Leasehold v Freehold?
BUYING the freehold is, one of the best ways to increase the value of your flat – isn’t it? With service charges creeping ever upwards, most people would be forgiven for thinking so, especially if their block is badly managed by the current freeholder.
And leases can present their own problems. If the lease on your flat has less than 75 years left, you may find it difficult to sell up: mortgage lenders are not keen to lend on flats with short leases because the value of the flat declines at a rapidly increasing rate as the lease gets ever shorter.
Extending the lease does cost money. As an example, if you had a two-bedroom flat in Guildford with a value of about £200,000, 75 years to run on the lease and a ground rent of £100 per annum, it would cost between £5,000 and £10,000 to extend the lease.
But when you buy a share of the freehold, you are free to extend the lease with only a small additional legal cost.
However, before you can buy a freehold you have to get the agreement of at least half your fellow leaseholders, and this can be hard where there are lots of people to convince, or where the owners are tricky to get hold of. Also, once you have got the freehold, someone has to run the freehold company and you need people to serve as directors. And, of course, there are legal responsibilities that come with running any company.
The hassles involved could mean that your co-freeholders, who were such nice people as fellow leaseholders, suddenly turn into neighbours from hell. It’s for this reason that many people bite the bullet and go for a lease extension instead.
Alex Greenslade of Leasehold Solutions says: `In order to extend a lease formally, you have to have owned it for at least two years (although you could come to an informal agreement with your freeholder before this time). You also need to have a “long lease” – which means the length of the lease when originally granted must have been at least 21 years.’
Tony Essien at the Lease Advisory Service says: `It’s best to start thinking about extending before the lease is less than 82 years. Once it is at or under 80 years, you’ll have to pay the freeholder half of what’s called the “marriage value” – which is the theoretical profit you make when you extend the lease.’
So what do you need to do to extend your lease? The first step is to issue a notice to the freeholder and then come to an agreement on a valuation. You’ll need to have the help of a valuer and a solicitor. You can then extend your lease by another 90 years. So if you have 81 years left, you’ll end up with a lease of 171 years (and zero ground rent – another bonus).
Unfortunately, you have to pay the freeholder’s professional fees whether you complete or not, so although you can do it on your own, it’s better to share the cost with other leaseholders.
Two recent landmark court cases have affected the way in which the price of a lease extension is calculated and it is bad news for leaseholders. In short, the price has gone up-in some cases, doubling. One place to get excellent free advice on leasehold/freehold issues is the government-funded Leasehold Advisory Service – see their address and website details below.
Airline purser James Forbes worked with fellow leaseholders to extend the lease on his flat in Hove. He says: `In an ideal world, you’d persuade everyone else of the benefits of buying the freehold. But since management was not a problem for us, extending the leases made more sense.
`Also, the extra time it would have taken to buy the freehold meant that extending the lease was smarter, especially for those who wanted to sell soon and were worried that a diminishing lease would have made selling their property more difficult.’
Copyright Leasehold Solutions and Alex Greenslade. Reproduction by permission only