Freehold Purchase Opportunity from Local Council

Smithy22

Hi, 

We bought our Leasehold house 2 years ago for £215k. The local council are the leaseholders and it is a peppercorn term. It was a 999 year lease dated 1972 so has ~948 years left on it. 

The council have now written, offering us the opportunity to buy the freehold. The cost is £1,750 which they say includes their £350 surveyors fees and £350 legal costs. They have also said we can pay this in 10 instalments of £175. The offer was valid for 6 months - which is now coming up so I need to make a decision. 

I think we do want to purchase as the council can charge £1500 each time you seek permission to make changes to the property etc so in the long run it could be economical as well as making any future sale more straightforward. 

My question is, do I need to instruct a solicitor? The letter just says to return the form with details of your solicitor "if you have instructed one". Obviously needing a solicitor would increase my costs but I don't really know if it is necessary? 

Any advice welcome.

Thanks

eddddy

Smithy22 said:

My question is, do I need to instruct a solicitor? The letter just says to return the form with details of your solicitor "if you have instructed one". Obviously needing a solicitor would increase my costs but I don't really know if it is necessary? 

So you are "informally" purchasing the freehold. The other way of buying your freehold is by "statutory enfranchisement".

A specialist solicitor could probably tell you if the terms the council are offering are better or worse than the terms you would get with a "statutory enfranchisement".

Perhaps the most important area is the proposed covenants in the freehold title. (For example, covenants restricting what you can do with the property, and/or requiring you to get consent from the council for doing things, and/or what services you have to pay for.)

• If you went with a "statutory enfranchisement", the law restricts what covenants can be carried across from the lease into the freehold title.

• If you purchase "informally", the council can try to carry across any covenants they like from the lease - or even invent new covenants. A solicitor can advise you on that.

As a final comment - it sounds like they are charging you £1050 for the freehold (after fees). If it's 948 year lease and peppercorn ground rent - that sounds outrageously expensive. I'm surprised that a council would be ripping-off their leaseholders like that. (Unless there's another factor - like development potential.)

Maybe ask them for details of how they calculated that £1050 valuation.

Smithy22

Thanks very much for the response. Plenty in there I had no idea about!  

There is little to no information in the letter so I will do some more investigating. 

I also didn’t think the price was bad (based on what I’m not sure?!) I assume it’s just a revenue raising exercise for the council. I will write back and see what response I get. 

user1977

Another saving would be the additional fees solicitors would charge in the future for dealing with a leasehold transaction.

eddddy

Smithy22 said:

I also didn’t think the price was bad (based on what I’m not sure?!) I assume it’s just a revenue raising exercise for the council. I will write back and see what response I get. 

If you went with "statutory enfranchisement", the price is supposed to reflect what the freehold could be sold for on the open market.

You mention a 'peppercorn' - so I'm assuming your ground rent is £0.

So to illustrate, imagine you saw an advert selling a freehold house saying something like this:

House for sale. But you can't use the house for the next 948 years. (Because of a lease). And you will not get any ground rent (or other income) for the next 948 years.

So how much do you think somebody would pay for that freehold house? According to the Government formula, the value is a tiny fraction of one penny.

That seems about right. I doubt that any rational investor would even pay 1 penny for that.


(But there might be a factor that you haven't mentioned which makes the freehold more valuable.)

user1977

eddddy said:

Smithy22 said:

I also didn’t think the price was bad (based on what I’m not sure?!) I assume it’s just a revenue raising exercise for the council. I will write back and see what response I get. 

If you went with "statutory enfranchisement", the price is supposed to reflect what the freehold could be sold for on the open market.

You mention a 'peppercorn' - so I'm assuming your ground rent is £0.

So to illustrate, imagine you saw an advert selling a freehold house saying something like this:

House for sale. But you can't use the house for the next 948 years. (Because of a lease). And you will not get any ground rent (or other income) for the next 948 years.

So how much do you think somebody would pay for that freehold house? According to the Government formula, the value is a tiny fraction of one penny.

That seems about right. I doubt that any rational investor would even pay 1 penny for that.

(But there might be a factor that you haven't mentioned which makes the freehold more valuable.)

The potential to sell it to a leaseholder for thousands more than your initial investment...

And (although such ultra-long leases generally are very light on covenants) there's the potential of being able to get payment for consent or variation for something in the future.

I'd pay at least 2p for it...

eddddy

user1977 said:

The potential to sell it to a leaseholder for thousands more than your initial investment...

And (although such ultra-long leases generally are very light on covenants) there's the potential of being able to get payment for consent or variation for something in the future.

I think you're saying that a freehold might be worth more, because...

