Buying the Freehold

So you’ve bought a flat! Congratulations. In the majority of cases, this will be the right to occupy the flat for a fixed number of years.
New flats are generally sold with 99 or 125 years remaining; however, the next problem to overcome is where you have a separate freeholder who is sending you service charge demands - in most cases for many thousands of pounds - in return for carrying out very little in terms of repairs and maintenance of the building, thereby potentially placing a limit upon the value of your flat or even collapsing a sale if you wish to sell it in the future. You have the right as a leaseholder (in the majority of cases) to extend your lease by an extra 90 years at a fair market price (and to convert your annual ground rent to zero) under The Leasehold Reform, Housing and Urban Development Act 1993, this solves the lease length problem.

However this does not solve the problem of a building being neglected, so this piece of legislation also provides the right for a number of leaseholders to join together and force the freeholder to sell them the freehold of the building. This gives the participating leaseholders not only the ownership of the site and the building through the formation of a freehold limited company, but it also gives them the control and freedom to carry out repairs and maintenance when they wish, through contractors of their own choice.

“By extending the lease up to 999 years remaining, you make your flat attractive to the whole of the open market”

A further bonus relating to the money invested by the participating leaseholders in buying the freehold is the potential return in future years from the non-participating flats exercising their right to extend their leases by an extra ninety-years. As mentioned above, any income from extending leases in the building will be payable to the internal freehold limited company, which is owned by the participating flats that bought the freehold of the building. Additional sources of revenue for the freehold company may be areas that are not demised in the current leases, such as a top floor Leaseholder wishing to buy the empty loft space above their flat.

If you are already an owner of a share of the freehold company, you may still encounter problems selling your flat in the future, even if you are selling it with a share of the freehold. If your lease has less than 70 years remaining, any potential purchaser requiring a mortgage to buy your flat may be rejected by a mainstream lender, therefore it is imperative when you join together to buy the freehold, that you also instruct your solicitor to extend all the participating leases up to 999 years remaining for one pound. This is cheaper to do through solicitors at the same time as the purchase of the freehold, as all the required legal paperwork is together in one place (you are advised to take tax advice prior to doing this regarding potential gains by HMRC).

Furthermore, by extending the leases up to 999 years remaining, you make your flat attractive to the whole of the open market (not just cash buyers) when the time comes to sell and you do not need to worry about the lease running low. Although you own a share of the freehold, the lease has to stay in place for legal reasons such as enforcing covenants in the leases in the building such as rights of support, rights of access, rights of drainage amongst many others. You will also avoid having to deal with the issue of the lease extension dropping below 80-years remaining whereby the same lease extension costs substantially more due to having to pay half the marriage value to the freeholder.

If you proceed with buying the freehold of your building, you must be prepared for a large amount of administration and complex decisions, therefore you may wish to instruct a professional managing agent to deal with the day-to-day management and they will take your instructions. You will also require the services of an accountant to carry out the regulatory requirements of preparing annual accounts and the paperwork required by Companies House and HMRC amongst others.

Finally, if you do not wish to own a share of the freehold, you can always exercise your rights to a ninety-year lease extension of your flat without having to speak to anybody else in your building.

Words:
David Goldstone
Capital Leasehold