Fed up with your freeholder? Tired of paying ground rent and maintenance charges, and forking out for work that isn’t up to scratch or costs way more than reasonably expected?
If you’re a leaseholder who finds yourself in this position, you may want to consider buying your freehold. There are pros and cons of doing this, as while you may end up having more control, there will also be more effort involved.
Even if you sign up a managing agent to maintain the communal areas, you’ll ultimately be responsible for making sure the work is carried out correctly.
Buying a freehold can involve some serious research and paperwork.
If you’re considering buying your freehold, there are some initial questions that you’ll need to ask.
These include whether the building you live in has the right criteria, and entering a ‘participating agreement’ with the rest of the residents who are interested in joining you in the purchase of the freehold.
If you’re looking to buy the freehold, there are some initial questions that you need to ask
We ask two experts for their top tips on where to begin if you’re looking to take this path.
1. How many tenants in the building are interested?
Find out how many tenants in the building may be interested in buying the freehold with you. A majority will need to agree to participate.
Helen Marsh, a partner at law firm Forsters, recommends that all those who are interested need to pool together a small fund of money to cover the initial cost of professional fees.
She said: ‘You will need to instruct a specialist surveyor to prepare a report to inform you how much the freehold purchase is likely to cost and you will need to obtain legal advice to ensure that your building qualifies for enfranchisement.’
2. Does your building qualify?
If there is something obvious that prevents you moving forward, you do not want to incur any further costs pursuing the freehold purchase.
For example, your building may not be self-contained, as defined in the legislation, or you may not have enough qualifying tenants.
Buying the freehold may not even be an option on some buildings. For example, if more than 25 per cent of the building is used for non-residential purposes, or the building is owned by the Crown.
3. Instruct a surveyor to value the freehold
If the building qualifies for this so-called process of ‘enfranchisement’ (see box below), your next step is to instruct a surveyor to provide a valuation to let you know how much it will cost.
Mary-Anne Bowring, of property management company Ringley, said: ‘When purchasing a freehold, it’s crucial to make sure that the premium payable to the freeholder has been correctly valued.
‘The best way to do this is by instructing a chartered surveyor to undertake a valuation. Ask your surveyor about recent case law and trends. If they’re unable to talk you through recent case law changes, you would be best off choosing another surveyor.’
She recommends Prosper Marr-Johnson, or Oliver Saxby, of Marr-Johnson & Stevens.
She said: ‘The valuation formulae used to buy a freehold are complex but are primarily based on ground rents and yields and the length of the unexpired term.
‘When looking to buy a freehold, you can’t rely on a valuation that is 12 months or older. The premium payable will increase as the leases get shorter.’
And Ms Marsh added: ‘You may find other tenants willing to join in once they know the likely cost, so it’s usually a good idea to go back to any tenant who initially said no to see if they would like join in now that you have more information.’
4. Nominate a representative
Nominating a representative to liaise with the professionals can be a way of keeping costs down. If 10 people all ask the same question, you don’t want to pay for the same answer to be given 10 times.
However, Ms Marsh adds a word of caution: ‘Depending on the size of the building this role can be very time consuming, so it needs to be somebody who has the time to run the process and co-ordinate all of the tenants.’
5. Enter an agreement
Ask participants to enter into a ‘participation agreement’ so that all the tenants are contractually bound together to proceed.
This is important because if anyone changes their mind it could jeopardise the purchase, as one leaseholder dropping out of the purchase would increase the share that the remaining participating leaseholders would each need to pay, which can be a deal-breaker.
She advises that if anyone sells their flat during the process that the new owner signs up to the terms of the participation agreement and agrees to participate in the purchase so that the number of participants remains constant.
Ms Marsh added: ‘It is important to try to keep the number of participants consistent so that the anticipated cost to each individual tenant does not change dramatically otherwise it may become unaffordable for some.’
6. Loan the company the money
The leaseholders looking to participate in the freehold purchase should band together to set up the company, buy a share at £1 and then loan the company the money needed to fund the transaction.
For example, if the freehold is worth £100,000 and you have four participating leaseholders they’d loan £25,000 each.
You shouldn’t buy shares to the value of the freehold, according to Ms Bowring.
After that, once you start receiving income from future lease extensions, the original shareholders will be able to repay their part of the loan.
Mary-Anne explained: ‘By loaning the money to the freehold company to fund the purchase and having a £1 share each, the income from future lease can be used to repay their loans.
‘So when you are set up as a freehold company, it is important that you think about your strategy for selling future lease extensions.
‘You aren’t required to sell a share in the freehold company if you prefer not to, and if you decide to do so, you can look at charging a premium of 1 to 2 per cent on top of the cost of the lease extension.’
7. Be prepared for the process to take months or years
Be prepared for the process to take many months and often longer than a year.
If all goes well, it may take only six to eight months from start to finish. However, if the price cannot be agreed and you have to go to tribunal – known as a First Tier Tribunal – it could take longer.
Ms Bowring explained: ‘Buying a freehold can take a long time, especially in a flat block where you will be relying on other parties to help complete the transaction.
‘The process is triggered by serving a Section 13 notice that secures the right to enfranchise (buy the freehold).
‘The best way to keep your expectations realistic is to speak to someone who has purchased a freehold in the past. However, if it has only taken them six or so months to complete the purchase, don’t expect it to necessarily take the same time for you.’
Ms Marsh explained: ‘The benefits for buying the freehold are that you can grant yourselves 999 year leases on your flats and you will have a say in how your building is managed and run.
‘Tenants may also want to undertake this process if they do not want the landlord further developing their building.
‘Common examples of where tenants use this process to avoid further development is where flats are proposed to be built on the roof of the building or there are proposals for telephone masts to be erected on the roof.’
Legislation passed in 1993 gives flat owners, in certain circumstances, the right to join together and buy their freehold. This is called collective enfranchisement. The rules are complex, and specialist advice is needed at all stages.
We take a look at a case study and offer a summary of the pre-requisites for a collective enfranchisement claim. The flat owner is in a block of five flats, which sits above a hairdressers.
· The building must be a self-contained building (i.e. structurally detached). So, for example, if the building sits above a large underground car park which spans and is shared between several other buildings, this would mean that the building is not self-contained and could not be collectively enfranchised. The tenants would then need to consider whether the entirety of all the buildings above the car park could be considered a ‘building’ instead.
· Use. No more than 25 per cent of the internal floor area of the building can be for non-residential use. In the case study, if the business on the ground floor takes up more than 25 per cent of the overall internal area, this would exclude the building from a collective claim.
· There must be a minimum of two flats in the building. In the case study, there are five so this test is met.
· At least two thirds of the flats must be let to qualifying tenants, which means that they must have leases which, when originally granted, were for terms of at least 21 years.
· At least half of the qualifying flats in building must participate. In the case study, assuming all five flats are owned by qualifying tenants, at least three of the flat owners must participate in the claim for it to be valid.
If the flat-owners can satisfy all these requirements, the next step will be for all the participating tenants to instruct a solicitor to act for them jointly on the claim.
As well as the claim itself, they will need to have a contract (a ‘participation agreement’) drawn up to govern the legal position as between themselves, and how they will jointly apply for and own the freehold.
This will deal with matters such as the sharing out of costs and how decisions are to be made on behalf of all.
The participating tenants will also need to instruct an expert enfranchisement surveyor, who will advise on the price they should pay for the freehold, and negotiate this on their behalf.