Buying a freehold with a massively long lease?

cjard

Hiya

I know that the calculations aren't simple, and I'm not asking for a cost to be given here, just curious to know if the remaining time on a lease being siginficantly in excess of a human life span will massively affect the value of the freehold in a purchase situation.. I'm a leaseholder of a flat at a ground rent of £10 per annum, the lease has 980 years remaining. Is this going to be significantly more costly to buy this freehold than if the lease only had 50 years remaining? I ask because I'm keen to know if there is an upper limit in terms of the length of time that the freeholder could reasonably enjoy use of the ground rent (because it's nearly certain that any entity would not outlast a least of 980 years, not a company, nor an individual)
Just wondering how/if the calculations change in a loooooong-lease situation? (all the examples I see are people buying their lease when it's nearly up)

princeofpounds

The length of the lease become increasingly more important as the lease gets shorter.

So there will not be nearly as much difference between a 900 year lease and a 200 year lease as there will be between a 90 and a 50 year lease.

The reason for this is something called the 'time value of money' (google it, it's a concept in finance). Money far out in the future is worth much less than money nearer to the present.

That should make intutive sense, but you can conceptualise it this way; if you need to pay £1000 ground rent in 1 year, you need to set aside £1000. But it you need to pay it in 100 years then you only need to set aside a small amount of money and invest it for 100 years.

If you sum up all the money you would need to set aside (assuming a particular 'discount rate' which basically tells you what return you would expect from investments of similar risk) then that is an approximation of the value to purchase the stream of income that is the ground rent.

The actual way freeholds are valued is a bit more formalised than that, but it will give you a general idea.

Look here for more info:

http://www.lease-advice.org/calculator/

In terms of leases, you will start to notice the acceleration in the value much more when you get to 90/80/70 years and below...

BitterAndTwisted

The freehold value is whatever the owner of the freehold decides that it's worth to them. There is no formula.

Extending a lease is a different question altogether.

HappyMJ

cjard wrote: »

Hiya

I know that the calculations aren't simple, and I'm not asking for a cost to be given here, just curious to know if the remaining time on a lease being siginficantly in excess of a human life span will massively affect the value of the freehold in a purchase situation.. I'm a leaseholder of a flat at a ground rent of £10 per annum, the lease has 980 years remaining. Is this going to be significantly more costly to buy this freehold than if the lease only had 50 years remaining? I ask because I'm keen to know if there is an upper limit in terms of the length of time that the freeholder could reasonably enjoy use of the ground rent (because it's nearly certain that any entity would not outlast a least of 980 years, not a company, nor an individual)
Just wondering how/if the calculations change in a loooooong-lease situation? (all the examples I see are people buying their lease when it's nearly up)

I wouldn't recommend buying the freehold of your flat. A 980 year remaining lease is virtually freehold anyway. A freehold flat will be difficult to mortgage so I'd keep paying the £10 per year and let someone else manage the maintenance of the property.

RabbitMad

how many flats are there in the block - depending upon this you just can't go an buy the freehold even if the freeholder was willing to sell. They have to first offer the freehold to all leaseholders in the block before selling to anybody else.

RabbitMad

HappyMJ wrote: »

I wouldn't recommend buying the freehold of your flat. A 980 year remaining lease is virtually freehold anyway. A freehold flat will be difficult to mortgage so I'd keep paying the £10 per year and let someone else manage the maintenance of the property.

It wouldn't be a freehold flat. it would be a leasehold flat where the owner of the lease also owned the freehold title too.

cjard

HappyMJ wrote: »

I wouldn't recommend buying the freehold of your flat. A 980 year remaining lease is virtually freehold anyway. A freehold flat will be difficult to mortgage so I'd keep paying the £10 per year and let someone else manage the maintenance of the property.

Mmm.. I was looking to form an association to take over the freehold because the current freeholder is massively neglectful of his obligations - he hasnt even finished the development of the property some 15 years after, and amounts charged for works are ridiculous..
For more than a year, the light bulbs in the hallway were not working. eventually another leaseholder bought some bulbs and fitted them. In terms of groundcare, he engaged a landscape contractor buddy of his to overcharge for shoddy work and the leaseholders were contractually bound to pay the fees charged..

The chief problem I have, however, is that his default answer is no, to any request and if pressed, becomes "only if a contractor of my choosing will do it" - he then engages a mate to ensure he creams an amount off the top. I want to remove a non-load-bearing wall to make the kitchen a usable size by combining it with the dining room but I need his permission that is persistently denied. The interest in buying the freehold is not to reduce financial burden, but to increase the freedom of what we, the leaseholders, can do with the property

Why does a commonhold flat become more unmortgageable?

cjard

RabbitMad wrote: »

how many flats are there in the block - depending upon this you just can't go an buy the freehold even if the freeholder was willing to sell. They have to first offer the freehold to all leaseholders in the block before selling to anybody else.

Five, four of the leaseholders have stated they would glady enter into an association to hold the freehold in common as they've effectively been performing most of the obligations of the freeholder themselves for the past 3 years anyway, and have a harmonious diplomacy when it comes to notions like "let's collectively buy some garden tools, and tend the flowerbeds ourselves ourselves on a rota, sack off the £1200 a year contractor who comes 8 times over the summer"
The fifth leaseholder is actually the director of the company that was established to manage the freehold; he bought one of the flats off himself at a ridiculously low price, and now rents it out. Neither he, nor any adult member of his family have ever lived in the building

princeofpounds

The freehold value is whatever the owner of the freehold decides that it's worth to them. There is no formula.

Extending a lease is a different question altogether.

Actually fair point, I did confuse the freehold and the extension. Guess I hadn't had my coffee yet!

Rational investors would value freeholds on the same sort of basis though, so the general point still hold.

They will probably value a long-term stream of ground rent at a yield, which is a simplified way of discounting future cashflows as I outlined above. So let's assume that freehold ground rent goes for 6% yield in your area (you can get a clue from auctions). If it's £100 a year then then market value of the freehold will be roughly 100/0.06, which equals £1667.

If you make an offer above the market value, then you are likely to be able to purchase because the freehold owner can reinvest the money on the market for a greater income.

Then the freeholder might also consider the lease expiry payments, which tend to be lumpy. Someone owning a freehold with a 10 year lease in Chelsea will be looking forward to a bumper payday any day, or taking possession of a nice house. It will get close and closer to full value of the house every year. But someone with a 900 year lease isn't going to care much if it's 890 or 900 years; due to the time value of money the big payment is still not worth much in present value terms either way.

Finally they might consider ancilliary value that the lease provides. For example, some leases allow the freeholders to pick an insurance policy but charge it to the leaseholders. They can then get paid commissions from the insurance firms to select their product. Or they might get payments for giving permissions for extensions, or works done for flats, or for other things they can control.

princeofpounds

you might wish to look at right to manage rather than buying the entire freehold.