Short lease , share of freehold

dottystar3

Some advice please. My elderly parents have viewed a flat they would like to purchase. We were informed the lease has only 56 years left but the flat comes with a share of the freehold( 4 flats in total). My parents are downsizing so there are no mortgage issues, we know you can extend leases and the cost varies.
The estate agent couldn't really give us much information about the whole situation. They have sent an email which says the occupants of the top flats manage the freehold (directors). We do know there was a cash offer from a builder of £250k which the sellers declined, similar flats in the area have sold for £285k-£300k (new build at £300K). this is a ground floor flat.
On re searching I can see it will cost them more as they will need solicitors who specialise in this area. I think the reason this flat has not sold is The vendor is asking too much for it, it requires a new kitchen, flooring and decorating which is why  we thought it was roughly £20k less than similar flats in that area, however we now think it is because of the short lease and £250k is too much taking into consideration the cost of extending the lease. 
My parents really like the flat but are unsure on whether this is worth the hassle. Many thanks.

princeofpounds

In theory this situation is totally resolvable, but that's not the case if the seller is unrealistic.

You are correct that the lease can be extended. There are two ways of going about this:

- Informal negotiation. The leaseholder negotiates with the freeholder to extend the lease. The freeholder can ask for anything they like. 

- Formal tribunal, aka the 'statutory route'. The leaseholder takes the freeholder to a Tribunal, which values the extension on the basis of a defined formula and forces it to happen. This route costs more in legal fees and takes more time, but is certain (assuming the property is eligible). 

Most lease extensions take place via the informal route, in large part because freeholders know that if they ask for a silly price then it will happen through the formal route anyway. Doesn't stop some of them trying it on with a high price being requested, particularly the first time they are asked. So if they just ask for a little more than the likely Tribunal valuation then the leaseholder will normally go for it to save on legal fees and move more quickly.

In this instance, if your parents were buying with a mortgage then the lease extension would need to be in place before the property can be bought. Generally-speaking, leaseholds with under 80 years remaining cannot be mortgaged. That is one big issue the vendor faces if they do not resolve the lease issue; properties that are cash-buyer only are typically sold at a significant discount.

Then there is the cost of extending the lease to consider. You don't mention anything about ground rent, but using 300k as a property value after the lease extension, and the 56 years, the cost of a statutory extension would be about £48k plus legal fees (https://www.lease-advice.org/calculator/).

You would need a solicitor who 'specialises' in lease extensions, but these are not rare - most conveyancing solicitors I think would have that competency, but not all. Fees would also cost more that normal (usually a bit less than double I think) as it does involve more work. Even if the vendors pay for and process the extension - they really should - then you would want your solicitor to check it over, especially if it's an informal extension.

So, as you can probably tell it's not sounding like great value. Asking price of minimum £250k plus 48k lease extension plus 2-4k fees plus internal renovation costs.... the seller is not being at all realistic based on what you have told us.

Why? Well, the only thing I can think of is that the vendor thinks that they might be able to get a cheap lease extension because of their share of freehold. This is not out of the question but this does not happen automatically! The freehold is owned by a company. That company is run by its Directors. Those Directors will be the ones that decide whether to offer an informal lease extension and at what price they will do it.

Sometimes, in share-of-freehold situations, the Directors will decide to offer everyone long lease extensions for minimal cost. That's easiest when all the leases are the same length, so everyone is being given the same thing. But if the leases are different lengths, or the Directors don't know what they are doing, then sometimes it just doesn't happen. Then when one person wants to extend, another can pipe up and says 'well I had to pay 30k a few years back before we owned the freehold, so why they hell should they get it for free'? So sometimes lease extensions still happen only on an arms'-length basis. Some of the money might come back to the leaseholder as a dividend from the freehold company they have a share in, but again that is not automatic!

So, you need to talk to the Vendor (possibly through the EA if they weren't so useless, and ultimately through the solicitor to check they are telling the truth) and the Freehold Company to establish the situation.

The EA is never going to sell the property without understanding the situation, because it's impossible to make an offer without knowing what the lease extension will cost. The best next step is to tell them that, fairly bluntly, and get them to supply all the information about precisely how the Vendor envisages the lease extension happening and what it would cost.

FaceHead

Make an offer of £x, conditional upon a lease of at least 99 years being issued at completion. If your parents are buying with a mortgage, this is the only option. If they are cash buyers, it sounds like this is what they want to avoid the hassle/risk of the lease extension. 

This leaves the vendor to negotiate the lease extension with their fellow freeholders. They might reject the offer an choose a cash buyer who can/is willing to buy and then extend the lease.  

LAD917

In theory, with a share of freehold, you should be able to extend the lease to 999 years for legal fees.  You need to understand from the agent / vendor why the freehold has not done this to date.  This could be because no one has gotten around to it, or it could be a sign of a dysfunctional freehold.

dottystar3

Thank you all for your advice.
I have spoken to my parents, apparently some of the flats according to the EA have had their leases extended when one of the flats was sold last year, why this one wasn't I can only assume the elderly owner didn't have that information or just decided not to do anything? no idea really. However they are going to make them an offer on the condition that if accepted the vendor has to have the lease extension completed. So we will see what happens next. As I said my parents are cash buyers in the sense the are down sizing, their place is sold and the flat they wish to purchase is empty, the elderly owner has been moved to a home.

NameUnavailable

As above, being shared FH the lease extension should be just a matter of legal fees. However it might not be the case, there's nothing to stop the others wanting market value for the extension. I've seen a few shared FH flats with short leases and always wonder why, when buying the FH, the leases weren't all extended to 999 years.

I would be extra careful - it could even be a case that the vendors didn't go in with the others to buy out the FH, so they don't in fact own a share and are just 'normal' leaseholders.

NameUnavailable

Just to add, there is an area near me that has a lot of flats and is very popular with retired downsizers. They will pay top price for flats with short leases because they might be over 70 and buying a place with a lease of 50 years as a cash buyer isn't an problem - it's just a problem for whoever inherits the estate.