary experience and knowledge to do so.
A Chartered Surveyor is also required to carry out a valuation if on the rare occasion there is an absentee freeholder. Prices to buy the freehold in this instance can also prove a little cheaper because of the lack of negotiations.
According to Schedule 6, Part II of the Leasehold Reform, Housing and Urban Development Act 1993, the price payable for the freehold interest will be made up of the following:
- Loss to the freeholder of his/her ground rent income. Future rent is discounted to reflect the value of receiving it early in a premium.
- Loss to the freehold of their reversion. That is the price the Market would otherwise pay to receive the property back at the end of the lease, if paid now.
- 50% of the marriage value. The marriage value is best defined as the increase in the value of the property arising from the leasehold and freehold interests being combined. Marriage value is not payable when the applicants un-expired lease term is 80 years or more.
What is marriage value?
This is the increase in value which accompanies the ‘marriage’ of the freehold with the leasehold and the Act rules that this potential profit is split 50/50 between the freeholder and the nominee purchaser company.
Local knowledge and experience is key here for a valuer, who has to estimate how much the flats’ value might increase once the freehold is acquired.
Why is the leasehold term important in the valuation?
The leaseholder pays ground rent each year to rent their lease. The longer the lease has left to run, the larger the total pot of money will be from rent collected overtime, which then needs to be compensated for.
The longer the unexpired term of the lease, the greater the loss in ground rent for the freeholder; hence it is a legal requirement for this to be considered in any valuation for the purpose of a Collective Enfranchisement.
It is important to be aware though that this is not simply a case of multiplying the ground rent by the number of years remaining on the lease. Future income is discounted to reflect the benefit of receiving it early.
Why is the reversion important in the valuation?
Leases run down over time to the point where the freeholder takes back full legal and financial ownership of properties leased. If a lease has 999 years to run, it will be scores of generations before the freeholder can benefit and so the reversionary value tends to zero.
Conversely if a lease has 2 years to run, the reversionary value will be very large, because in normal circumstances the full ownership is set to revert to the freeholder in a comparatively short period of time.
What is injurious affection (compensation for other losses) in relation to the freehold valuation?
Injurious affection refers to the compensation to the freeholder for other losses such as a decrease in value of other properties or denial of a development opportunity because of the forced sale.
You can imagine, for example, that a freeholder of a two-storey block of flats could, if planning permission allows it, build a third storey and sell further leaseholds as a result. Equally, if a freeholder were to lose the property in question, they might lose further value as a result if the property allowed access to another building they own.
At Websters our Chartered Surveyors (who are also RICS registered valuers) have the necessary knowledge and expertise to carry out surveys across London and the South East.
We endeavour to provide valuation advice in compliance with the RICS Valuation – Global Standards, also referred to as the RICS ‘Red Book’. This document sets out the gold standard for undertaking valuations through a quality assured process, so you can have confidence that consistency, objectivity, transparency and a high standard of service is maintained.