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I have bought a flat – What do I Own?

Most flats and a few houses in England and Wales are owned under long leases, and if longer than 21 years, you will have statutory rights.

The lease is the contract used to make obligations run with successive owners of the property, every time the property is bought and sold, all of the existing obligations in the lease are transferred to the new owner of the lease.

Most flats are in purpose built blocks or in a converted and shared property. The lease contract sets out what parts of the building belong to the leaseholder (usually, but not always, these are the internal parts of the property.) Normally the structural elements and exterior and perhaps the grounds belong to the freeholder.

The parts of the building outside the property itself, including the ground beneath it and the space above, belong to the freeholder. The one disadvantage of this system is that a lease is a ‘time limited’ interest in land. As time passes the length of the lease (and potentially the capital value of the property) diminishes.

I have bought a flat – What rights do I have as a long leaseholder?

The lease gives you the right to occupy and use your property (usually a flat but in some cases a house) for a period of time, “The Term”

Legal Rights:

Leasehold enfranchisement legislation implemented from 1967 to 2014 in England and Wales has made it progressively easier for Long Leaseholders wishing to purchase their freehold (collectively with fellow leaseholders), extend their leases (individually) or exercise the Right to Manage their buildings (collectively). This area of the law is one that many consumers and property investors in England and Wales do not fully understand.

ALEP is an organisation committed to raising awareness in the wider industry and to consumers, and ensuring that clients of our member firms receive both the information and support they need, as well as a thorough, quality service.

Their members can help with the following rights:-

Extending your lease

I would like to extend my lease to Protect my Investment. Make sure I have no restrictions on sale and to comply with my Mortgage Lender Requirements.

The lease is of a predetermined term and will eventually expire. When it runs out, the freeholder can take back the keys of the property. Practically the property will revert to the ownership of the freeholder, who is sometimes called the 'reversioner' as a result.

The long leasehold flat or house is a wasting asset as a result of the shortening lease. The closer the lease gets to zero years unexpired, the more it reduces the value of the property. Of course, in a rising market, this is can be outweighed by the appreciation in the value of the property. In a static property market, a diminishing lease will gradually reduce the value of the property, all other things remaining equal.

Long Leaseholders can extend the lease term by serving a “Section 42 Notice” one stipulation is that they must have owned the property for two years (unlike a Section 13 notice for purchasing the freehold, when leaseholders can participate from day one of ownership). If progressed properly under statue the Long Leaseholder will have the right to an extension of 90 years to the current term and ground rent is reduced to zero.

Valuers and Solicitor’s specialising in lease extensions and leasehold enfranchisement can become ALEP members and will explain the options available to you during an initial telephone conversation.

Sometimes it is possible to negotiate informally with the freeholder to extend the lease. They may agree to a smaller lump sum and an increase in the ground rent, but to shorter extension terms in return. You should be careful about making sure the agreed terms represent good long-term value compared with the statutory rights of the Section 42 Notice and try to ensure that no onerous clauses are inserted into any new lease.

Should I extend my lease and/or buy the freehold?

There is very little in terms of value difference unless there is some development potential. However you will need a minimum of 50% of Long Leaseholders to participate in buying the freehold.

Other not wholly financial considerations include being able to organise your own insurance and repairs (if you own the freehold you will have to organise this).

What is the difference between a 999 year lease and a 125 year lease?

There is negligible difference between the two in terms of value. The longer the lease the more secure, although most properties would be redeveloped several times over 999 years.

How does the process of extending the lease of a flat work?

