Buying out the intermediary landlord (and freehold) when owning an UNDERLEASE

trusaiyan

Hello peeps

This is the situation.

Person A owns a 3 bedroom underlease house with short term length (99 years from 1978) which is approx 57 years left. It's a terrace from the later 1970s, where the whole private development was conducted under a head lease/underlease system, whereby the council retains the freehold title to each property, but each underlease pays the head leaseholder ground rent. The developer has since sold the head lease to another random company that specialises in buying leases/freeholds, and is now the head leaseholder/intermediate landlord.

• Underlease is owned by Person A
• Head lease is owned by a random company that bought it from the property developer (who originally owned the head lease).
• Freehold title is owned by the local council that never sold the freehold to the developer.

Person A wants to sell the property, but it is regarded as unsellable until either the lease is extended (other than cash buyers), the intermediate leaseholder "bought out" or possibly the freehold title is also owned.

The ground rent which is paid to the intermediate land lord/head lease holder is minimal, but it is collected yearly.

The intermediate leaseholder (the company that owns the head lease and receives ground rent from all the underleases on the development) offered the "leasehold" to Person A for around 1000GBP a few years ago (plus legal fees).

The council is also willing to sell the freehold, probably for around a similar price but that is yet to be determined, but it said it will sell it for a reasonable price.

The general questions we have are:

1. If they buy the "leasehold" from the intermediate landlord, what are they actually buying in the context of them already owning the underlease? We understand this to mean they would be buying out the intermediate landlord, but what would they actually own if they did this? Would they own a new lease, i.e the head lease? Or would they merely extinguish their underlease ground rent requirements to the intermediate landlord, but if so what do they actually own (do they own a new or different lease or not)? They already own the underlease, that is a fact that is shown in the title deeds, so does this mean they would in fact be buying the head lease (but if so would that not make them in receivership of all ground rents, which can't therefore be true)?
2. If they "buy out" the intermediate landlord, are they still subject to the term length of the head lease, or would this be extinguished (thus why purchase the freehold)?
3. Would the head lease term length typically be much longer, like ten times longer, than the 99 year term lengths of all the underlease properties on the development? I've downloaded the title register to each title, but to an untrained eye I cannot determine the head lease length in the document.
4. Other people on the development said they had to buy both the leasehold and freehold to make it marketable, but as a general rule would it be better to buy the freehold, the leasehold (buying out the intermediate landlord) or both in this kind of circumstance?
5. If they buy the freehold, but do not buy out the intermediate landlord, would they still have to pay ground rent and be subject to the 99 year term length of the underlease (so they would own the underlease, as they do now, but also the freehold title)?
6. When buying out the intermediate Landlord, would the underlease generally be merged with the freehold title once all are acquired?
7. Do they have any legal right as an underlease house owner to EXTEND the underlease instead of buying it out?
8. Is it typically expensive and very time-consuming to extend the lease formally through the courts instead of buying out the intermediate landlord informally (which will cost less than 2000GBP)?

Any thoughts would be welcomed

eddddy

It's probably a bit simpler than you imagine.


Person A should just follow the legal process for buying their freehold - it's called 'Statutory Enfranchisement'.

It will probably work like this:

• Person A serves notice on the Freeholder and Intermediate leaseholder

• Person A negotiates a price for the freehold with the freeholder. Person A doesn't get involved with the intermediate leaseholder.

• If Person A and the freeholder can't agree a price - they ask a tribunal to decide (an expensive process which should be avoided, if possible)

• The freeholder and the intermediate leaseholder then 'argue' about how the price should be split between them - Person A isn't involved in that argument/negotiation.

• And Person A ends up with a freehold property with no intermediate lease.

Person A will have to pay their own legal and valuation fees.
Person A will also have to pay the freeholders legal and valuation fees.

The downside of having an intermediate landlord is: Person A will also have to pay the intermediate landlord's legal and valuation fees.


Person A should probably hire a specialist solicitor and specialist valuer to deal with this.  The rules are a bit complex, and if a notice is filled in wrong, or somebody isn't served notice, or a deadline is missed - the freehold purchase could fail.  And all the legal and valuation fees above would still need to be paid - and Person A might have to wait a year before they're allowed to try again.



Edit to add...

A bit more info: https://www.lease-advice.org/advice-guide/houses-qualification-valuation/

trusaiyan

Interesting, but I assume the length of time for the statutory route will be bigger than merely informally buying both without the court's involvement?

This suggests it would be 6-12 months which would be too long: https://www.bishopslaw.co.uk/lease-enfranchisement/house-enfranchisement-purchasing-the-freehold/#:~:text=The length of time it,date of your initial notice.

Also, are you suggesting that the Intermediate leaseholder would have to be consulted if Person A went to the council directly and skipped them to buy the freehold? But I assume owning the freehold will be required if "buying out" the intermediate leaseholder doesn't result in a long lease length (because I don't understand what Person A would actually own if they buy out the intermediate leaseholder).

Are you able to conclusively answer question 1 above? I'd like to know, as the formal route may very well be the best option, but time constraints and stress of courts etc would very likely preclude this option. I very much doubt Person A wants to get involved in land courts.

Lastly, she ultimately only wants the house to be sellable (she's buying a new house with cash). She just wants to get rid of it but obviously for a fair price. She doesn't really want to get involved in complicated purchase when she wants to rid the asset.

Thanks Tru

eddddy

trusaiyan said:

...I assume the length of time for the statutory route will be bigger than merely informally buying both without the court's involvement?

If you've reached agreement with the freeholder, the time difference doesn't have to be that great.

• If you buy informally, you'll have to agree terms with the freeholder (and the intermediate landlord) first. If you can't agree terms, the purchase can't happen.

