If you own the lease to a flat the value of your investment diminishes a little each year as the unexpired term of that lease gets shorter. Under current legislature a lease can normally be extended and if there are more than 80 years remaining on the term the cost is relatively inexpensive. The alternative would be purchasing your freehold or even a share of the Freehold. The process is known as ‘Freehold Enfranchisement’.
As with extending a lease certain qualifying tests are applied; starting with the building:
• Does it contain at least two flats?
• Are at least two-thirds of the flats let to qualifying tenants?
A qualifying tenant (lessee) must:
• Have a long lease – in general that will mean a lease in excess of 21 years when it was first granted. Other scenarios include shared ownership schemes where the tenant’s share is 100% and leases are granted under the ‘right to buy’ scheme.
I often receive calls from leaseholders who have a short lease and have heard that buying the Freehold is an option for them. Essentially, from a pure valuation point of view, a property with a new lease of say 160+ years is equal in value to that same property with a share of Freehold although buying the Freehold enables the leaseholders to have total control over the management of their building.
To estimate the cost of purchasing a Freehold a surveyor would have to value all of the leasehold interests within that building. For example, if there are 7 flats in a block and 5 of the leaseholders are participating, they will have to pay not only their own share of the premium but also cover that of the non-participating lessees.
Regardless of the makeup of participating tenants the calculation for the total premium to be paid is based on the principles of the Leasehold Reform, Housing and Urban Development Act 1993 (the Act) and is made up of three parts:
The diminution in the value of the Freeholder's interest
This is a combination of the Freeholder’s loss of both the ground rent he would have received and the loss due to the surrender of the Freehold. The first is governed by fact that for how ever many years are remaining on each individual lease the Freeholder would have been entitled to ground rent from each lessee. The latter is to compensate the Freeholder for the fact that the leasehold interests will no longer revert to him at the end of the term. It must be determined what the current value of the right of receiving those ground rents and reversions upon some future date is.
The landlord's share of the marriage value
The combined value of the flats will be worth more when each has a share of Freehold than in their current form with short leases. As with the calculation for acquiring a new lease, marriage value is only applied when the unexpired term of a lease falls below 80 years. It is also worth noting that marriage value on non-participating flats is ignored when valuing the overall premium.
For each participating property, the Act states that any marriage value that arises from the enfranchisement should be equally apportioned between the lessee and Freeholder.
Injurious affection
The Freeholder must also be compensated for any other loss resulting from a forced sale. This could include, for example, loss of access to an adjacent site or the loss of a future development opportunity such as the opportunity to add an additional floor onto a block of flats. In most instances, much smaller items such as loft developments are the usual sources of injurious affection and the devil is in the detail as to who owns what and what covenants are in the leases
The choice to enfranchise the Freehold of a building will depend upon the circumstances of the lessees. As previously mentioned, a flat with a new long lease will be worth the same as one with a share of freehold, so the deciding factor should be whether there is a desire to manage your own building.
