Owning a leasehold property gives the owner / leaseholder the right to reside there / own the leasehold for a certain number of years. Leases can be granted for up to terms of 999 years but it is quite common for leases to be granted for a term of around 125 years.
Leases with shorter terms will provide a freeholder with the option of whether or not he wants to extend the lease. If a lease is extended a premium usually has to be paid to the freeholder which can range from a nominal sum to hundreds of thousands of pounds. The fee payable would obviously depend on the property’s value and location.
It is paramount for a leaseholder when buying a leasehold property to know how many years are remaining on a lease as the lower the lease term, the lower the value of the property will be. The value will continue to diminish as the lease term does. Mortgage lenders are reluctant to lend money where there are less than 60 years remaining on a lease. The remaining term permitted depends on the mortgage product, i.e. how many years the mortgage will run for. One should always think ahead in this respect as it could affect you when you wish to sell or re-mortgage some years later.
Sometimes the shorter the lease terms gets the more expensive it is to extend it so it is better to extend sooner rather than later to save on the cost and also to protect your leasehold investment.
What is Collective Enfranchisement?
Collective enfranchisement takes place when the leaseholders in a block can purchase the freehold between them. Certain criteria has to be met in order to do this, some examples are as follows:
- At least two thirds of the leaseholders must wish to participate in the purchase who are “qualifying tenants” (it does not matter if the leaseholder resides in the property or not and the leaseholder can be an individual or a company).
- The property must be held under a long lease, i.e. one which was granted for a term of more than 21 years. Having a lease of more than 21 years partly renders a leaseholder to be a “qualfying tenant”.
- The property must have been owned by a leaseholder for more than two years.
- A leaseholder cannot participate if he/she owns three or more flats in the building.
- If a building is partly non-residential, leaseholders cannot enfranchise if the non-residential element is more than 25% of the building. For instance, the leaseholders of two flats above a shop which are registered under the same freehold title would not qualify to enfranchise.
- A building converted into four flats or less with a freeholder who lives there may not qualify for enfranchisement.
What are the Advantages of Enfranchisement?
There are several advantages to collective enfranchisement, examples are as follows:
- When the new leases are granted they can be varied and used to iron out any discrepancies or defects in the original leases which do not comply with the requirements of the Council of Mortgage Lenders; this would make it harder to sell (or re-mortgage) or it would delay your sale (or re-mortgage) if a new Deed of Variation has to be drafted, agreed by all involved parties and registered.
- It would give all leaseholders control of the management of the building.
What if the Freeholder is Missing?
If a freeholder is missing there is a separate procedure which involves the Leasehold Valuation Tribunal and the Courts. It is still possible to buy the freehold even in these circumstances.
How much does it cost to enfranchise?
Leaseholders will end up incurring costs by way of paying a premium to the freeholder to be able to enfranchise. The freeholder’s legal fees and surveyors’ fees are usually burdened by the leaseholders and the leaseholders would have to obviously pay their own. Usually one fixed fee would be given to all of the leaseholders by a solicitor (this is how we operate) and the fees would be split amongst all of the leaseholders.
You should bear in mind that if the matter is complex and/or the freeholder is missing, barristers fees would be payable for court and Leasehold Valuation Tribunal appearances.
The premium payable to the freeholder is always negotiable and if a reasonable price cannot be determined, one would have to approach the Leasehold Valuatlon Tribunal.
It is important to have a formal independent valuation carried out so that you are not over-quoted for the freeholder’s premium. Of equal importance, when the initial notice is served for the freeholder which is the intention to collectively enfranchise, the price quoted in the notice must be “realistic” by law.
When the new leases of 999 years are granted, the ground rent is reduced to a “peppercorn”, i.e. a nomimal value (so no longer payable).
There may also be tax implications which we would advise you of during the course of your transaction.