The process for the majority of lease extensions is fairly straightforward:

(i) Obtain a valuation or valuation advice.
(ii) Consider an informal approach to the freeholder initially to see if an agreement can be reached without having to serve a notice (this may save some legal fees).
(iii) if the informal approach doesn’t progress after a short period of time serve a statutory notice (a "Section 42 Notice")
(iv) the freeholder will (in most cases) appoint a valuer.  It is the leaseholder's responsibility to pay for the freeholder's valuation advice. 
(v) if a notice has been served the freeholder will serve a counter-notice (a "Section 45 Notice").
(vi) the two valuers will negotiate (or the leaseholder will negotiate directly with the landlord / landlord’s valuer).
(vii) an agreement can be reached.
(viii) the solicitors will conclude the legal matters, in the form of a new lease registered at Land Registry, and full notification to your mortgage lender.

Where an agreement cannot be reached between the two valuers, the matter can be decided by the First Tier Tribunal, at considerable extra expense for both the landlord and the leaseholder.  As a result of this extra expense (and the uncertainty about what the tribunal will decide) the majority of lease extensions tend to be settled by agreement.  Depending on the numbers involved, it is often in both parties interest to settle instead of leaving the case to be settled by tribunal.

Please note that:

whilst the process is fairly straightforward (i) the notices must be valid - it is therefore essential to use a solicitor familiar with the service of these notices (ii) the time-limits must be strictly adhered to, and (iii) the value proposed in the notice must not be frivolous  (iv) if you wish to amend any lease terms you should state this in the notice.

Do you have an absentee freeholder?

Where there is an absentee freeholder, the process is much more time-consuming:  a notice has to be served on the freeholder at its last known address, the leaseholder has to demonstrate that all efforts have been made to find the address of the freeholder, an application is made to the County Court which will usually direct that the matter be decided by the First Tier Tribunal.  The leaseholder's valuer will therefore have to prepare an expert witness report and once the tribunal has decided on the premium to be paid the Court will, effectively, grant the lease extension in the place of the freeholder.

 My Landlord has offered a New Lease of 99 or 125 years is this acceptable?

The answer is yes subject to reasonable terms; it is referred to as a lease extension 'outside the Act'.  Provided the premium paid is reasonable this can produce a good result for both the leaseholder and the freeholder.

Why is this good for the leaseholder?

It generally results in a lower premium.  This is because (i) a term of 99 years will be less than you would achieve with the statutory basis where the existing term is extended by 90 years to (i.e. a 72 year unexpired terms becomes 162 years), and (ii) because a lease extension 'outside the Act' can incorporate a ground rent, which is of greater value to the freeholder. 

It is also marginally cheaper because a formal notice does not have to be served.

Why is this good for the freeholder?

A freeholder is an investor and quite often prefers this sort of lease extension because it means the 'reversionary' interest i.e. the interest at the expiry of the lease is not so far away, and because the ground rent can, and usually is, increased giving the freeholder an extra income.  This is more attractive especially when the present ground rent is at a level where the costs of collecting are arguably greater.

When negotiating, please remember that the only lease extension that you are able to force the freeholder to agree to through legal process is the one which extends your existing lease by 90 years.

Who should obtain Valuation advice:  the freeholder / landlord or the leaseholder / flat owner?

Usually, both sides get their own valuation advice. However, there is nothing to stop a leaseholder from approaching a landlord and agreeing that both parties will agree to pay a premium based on one valuer's advice.  This would mean the valuer would need to be jointly appointed by both parties, and probably act as an expert.

What are the time restraints?

The earliest a leaseholder can apply to a tribunal is two months after the freeholder's counter-notice is served.  The latest it can be done is six months after the date the counter-notice is served.  The solicitors should advise and diary note this process for you.

Will the valuation report be sent by email and post?

Our reports can be sent by both methods to suit.

What are the considerations for buying a flat with a short lease?

You have three options:

Ask the current owner to extend the lease prior to buying the flat - this may take some time, but it is the 'safest' route.

Request the current owner to serve a statutory notice to extend the lease and assign the benefit of this to you at the same time as the purchase of the flat completes - this means that you can 'take over' the position of the existing leaseholder so you don't have to wait two years before being able to extend the lease.  This route is less common because of the uncertainty about how much it will cost.  This uncertainty can be greatly reduced by getting professional advice on what the correct premium to pay for extending the lease is, and asking your solicitor to approve the notice.

