Shared Ownership: Leasehold to freehold and staircasing - lease query

theGinge

Hi all,

I’m looking for some thoughts on my Shared Ownership lease. I realise that there is currently a very similar topic going on (which is what gave me the idea of asking!) but thought it better to start my own thread rather than hijack someone else’s as the details are slightly different.

The background:

I purchased a 50% Shared Ownership property in November 2020. At the time of completion, there were just over 85 years left on the lease. Before purchasing I confirmed with the housing association that I would be able to extend the lease. The response was that yes, under their rules I’d be eligible for a lease extension after 2 years, but they would encourage me to staircase:

“Should you purchase the property, you would have the right to do an informal lease extension in 2 years’ time. Though you would have the right to do an informal lease extension, we try to encourage shared owners where possible to look to staircase rather than extend the lease term if they are not ready to move on as the end goal is to purchase the remainder of the property at low value, rather than add value to the property that they don’t own full ownership.”

 All well and good and as expected. Various online calculators and informal chats with solicitors suggested that it would cost me around £6-7k (plus costs) to extend the lease after 2 years in the property, with 83 years left on it. This was factored into my plans and is no issue.

 

The change of thinking:

Enjoying some light bedtime reading a few weeks ago, I happened to be reading my lease (exciting times, I know) and spotted a clause that I hadn’t noticed before:

 “4.1 At any time the Tenant shall have the right on giving notice to the Landlord to acquire the freehold of the Property for no charge and otherwise by a transfer which shall include the rights and obligations set out in the Fourth Schedule hereto provided always such notice shall not take effect before the Relevant Percentage is nil (the Tenant having acquired 100% of the shares in the Property) and until any sum payable under paragraph 3 has been paid”.

 (Paragraph 3 is the staircasing procedure, the Fourth Schedule is about property transfer rights and processes)

 Translating that into my lay persons understanding of legalese: If I staircase to 100%, I can then apply for the freehold and it will be given at no cost.

 

Question 1: Is my understanding of this correct?

 

Question 2: If I owned the freehold, would I therefore no longer need to worry about years left on the lease, as it would no longer be a leasehold property but a freehold?

 

Assuming the answers to 1 and 2 are “Yes”, Question 3:

Is this where I can get a bit cunning?! If I intentionally allowed the lease to drop below 80 years, I would then expect the open market value of the property to fall due to the short lease. This would then allow me to staircase to 100% at a reduced price. On doing so I could then acquire the freehold without worrying about lease extensions and marriage value, remove the lease issue, and have the property value back up to where it would be without the short lease issue.

To me, this seems logical, but far too good to be true. What am I missing? Please pull my logic apart and point out where I’ve misunderstood, am forgetting something, or am making an assumption that won’t stand up. I have plenty of time to think about this before my 2 years are up, and I’m aware of the new bill that may or may not happen with the changes to leaseholds and marriage value, but at the same time, if I have a stupid idea in my head I’d like to get rid of it before I make a mistake that costs me thousands!

 

Thanks in advance.

eddddy

Is the property a house or a flat?

Many shared ownership houses become freehold 'for free' when you staircase to 100% (but that wouldn't apply to a flat)

But your mention of lease extensions, online calculators etc, sounds like you're referring to a flat.

theGinge

Sorry, missed that info.
It's a house. 
The online calculators may be my erroneous usage (since the majority of info on the internet seems to be about flats but isn't always clear on that), but both the HA and solicitors have been happy to engage in the conversations about lease extensions - it is afterall leasehold and shortening quickly - so I'm assuming that bit is still correct.

eddddy

The online calculators you're looking at are almost certainly for statutory lease extensions for flats (i.e. it's the cost of adding 90 years to a flat lease, and reducing the ground rent to zero.)

A statutory lease extension for a house is very different - it costs nothing, it adds 50 years to the lease, but the ground rent is increased to a 'modern ground rent'
See: https://www.lease-advice.org/faq/i-cant-afford-to-buy-the-freehold-of-my-house-can-i-extend-my-lease-instead/


But all that may not be relevant. The housing association can calculate the cost of a lease extension in any way they choose, and add whatever number of years they choose. and change the ground rent to whatever they choose.  Maybe they would provide their rules and calculation formula they use, if you ask them.


Regarding the valuation for staircasing - again you need to ask the housing association how they do that valuation. 

For example, even if there is only, say, 70 or 60 or 50 years left on the lease, they might always value it for staircasing as though it had a 99 year lease. 

Otherwise, as you rightly say, everyone would just let their lease get as short as possible before staircasing.

eddddy

.... I just did a bit of googling.  One housing association says this about valuations for staircasing with a shared ownership house:

If you own a house you will need to tell the surveyor to value the property with the freehold whether you are staircasing to 100% or not.

