Buying freehold

geocatwest

The landlord is offering the freehold on this block of flats for £140,000. 

There is 123 years remaining on the lease, and the ground rent is currently set at £250 per year. 

1. I am planning to move out here next year - is it worth it or not to consider the purchase the freehold?
2. I understand over half of the leaseholders need to give approval, what if, let's say, 1/3 decide not to go via this route? Would the 1/3 continue to pay ground rent etc? This block currently has 21 flats. 140,000 divided by 21 is approx £6.6k per flat - if 1/3 decide to say no, that would automatically mean the price per flat goes up right?

Thanks

eddddy

Do you mean that the freeholder is offering you the Right of First Refusal? (i.e. the freeholder has served section 5 notices on the leaseholders.)


If so, as you suggest, more than 50% of the qualifying tenants have to 'team-up' and accept the offer.

As long as you have at least 50% of tenants, you can split the cost / shares any way you like:

For example:

• One person, can contribute £140k and own 100% of the shares
• 10 people can contribute £14k each and own 10% of the shares each
• 20 people can contribute £7k each and own 5% of the shares each
• One person can contribute £70k for 50% of the shares, and 5 people each contribute £14k for 10% shares each
• etc

But usually, people go for equal shares for all leaseholders taking part - for simplicity.

A lot of buyers see it as a benefit to have a 'share of freehold' when they buy a leasehold flat.


But I'd suggest that you do things 'properly' - for example, hire a professional management company.

And with, say, 21 joint owners - document how decisions will be made. (e.g. 7 joint owners want the communal front door to be repainted dark blue, 7 want it light blue, and 7 want it green. How is a decision made?)

geocatwest

eddddy said:

Do you mean that the freeholder is offering you the Right of First Refusal? (i.e. the freeholder has served section 5 notices on the leaseholders.)


If so, as you suggest, more than 50% of the qualifying tenants have to 'team-up' and accept the offer.

As long as you have at least 50% of tenants, you can split the cost / shares any way you like:

For example:

• One person, can contribute £140k and own 100% of the shares
• 10 people can contribute £14k each and own 10% of the shares each
• 20 people can contribute £7k each and own 5% of the shares each
• One person can contribute £70k for 50% of the shares, and 5 people each contribute £14k for 10% shares each
• etc

But usually, people go for equal shares for all leaseholders taking part - for simplicity.

A lot of buyers see it as a benefit to have a 'share of freehold' when they buy a leasehold flat.


But I'd suggest that you do things 'properly' - for example, hire a professional management company.

And with, say, 21 joint owners - document how decisions will be made. (e.g. 7 joint owners want the communal front door to be repainted dark blue, 7 want it light blue, and 7 want it green. How is a decision made?)

Thanks, yes, the landlord is offering right of first refusal.

1. If at least 50% of the tenants say yes, let's say the rest say no, would the tenants that said no still have to purchase the freehold or would only the tenants that said yes, be going forward to purchase to have a share of the freehold?

2. If that isn't the case, would the tenants that said no continue to pay ground rent etc as stipulated in the original lease?  And presumably they wouldn't have any say in the decision making process then (with the example you made at the bottom).

canaldumidi

Or it could get more complicated if the flats are all different sizes. You all might agree that  3 bed flat might gets 3 shares compared to a 1 bed flat fetting1 share.....

Yes - those leaseholders/flat owners who decide not to buy in to the share of freehold would continue to pay ground rent. Actually, so would those who do buy a share of the freehold though they would be paying themselves - with their leasehold hat on they would pay the same ground rent as before (as specified in their lease), but as a part owner of the freehold, they would receive a share of the ground rent receipts.

geocatwest

I understand there is an advantage to owning a share of the freehold, however, as we are planning to sell within the next six months (and the deadline for right of first refusal is up on 4 Feb) - how would that realistically work with prospective house buyers? Wouldn't we need to factor in how ever much onto our current mortgage, plus solicitor, legal fees on top? Surely the process would take months, by that time our flat is already on the market?

zagubov

eddddy said:

And with, say, 21 joint owners - document how decisions will be made. (e.g. 7 joint owners want the communal front door to be repainted dark blue, 7 want it light blue, and 7 want it green. How is a decision made?)