• agree terms with the freeholder - you're good to go. No further delays.

• With the statutory route, you only go to tribunal (which is like a court) if you can't agree terms with the freeholder.

trusaiyan said:

I'd like to know, as the formal route may very well be the best option, but time constraints and stress of courts etc would very likely preclude this option. I very much doubt Person A wants to get involved in land courts.

Just to summarise:

With the Informal Route:

• Person A, Freeholder & Intermediate Landlord all in agreement with each other: All done very quickly and easily
• Person A, Freeholder & Intermediate Landlord unable to all agree with each other: Freehold purchase is dead - it won't happen

With Statutory Route:

• Person A & Freeholder in agreement with each other: All done fairly quickly and easily
• Person A & Freeholder unable to agree with each other: Go to tribunal to decide on terms
• (Freeholder and Intermediate Landlord might argue between themselves - but not your problem.)

You mention stress of Person A - I'm not sure what you're imagining. In simple terms, if it goes to tribunal, the case could be written or oral...

Written...

• Person A's valuer writes a document saying "I think the freehold should cost £x because of a, b, c etc"
• Freeholders valuer writes a document saying  "I think the freehold should cost £y because of d, e, f etc"

• Optionally, the intermediate leaseholder's valuer writes a document saying  "I think the intermediate leaseholder's share should be £z because of h, i, j etc"

• The tribunal judge looks at the documents and makes a decision

Oral...

• The 2 or 3 valuers still write their documents as above - but they turn up and argue their case face-to-face

• The tribunal judge looks at the documents and makes a decision

Person A wouldn't normally turn up - but they could if they wanted. But it would be a very technical discussion about things like 'First Reversion Value', 'Second Reversion Value', 'Yield Rate', 'Marriage Value' - so Person A probably wouldn't understand it.

trusaiyan

Thanks again. 

So if they all agree, what WOULD the benefit be of doing it formally as opposed to informally? Can terms be somehow worse if done informally? What should she watch out for?

And when you say "terms", what terms are there to actually agree? Other than price, what is there to agree?

Ah I'm just thinking, restrictive covenants in the freehold (if there are any) would be extinguished if she went formal I think? So I suppose there are benefits, but then again she doesn't care as it's shortly not going to be her asset.

eddddy

trusaiyan said:

So if they all agree, what WOULD the benefit be of doing it formally as opposed to informally? Can terms be somehow worse if done informally? What should she watch out for?

There are no rules when you negotiate informally, so...

• The freeholder can ask for a silly price - maybe double, 5 times or 10 times what it should be
• The freeholder can string you along for months, and then never actually sell you the freehold
• The freeholder can wait until the day you're supposed to exchange contracts - then increase the price
• etc, etc etc
• The intermediate leaseholder can ask for a silly price - maybe double, 5 times or 10 times what it should be
• The intermediate leaseholder can string you along for months, and then never actually sell you the freehold
• The intermediate leaseholder can wait until the day you're supposed to exchange contracts - then increase the price
• etc, etc etc

None of those things can happen with a statutory lease extension.

(Maybe a council freeholder wouldn't try to play any dirty tricks. But I guess the intermediate landlord might. But councils sometimes insist that you follow the statutory process - to ensure transparency and fairness.)

trusaiyan said:

Ah I'm just thinking, restrictive covenants in the freehold (if there are any) would be extinguished if she went formal I think? So I suppose there are benefits, but then again she doesn't care as it's shortly not going to be her asset.

It depends who the covenant benefits. If a covenant benefits others, the freeholder can ask for the covenant to be carried over to the freehold title.

If a covenant is something like "No extension can be built", that might reduce the property's value when it's sold.

trusaiyan

Going through the official route (stat enfranchisement or extension) will simply be WAY too time-consuming, had other advice it would more than likely take around 10-12 months, 6 months would be the absolute quickest in reality which is still not acceptable (providing the parties agree to informal, obv this would be the only option if she didn't). 

Therefore, she now thinks that she will NOT get involved in the purchase of head lease or freehold - she will simply offer a discount/reduced price of the underlease title so that the new buyer can resolve it however they like (providing they and their solicitor agree).

Thus, she needs to determine a guide price or the actual price of buying both the head lease and the freehold. The council said to value it, they would have to instruct valuers at a cost of 500GBP. However, most other households on the estate have purchased both the head lease and freehold, therefore is there an easy way we can determine the prices they paid for these titles and thus give a fairly accurate price to reduce from the house purchase price (to cover buying the leasehold/freehold)?

Similarly, the company that owns the head lease offered it around 10 years ago for I think 1000GBP. I'm thinking if she offered around 2-3k off the asking price, this should cover the costs of buying them informally. I suppose she can get an new head lease price of that company when they respond, but the council have said we must pay £500 to value the freehold which is obviously not ideal when she won't actually buy it.

Any thoughts?

eddddy

Ask some local estate agents what they think it will sell for with a 57 year lease, versus as a freehold.

It's probably best to ask more of 'old school' estate agents, who understand short leases, freehold purchasing, lease extensions etc.

Any info you can give the Estate Agent about freehold purchase costs would be useful - e.g. a valuation from a specialist valuer, details of what others paid, etc.


It will be difficult (maybe impossible) for a buyer to get a mortgage on a 57 year lease - so it's probably going to be for a cash buyer only.


I imagine the profile of buyer will be:

• An investor with cash - who wants to make a nice profit on a 'difficult' property.

• i.e. Buy for £x - rent out the property while doing a statutory freehold purchase at a cost of £y.

• Aim to end up with £10k or £30k or £50k profit (i.e. a cheap way of buying a freehold house)

If you're lucky, a few investors might all be interested at the same time, which might push the price up.