That seems logical and I guess other Housing Associations would say the same.

So that confirms that there is no benefit to letting the lease run down - the house will be valued as though it's freehold. The length of lease doesn't matter.

theGinge

Thanks eddddy, really useful.
I don't think I pay ground rent (just the 50% rental charge and service charge), but it could be included in one of those. I see no reference to it in the lease or the rest of my documentation.

As you suggest, I'll contact the Housing Association to see if they'll share their formula and valuation for staircasing procedures.

Does this mean then (next dumb question): If we make the assumption that even if there was 1 year left on the lease, the HA would value it as 99 years for staircasing purposes (worst case scenario?) then as long as I staircase eventually, I would not need to worry so much about being sub-80 years and marriage value as the staircasing valuation would be basically the same? I would only need to worry if I needed to sell rather than staircase? (And remortgaging issues)

theGinge

eddddy said:

.... I just did a bit of googling.  One housing association says this about valuations for staircasing with a shared ownership house:

If you own a house you will need to tell the surveyor to value the property with the freehold whether you are staircasing to 100% or not.

That seems logical and I guess other Housing Associations would say the same.

So that confirms that there is no benefit to letting the lease run down - the house will be valued as though it's freehold. The length of lease doesn't matter.

Sorry, I was typing my last one when you posted this one. So the cunning rouse doesn't work (I knew it was too good to be true!), but also, as long as I staircase to 100% before it gets too unmortgagable (below 70), there'd be little point in renewing the lease as it would eventually be negated through the staircasing and thus wasted money.

eddddy

theGinge said:

eddddy said:

.... I just did a bit of googling.  One housing association says this about valuations for staircasing with a shared ownership house:

If you own a house you will need to tell the surveyor to value the property with the freehold whether you are staircasing to 100% or not.

That seems logical and I guess other Housing Associations would say the same.

So that confirms that there is no benefit to letting the lease run down - the house will be valued as though it's freehold. The length of lease doesn't matter.

Sorry, I was typing my last one when you posted this one. So the cunning rouse doesn't work (I knew it was too good to be true!), but also, as long as I staircase to 100% before it gets too unmortgagable (below 70), there'd be little point in renewing the lease as it would eventually be negated through the staircasing and thus wasted money.

Yep - extending the lease would seem to be a waste of money...

...unless you need to do it in order to make it mortgageable for a future buyer.

But if you were selling, I guess you could also look into staircasing to 100% ownership (i.e. freehold) on completion. So the buyer essentially pays 50% of the freehold value to you, and the other 50% to the HA and they get a freehold house.

theGinge

Just to update for anyone reading in the future, this is what the housing association said (edited for brevity and to remove the name of the HA, emphasis my own):

I will set out below the guidance we provide for both staircasing and lease extension enquiries. I would like to preface this information by saying that we advise Shared Owners that purchasing greater shares in your property is more beneficial than extending the lease. In your case, should you purchase 100% of the property, the freehold would automatically transfer to you.

Staircasing

If you wish to proceed the steps you need to follow are shown below:

• Instruct us formally (an email will be sufficient) confirming the legal owners, percentage of the lease you own and the amount you wish to purchase
• Make payment for the RICS valuation, if HA is organising this please complete attached form– the fee is £288.00
• OR Instruct your own RICS Valuer (Royal Institute of Chartered Surveyors) and provide an appraisal of the property based on the valuation of the property, less any improvements you have made
• Provide details of your solicitors, address, telephone number and contact person

Once we have this and you are happy to proceed based on the valuation, we will instruct our solicitors who will the deal with your solicitor direct.

The valuation will be based on the freehold value.

Lease Extension

 The fees for this service as a guide are as follows:

• Property Valuation £720.00 + VAT
• HA Solicitors Fees £500.00 + VAT plus disbursements and associated legal fees
• Variation of the lease
• Cost of the lease extension this will be determined by the expert Valuer
• Your Solicitors fees

 The extension to the lease would be 90 additional years.

 You may find the following website useful <i>https://www.lease-advice.org/calculator</i> .

 If you would like to proceed with this enquiry we require you to pay £720.00 and your written undertaking that you will be responsible for the remaining balance upon completion. We will then arrange the valuation.

Ignoring that they've referred me to a calculator that is clearly for flats and not houses, the rest of it seems to make sense and they're clearly pushing toward staircasing rather than lease extension.

Therefore my conclusions on the best way forward (based on this and eddddy's magnificant brain):

Plan to staircase, rather than extend the lease - a lease extension would be money wasted if the eventual goal was staircasing anyway. The lease dropping below 80 would only really cause an issue if I needed to sell urgently (unlikely) - otherwise it would almost always be better to staircase first, claim the freehold, and sell as a freehold - this would negate any issue with short leases and marriage values.

Thank you brains of the internet.