Buy the existing leasehold interest and wait two years before serving a notice to extend the lease - this is the period of time you have to have owned a flat before being able to serve a statutory notice.  A lease extension can be agree before this time period elapses but there is no obligation on the freeholder to grant one unless a statutory notice has been served.

How much does it cost to extend the lease or buy the freehold?

The cost of extending your lease depends on the value of the flat and the number of years left to run on the lease.

The cost of buying the freehold depends on these factors plus any development potential.

You are likely to need two sorts of advice:  valuation and legal.

For the valuation advice which we provide, prices for the initial inspection and report start at £400 for a lease extension report and £500 for a freehold purchase report, both exclusive of VAT. Landlords fees and costs also need to be reimbursed, but somewhere between, £1,100 and £1,600 should be a reasonable budget, subject to quotations.

Subsequent negotiations are charged on an hourly rate basis.  For a lease extension, it usually takes 1-3 hours to negotiate a deal with your landlord or their surveyor, and 2-5 hours for a freehold purchase.  Complicating factors, or an unreasonable Landlord can add to this.  We have an excellent track record of negotiating premium settlements.  

In the case of the matter being referred to a tribunal (because the freeholder and leaseholder cannot reach agreement), these costs are also based on an hourly rate.  These costs are difficult to estimate because they will vary dependent on the extent of the differences e.g. if the difference between the freeholder and the leaseholder(s) just relates to relativity, the time involvement will be considerably less than if the differences involve, values, development value and appurtenant land.

Contact Ian Young – 01635 262590 or email ian.young@yaproperty.co.uk

You should also contact a solicitor to find out how much they will charge to serve the notice and prepare the paperwork.

How long does it take to extend my lease or to buy the freehold?

To extend a lease, 2-3 months where the two parties have reasonable expectations, although it is possible to do it much more quickly when the freeholder and leaseholder are on good terms.  If the matter cannot be agreed by negotiation and is referred to the Leasehold Valuation Tribunal it could take 6-12 months.

To buy the freehold, 4-8 months where the two parties have reasonable expectations.  If the matter cannot be agreed by negotiation and is referred to the Leasehold Valuation Tribunal it is likely to take more than 8-15 months.

Impact on value of an Extended Lease

Extending protects the value of, and adds value to, your property.  Having a longer lease will make it easier for a purchaser to obtain a mortgage, and therefore your flat will be more attractive relative to others with shorter leases: this is the main reason a longer lease adds value to your flat. 

The cost of extending your lease will increase as prices rise and as your lease length declines over time.

You have statutory rights to a 90 year extension

The law grants you the right to extend your lease by 90 years e.g. if there are presently 72 years remaining, you can obtain an extension to 162 years.  This applies whether or not the landlord agrees.

The law does not prohibit you from agreeing other sorts of lease extensions privately with your landlord - it is just that the only sort of lease extension the law forces your landlord to agree to is the 90 year one.

When you extend your lease by the 90 year route, the ground rent is ‘bought down’ to zero e.g. if previously your ground rent is £100 yearly, the new ground rent will be zero.  This comes into effect immediately, not after the expiry of the original term.

 

 

Extend your lease before the unexpired term reaches 80 years

Where possible you should extend your lease before the number of years remaining reduces to below 80.  There is more expense in extending your lease when the unexpired term falls below 80 years.

The legal requirements for Lease Extension

You have to be a ‘qualifying leaseholder’.

(i) You have to have owned the flat for a minimum period of 2 years; and

(ii) The original lease was granted for a term of at least 21 years - generally leases are granted for at least 99 years so this is almost never an issue.

