Legal Advice - Opportunities

Property law can be an extremely complex area. For peace of mind you would be well advised to seek professional advice if you are unsure on any aspect.
Tatiana Svetlova of Svetlova LLP

In the times of any financial crisis, there usually emerge just as many opportunities as problems. Whilst the media's 'doom and gloom' coverage spreads at the speed of light, opportunities that may be freely available for another 12 to 18 months, barely come to the surface. So it pays to look out for something that can potentially make you much better off when the credit crunch is over.

I would hesitate with predictions of when a new wave of healthy economical cycle may descend upon us, but it is clear that it is a matter of 'when', not 'if'. And so it is timely to look beyond the immediacy of escalating financial problems and spot the unique pockets of real value.

Extending your lease or buying the freehold interest for your long leases on a flat or a house is one of those well-kept secrets. We all know that the property prices are taking the shape of a deflating balloon (however, not at the speed expected by many). Central London property is still holding strong and the supply of prime location properties is scarce. Professional valuations undoubtedly took a dip, and this is a great advantage for those whose leases are 85 years and less. I will explain why:

The value of a leasehold property falls as the term of the lease reduces. Conversely, the value of the freehold (or a reversionary interest) increases to the same amount. If your lease goes down to less than 70 years, you may struggle to obtain a mortgage and a potential buyer may demand a substantial discount in your property. So it becomes harder to sell, but, most importantly, the value of your property diminishes.

If your lease is below 70 years, at some point you will need to extend the term of the lease, irrespective of whether you plan to sell the property or stay in it (if it is subject to a mortgage).

The price that you would pay for extending your lease or for buying the freehold will be determined by reference to the market value of your property. Currently the prices are contracting, but also valuations are even more conservative than the actual market value prices. So if you don't wish to sell your flat or house, you may take advantage of a depressed valuation to get a good price for your lease extension or purchase of the freehold.

As an example, if your flat is worth £250,000 and you have 70 years remaining on your lease, the lease extension may cost you anything from £8,000 to £12,000 (plus professional fees). If in 5 years' time your property is worth £400,000, you will be paying in excess of £25,000 and of course by then your lease would reduce to 65 years, which in turn would possibly increase the premium to double of £25,000. As a general rule, the fewer years left on your lease, the more you will have to pay to extend it. You can see that waiting for better financial times in such circumstances is detrimental. Not only will the price of the extended lease go up in accordance with the fluctuating market, but you would also lose value through the lapse of time. With low interest rates, there hasn't been a better time to extend the lease or buy the freehold.


What is the difference between extending the lease and buying the freehold (or reversionary) interest?

Both rights to buy the freehold or extend the lease are statutory rights available to tenants of long leases (i.e. over 21 years) subject to a number of requirements.

If a leaseholder wishes to extend the lease, he can do so on an individual basis as long as he had owned the property for at least two years. You would be able to extend the existing term by adding another 90 years. There is a formal procedure that must be followed, which includes serving a notice on the landlord. It is important that you instruct a competent solicitor to guide you through the process. For example, if the notice is inaccurate or incorrectly completed, it can be rejected as invalid. It can subsequently be amended by application to the county court, however, that is an expense that should be avoided at all costs.

Any leaseholder who satisfies the above criteria can apply for a lease extension. You should bear in mind that you would need to carry out a valuation to determine the value of the lease extension. You will also be responsible for the landlord's reasonable legal and valuation fees.

It is useful to know that once the tenant's notice has been served on the landlord, it may be assigned with the lease. This means that if a tenant wishes to sell the flat in the meantime, he can do so and the buyer would not have to wait for the two-year ownership requirement.

You can buy the freehold of a leasehold house individually. However, buying the freehold interest of a building of flats varies in that it is a legal right to act together if leaseholders meet certain qualifiying criteria. This is known as collective enfranchisement. Alternatively, it is possible for leaseholders to negotiate with the freeholder informally to buy the freehold by agreement. This is simply a matter for negotiation and can be a more cost effective way of buying out the landlord.

The qualifying criteria for buying the freehold is that there must be at least 2 flats in the building, no more than 25% of the internal floor area excluding common parts must in non-residential use and at least 75% of the flats should be held by qualifying leaseholders. Further, the minimum number of participating leaseholders must be at least 50% of the total number of flats. If there are 6 flats, then at least 3 flats of the qualifying leaseholders must participate. However, if there are only two flats, then both must participate.

Again, the process is not complex as such, but it is procedurally heavy and is subject to strict time limits.

It is worth getting through the hurdle of enfranchisement. The advantages are numerous: you are increasing the value of your property, you can effectively take control of the building and assume responsibility for the day to day management. In practice, if you are part of a 4 tenant building for example, your service charges may decrease dramatically.

One of the main benefits of purchasing the freehold is the ability of leaseholders to grant to themselves new 999 year leases with no ground rent and often with less restrictive terms. For example, the new lease may have less control over alterations or lettings.

The law in this area is complex, so if you would like to know more about how to go about this, please contact Tatiana Svetlova for a consultation on tsvetlova@svetlovallp.com or on 020 7237 8409.

The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.


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