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The following article has been provided by this category's sponsor, the Association of Leasehold Enfranchisement Professionals (ALEP).What is a lease and how does it affect a flat’s value?
First of all, it is important to understand that what you are getting when you purchase a leasehold property is a lease, which is a long-term rental contract that governs the relationship between the freeholder, the flat owner and the management company.
The length of a flat’s lease affects its underlying value for a number of reasons. When a lease falls below 80 years it can be difficult to secure a mortgage for the flat and you may therefore find it difficult to re-mortgage or sell a property with such a lease. Once a lease falls below 80 years, it costs more to extend a lease or purchase a share of the freehold (and subsequently extend the lease as part of that transaction) than when it has 80+ years. This is because of a valuation component known as marriage value, whereby the freeholder is entitled to 50% of the uplift in value resulting from the lease extension or freehold purchase transaction. It is comforting to know that if you extend your lease or participate in a collective freehold purchase, you will not just protect the value of your flat but also increase it, typically at least by the cost of that transaction.
Purchasing your freehold
It is important to understand the basic legal rights that flat owners have. In the case of freehold purchase – always a collective action - flat owners may suddenly receive a Section 5 Notice. Freeholders must issue a Section 5 Notice to flat owners of a block if they are intending to sell the freehold interest to a third party, including at auction. If you receive a Section 5 Notice, the important thing to be aware of is that time is not on your side. You only have two months to respond and, as these are often served during summer months or in the run-up to Christmas, it can be very difficult to coordinate your fellow flat owners in a united response with a view to acquiring your freehold collectively.
If you want to be proactive and not just wait for a Section 5 Notice to fall on your doormat, then you can get together with your neighbours (a minimum of 50% of flat owners are required) and serve a Section 13 Notice on your freeholder to compel them to sell. There is a strict procedure for this action and any ALEP member will be happy to advise you of the steps in more detail. It is important to note that the level of participation in a collective freehold purchase has a bearing on the affordability of the transaction. The higher the participation level, the more affordable it is for the participants.
The First-tier Tribunal (FtT), 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 of any dispute, 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.
If an agreement cannot be reached between the freeholder’s valuer and yours, it may be necessary to apply to a Leasehold Valuation Tribunal but, in my experience, the majority of transactions – and certainly most of those outside the ‘Prime Central London’ area - tend to settle before reaching that stage. In some deals, an informal deal is reached with the freeholder. If this is the case, it is important to make sure that the resulting ground rent is not too onerous and off-putting for a future buyer, should you wish to sell your flat.
Extending your lease
Unlike a freehold purchase, this is an individual action, although collective bargaining power can be used when owners join forces to reduce costs of the premium payable to the freeholder and the legal and valuation costs payable. Once you have owned a flat for two years you are entitled to serve a Section 42 Notice on the freeholder and obtain a 90-year lease extension (which is added to the remaining term) and reduce your ground rent to nil. If you are thinking of buying a flat where the lease length is an issue, then you can negotiate the likely cost of a lease extension into the purchase price and ensure that the vendor assigns their legal entitlement to you, assuming they have owned the property for at least two years. Once again there is a strict process and an application to the FtT can be made if there is no agreement after the period of negotiation.
How much should it cost?
Any ALEP valuer will be able to give you a ballpark figure once they know the ground rent, the reversionary value and the marriage value (reversionary and marriage are affected by recent sales evidence in similar flats in the area), but they may need to inspect the flat to give a more accurate figure. The freeholder will also have a figure (and may also need to inspect the flat) and both parties’ valuers must then negotiate to agree a fair price. The flat owner must also budget for the legal and valuation costs as well of those of their freeholder (these can be contested if considered unreasonable).
So, freehold purchase or lease extension?
There are a number of advantages to an outright freehold purchase.
However, it is important to understand the potential drawbacks:
There are also advantages to simply extending your lease:
And of course, there are the drawbacks:
Doing nothing is not an option
If you own a flat and you have less than 85 years to run on your lease, it is very important that you take action immediately. It is important to appoint those professionals who can demonstrate a track record in enfranchisement and who can provide independent and unbiased advice.When talking to potential advisers, look out for specialist knowledge and a clear track record in helping flat owners to extend leases or purchase freeholds together with a clear fee structure. If the organisation is a member of ALEP, you can be assured that it has a significant level of experience and has been vetted, which includes taking references from clients and other professionals working in the sector._____________________________________________________________________Working with an ALEP member, you can be ensured of expert input and guidance.You can find your nearest ALEP member using this handy postcode search tool.SEE ALSO - Welcoming ALEP as sponsor of Property TribesUP NEXT - Purchasing Freehold on pair of flats DON'T MISS - Investment potential of leasehold properties ... NOW WATCH:
Vanessa Warwick Landlord and Co-Founder of PropertyTribes.com **If you have got value from Property Tribes, find out how you can support it in remaining a free to use community resource**
The title of this thread appears incorrect. Judging by the article it should say "Leasehold Flats" not Leasehold Property". There are plenty of leasehold houses around, both in the areas where they were traditionally common (like the North West) and new ones. The article does not mention them at all.