(iii) There are some exceptions for social or charitable landlords

The statutory timetable for extending your lease (source:  Leasehold Advisory Service)

1.    Long Leaseholder serves S42 Tenant’s Notice

2.    The "valuation date" will be fixed as the date of service of the S42 Tenant's Notice

3.    Landlord may request additional information, but he must do so within 21 days of receipt of the Tenant's Notice

4.    Leaseholders must respond to his request within 21 days

5.    Landlord must serve a Counter-Notice by the date specified in the notice. This date must be at least two months from the date of service of the Tenant's Notice

6.    Where the landlord fails to serve the Counter-Notice leaseholders must apply to court within six months for a vesting order

7.    After service of the Counter-Notice either party may apply to the First Tier Tribunal. This must be done no sooner than two months from, but within six months of, the date of service of the Counter-notice

8.    First Tier Tribunal determination becomes final after 28 days. Appeals must be made within this period to the Upper Tribunal but only with the leave of the First Tier Tribunal

9.    After First Tier Tribunal decision is final landlord must provide draft lease within 14 days

10. Period of two months after decision becomes final for parties to enter into the new lease

11. If the period above elapses without entry into new lease, then leaseholder must apply to court within a further two months requiring the Landlord to meet his obligations

  

Will I have to pay any other costs other than those of my valuer and solicitor?

Yes you are required to pay the landlord’s reasonable valuation and legal fees.  Other incidental costs include stamp duty and mortgage lenders fee and costs.

What is involved in the Calculation of premium to extend the lease?

The first part of the premium a long leaseholder have to pay is therefore the reduction in the landlord’s reversionary value.

If there are fewer than 80 years remaining you will additionally have to pay half of the ‘marriage value’.  This is the difference between the sum of the proposed interests (your extended lease and the landlord’s reversion which is now 162 years away) and the existing interests (your present lease of, say, 72 years, and the landlord’s reversion which is only 72 years away).  In this calculation the ability of the leaseholder to extend its lease is disregarded.  This is the second element of the calculation.

The third and final element of the calculation is the sum of the ground rent which is to be reduced to a peppercorn or nil. The ground rent income is therefore capitalised over the term. The fourth part is loss of development value, if the property has potential, or even a planning consent.

We recommend you take professional advice on the premium to pay to extend your lease, because it is in your interest. If you wish to have a look at it before you take professional advice, the Lease Advisory Service offers a free 'calculator'. 

What exceptions are there which may mean a property is not eligible for a lease extension

There are very few - you are not permitted to extend your lease if:

(i) The flat is leased to you by a charitable housing trust on a charitable basis

(ii) You are a business or a commercial tenant (i.e. you have to be an individual)

(iii) The flat is part of a National Trust property

(iv) The flat is part of a property owned by the Crown

(v) The flat is within a cathedral precinct

The landlord can also refuse to extend your lease if there are fewer than five years remaining on the term and there is proof that the property is to be redeveloped.

 

What are the benefits of buying the freehold?  

A freeholder owning company can grant it’s members a lease for as long a term as you all agree.  Owning a share of the freehold will make it easier for a purchaser to obtain a mortgage, and therefore your flat will be more attractive relative to others with shorter leases.  Most of our clients come to us for this reason - that the present length of the leases makes their flats more difficult to sell, and particularly for purchases to obtain a mortgage.

Additionally, owning the freehold enables you to have complete control over, and joint responsibility for, the management of the property for example decoration, garden maintenance and insurance.  Some clients have problems with their freeholder who either won't do repairs or charges to much for doing uneccessary repairs.  The cost of insurance can also be a factor - some freeholders seek to charge more than is fair for the insurance and there is little, without incurring the expense and hassle of a tribunal, which the leaseholder can do about this.  Owning the freehold resolves obligations and gives control.

Buying the freehold will also transfer to the freehold company the benefit of any redevelopment potential.  For example, if a flat has some loft space which could be converted and extended to create an additional flat, freeholder's consent is required:  owning the freehold  means that you could carry out this development , subject to receiving the consent of the other people who own a share in the freehold who may be easier to deal with than a landlord.