Try to make sure you've got a prime number of owners!

eddddy

geocatwest said:

1. If at least 50% of the tenants say yes, let's say the rest say no, would the tenants that said no still have to purchase the freehold or would only the tenants that said yes, be going forward to purchase to have a share of the freehold?

It doesn't really work like that.

(Remember that there would continue to be 21 leasehold flats - that wouldn't change at all. We're talking about forming a company - and that company would buy the freehold from the current freeholder.)

11 or more people need to sign a form saying they agree to set up a company buy the freehold for £140k.

Let's say it turns out to be a 'Group of 11' who sign the form.

That 'Group of 11' can raise the money anyway they like and give shares to anyone they like.

But they cannot force anyone to contribute any money. So they cannot force the remaining 10 leaseholders to contribute. And they probably wouldn't give the remaining 10 leaseholders any shares.


But a fair approach might be...

• the 'Group of 11' each contribute 1/11th of the costs
• the 'Group of 11' each get 1/11th of the shares
• the 'Group of 11' extend their own leases to 999 years with zero ground rent
• the 'Group of 11' continue to collect ground rent from the other 10 leaseholders (and get 1/11th each)
• the 'Group of 11' take over the role of the freeholders.

geocatwest said:

 Wouldn't we need to factor in how ever much onto our current mortgage, plus solicitor, legal fees on top?

Do you mean you'd need to re-mortgage in order to raise the finance you need? If so, that's risky.

If you 'sign the form' but then can't raise the finance, you might scupper the freehold purchase for everyone else, and leave everyone liable to pay the current freeholder's legal bills.

Freecall

eddddy said:

If you 'sign the form' but then can't raise the finance, you might scupper the freehold purchase for everyone else, and leave everyone liable to pay the current freeholder's legal bills.

eddddy is correct.  The usual way to prevent problems of this nature arising between the formation of the company and the completion of the purchase of the freehold (usually several months) is a shareholder agreement.

You need to agree in advance what happens if...

One of you has to unexpectedly move away.
Goes bankrupt.
Dies.
Etc.

geocatwest

Freecall said:

eddddy said:

If you 'sign the form' but then can't raise the finance, you might scupper the freehold purchase for everyone else, and leave everyone liable to pay the current freeholder's legal bills.

eddddy is correct.  The usual way to prevent problems of this nature arising between the formation of the company and the completion of the purchase of the freehold (usually several months) is a shareholder agreement.

You need to agree in advance what happens if...

One of you has to unexpectedly move away.
Goes bankrupt.
Dies.
Etc.

Thank you both. I guess it wouldn't be worth it if I had to remortgage, plus with the plan to sell the flat whilst all this would take place, that would seem to complicate the sale a lot?

eddddy

geocatwest said:
 I guess it wouldn't be worth it if I had to remortgage, plus with the plan to sell the flat whilst all this would take place, that would seem to complicate the sale a lot?

Unfortunately, a change of freeholder around the the time of your sale is likely to be viewed as a risk by some buyers - whether the freehold is sold to the leaseholders or somebody else.

They'll be no track record for the new freeholder(s). The buyer won't know if the new freehold owners will...

• leave the property to fall into disrepair
• spend loads of money on repairs, resulting in huge service charges
• generally be difficult to deal with

One strategy which buyers might view positively...

Assuming the other leaseholders go ahead with the freehold purchase, you could ask them if they'd consider selling a share to your future buyer, for say £10k (or whatever).

If they agree, you can tell the estate agent advertise your leasehold property for £x, plus the option for buying a share of the freehold for £10k on top.