MORE London leaseholders than ever are taking advantage of their right to freehold enfranchisement – that is, the right to buy the freehold of their property – before the lease length drops below 80 years. “80 years is a magic number and not many people realise that,” says Katie Cohen of Jaffe Porter Crossick, a specialist property law firm. “It’s because of the marriage value.”
This is nothing to do with promising to love and obey your landlord; the “marriage value” is the size of the fee you have to pay to extend your lease. Once the lease length drops below 80 years, the fee jumps and thenceforth increases the shorter the lease gets. Alongside this, the sale value of your property drops. So if your lease is coming up to the 80-year level, it can make good financial sense to start arranging the purchase of your apartment block’s freehold.
Because commercial tenants can now use this right, increasing numbers of residents are becoming aware that if they can get together at least half the other tenants in a block to make a reasonably priced bid, the freeholder is obliged to sell. Cohen says she has seen around a 50 per cent jump in the number of people interested in freehold enfranchisement over the last year, in part due to shortening leases and the recession prompting home-owners to become more savvy about their investments.
This can prove to be a worthwhile investment because in many cases, it costs no more than it would to extend the lease and gives tenants direct ownership and control over the management of the building. To start off, tenants have to arrange an entity that will be the new owner – often a company whose shareholders are the building’s tenants. The entity then serves a notice to the landlord with a reasonable offer, followed by a period of negotiation over the price. If this is disputed, cases can end up going to the Leasehold Valuation Tribunal, where valuers and lawyers will argue tirelessly over the niceties of the freehold price. But because of the legal costs of this process to both sides, the vast majority of cases strike a deal before it gets to this stage.
While most tenants in small blocks can get away with meeting informally to arrange this process, larger blocks require more organisation to pull it off. In one recent block of 180 flats in Lambeth known as The Perspective, the residents hired an expert advisor to manage the purchase. David Jones, the tenant who organised bringing Enfranchisement Lease Solutions on board, says: “None of the residents had the time or expertise to manage the process, so the best option was to get an expert to do the job. Mobilizing 180 people is like herding cats and having an independent expert advising on the benefits and best way forward was very comforting for everyone.”
Engaging a professional will cost, of course, so it is important that tenants streamline their decision-making to give lawyers and valuers just one or two points of contact – people who are prepared to scrutinise the fee proposal to make sure it is fair. Otherwise, you risk racking up hours of costs as busybody neighbours all try to weigh in over one another. “Half the trick is to keep a cap on the costs,” says Bruce Maunder Taylor of Maunder Taylor chartered surveyors. “You’ve got to keep your eye on those costs because they can end up being more than you pay the landlord.”
An organised group of tenants, by contrast, will gain from a well-judged purchase many years down the line. Not to mention that freehold enfranchisement brings the added bonus of forcing you to get to know your neighbours – a rare phenomenon in a modern apartment block.
The Facts | FREEHOLD ENFRANCHISEMENT
The right to freehold enfranchisement applies only when over 50 per cent of a building’s tenants can agree to make a purchase offer together.
The tenants set up a company to buy the building, of which they become shareholders.
The company serves a notice to the landlord with a reasonable offer.
If the landlord agrees to the offer, the purchase goes ahead. If not, negotiations ensue, with a costly tribunal to decide if there is no deal.
Tenants pay for the freehold in proportion to the cost of buying it for their own particular apartment. Therefore, tenants with little time left on their lease will pay more than tenants who still have long leases.
The main costs of the process include independent valuations and legal fees, so it is important to read any fee agreements in detail.
It is vital to find advisers who have the right specialist knowledge.