Can Ya Property Help

Ya Property provides the initial professional valuation advice which you need to serve a Notice on the landlord to start the process of buying the freehold. 

The valuation advice will enable you to negotiate the purchase our report are 20-25 pages long with enough information for you to deal direct with your landland.  If required we can also negotiate the transaction with the landlord or the landlord's surveyor and  represent you at a tribunal if an agreement cannot be reached.  Unless the landlord is being unreasonable, it is usually possible to negotiate a fair premium avoiding the costs of a tribunal.

Is there a 'right time' to buy the freehold?

In valuation terms, the advice in respect of timing for buying the freehold is the same as it would be for extending your lease i.e. buy it before the unexpired term of the leases falls below 80 years.  For reasons to do with ‘marriage value’, it gets more expensive to buy the freehold when the unexpired term on the leases falls below 80 years.  You can still buy the freehold if the unexpired terms on the leases fall below 80 years - it will just cost a bit more. 

Legal requirements for buying the freehold

The requirements are as follows:

(i) At least half of the leaseholders need to participate in the collective enfranchisement claim.  Where there are two leaseholders in the building (e.g. where a house has been converted to two flats), both leaseholders have to participate.

(ii) There have to be at least two flats in the building….

If this is not possible, we recommend you consider extending your lease instead.

Unlike the lease extension rules, there is no requirement for a minimum period of ownership in the case of collective enfranchisement under the 1993 Act i.e. of a block or converted house.  For enfranchisements under the 1967 Act i.e. of a single 'house', the two year ownership rule applies.

Procedure and timetable

Provided you collectively meet the requirements (see above) you need to take two initial steps:

(i) Get a valuer to advise on what is a fair premium to pay to purchase the freehold, including allocating the premium among the different participating leaseholders - a flat owner with a shorter lease than the neighbour ought to pay a greater proportion of the total premium;

(ii) Employ a solicitor who is familiar in dealing with this area of law.

Following this you will create a company to purchase the freehold (in which the participating leaseholders will have shares), then you will serve a S13 Notice on the landlord with a proposed premium.  The landlord will usually reply by serving a Counter-notice on you which will usually be at a higher number...  Then the two parties usually agree on the premium, using their valuers to negotiate. 

Where agreement cannot be reached by negotiation, the correct premium is determined by a tribunal.

If the matter can be agreed between the parties it usually takes around 4-8 months.  Where it cannot be agreed, and is referred to the Leasehold Valuation Tribunal,  it can take more than a year.  Unless you have time on your hands, this is why it is important to employ a valuer with a strong track record of agreeing collective enfranchisement claims by negotiation.

 

 

Will I have to pay any other costs other than those of our valuer and solicitor?

Yes the landlord can require you to pay its reasonable valuation and legal fees. Other incidental costs include stamp duty.

ALEP members will be happy to give you initial advice about this process.

What is a Section 5 notice?

Section 5 Notices must be served by any freeholder looking to sell their freehold to an unrelated third party.

This is often known as the 'right of first refusal'. Leaseholders of the relevant building(s) must be notified of this intention and be given a chance to group together and make a rival bid either at auction or directly. If the freeholder fails to do this before selling the freehold, they could forfeit it to the group of leaseholders.

It is important to act very quickly if you receive a Section 5 Notice, as there are very tight timescales to consider.

What is the First Tier Tribunal?

The First-tier Tribunal, formerly the Leasehold Valuation Tribunal (LVT) is part of the Residential Property Tribunal Service and can be a valuable last resort for leaseholders who want to vary their leases or question management charges, the conduct of the freeholder, buildings insurance charges, or other issues.

Whatever the circumstances, you will need professional support from a specialist leasehold enfranchisement solicitor or valuer. In some cases you may also need to be represented by a barrister.

 

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