• A 'rogue' freeholder can fool a leaseholder into paying thousands - because the leaseholder doesn't know that they can use the law (statutory enfranchisement) to buy the freehold for 1p

• A 'rogue' freeholder can overcharge leaseholders for granting consents in order to make a profit (when the law says that they can only charge their reasonable costs - and not make any profit)

But when a tribunal values a freehold - they don't take into account the potential value that can be derived from it from dishonest and/or illegal behaviour.


(But you're right that a freeholder could charge a premium for lease variations. But that isn't accounted for in the statutory formula.)



The OP's decision between buying the freehold for £1050 vs 1p is skewed by the fees charged by the pesky solicitors and valuers!!!

• If the OP buys the freehold for 1p using statutory enfranchisement - they might have to pay solicitors and valuers fees of £1k to £2k

• If the OP accepts their freeholders offer of £1050 - they only have to pay fees of £700

That's why the government wants to remove solicitors and valuers from the process, as much as possible.

user1977 said:

I'd pay at least 2p for it...

Yep - there are a number of rogue companies that do that kind of thing.

They buy freeholds in bulk for pennies or a few pounds - purely with the goal of fooling leaseholders into overpaying for the freeholds...

... and or overcharging them for consents.
 

Schwarzwald

eddddy said:

user1977 said:

The potential to sell it to a leaseholder for thousands more than your initial investment...

And (although such ultra-long leases generally are very light on covenants) there's the potential of being able to get payment for consent or variation for something in the future.

......

That's why the government wants to remove solicitors and valuers from the process, as much as possible.
.......
 

any transaction of this kind will require some solicitor involvement, how do you want to exclude them fully?
£350 for legal costs sounds pretty reasonable to me for a trained solicitor to look at the case and prepare/process required documents

Schwarzwald

Smithy22 said:

Hi, 

We bought our Leasehold house 2 years ago for £215k. The local council are the leaseholders and it is a peppercorn term. It was a 999 year lease dated 1972 so has ~948 years left on it. 

The council have now written, offering us the opportunity to buy the freehold. The cost is £1,750 which they say includes their £350 surveyors fees and £350 legal costs. They have also said we can pay this in 10 instalments of £175. The offer was valid for 6 months - which is now coming up so I need to make a decision. 

I think we do want to purchase as the council can charge £1500 each time you seek permission to make changes to the property etc so in the long run it could be economical as well as making any future sale more straightforward. 

My question is, do I need to instruct a solicitor? The letter just says to return the form with details of your solicitor "if you have instructed one". Obviously needing a solicitor would increase my costs but I don't really know if it is necessary? 

Any advice welcome.

Thanks

so leasehold asset value is £215k, potentially even more depending how prop prices developed since then.

buying the freehold costs you an additional £1k pluss associated transaction fees of £700. the 1k gross is probably much less if you factor in future fees you have to pay when interacting with the freeholder.

I think there is an academic valuation exercise to be done where you determine that the 1k is too high by some hundred pounds and you can dismiss it on those grounds.

you could alternatively go down the "statutory enfranchisement" route with unclear timing and much more involvement form your side

but there is practical side to it which IMO is:
you spending less than <1% of asset value to purchase the freehold title
means no hassle with freeholder going forward
probably increases interest in your property upon a sale which is likely to outweigh the net costs of the purchase
peace of mind

I probably would counter offer some £500-700 to the council, but independent of their response i would buy it
the practical advantage of buying the freehold in this situation seems to far outweigh not owning it or going down an alternative route of   "statutory enfranchisement" 

but ultimately comes down to value of time and peace of mind.

i rather pay few hundreds pounds more and be done with it easily than spending my own time and effort to get it for £200 plus fees. #preferences

eddddy

Schwarzwald said:

i rather pay few hundreds pounds more and be done with it easily than spending my own time and effort to get it for £200 plus fees. #preferences

I broadly agree with what you say, except that (for the benefit of future readers)...

• Statutory Enfranchisement shouldn't take any more time and effort than informally buying the freehold. You instruct a solicitor and a valuer, and they deal with it.

• Based on what the OP has said - using the statutory formula, the cost of statutory enfranchisement would be zero, not £200

Because...

• There is no ground rent - so the term value is zero.

• First reversion happens in 948 years, so using any sensible discount rate, the first reversion value is essentially zero

• Second reversion happens in 998 years, so using any sensible discount rate, the second reversion value is essentially zero

• There is over 80 years left on the lease, so the marriage value is zero

Add those together, and you end up with zero.


The only other possibility is that losing the freehold reduces the value of the council's adjacent land. (But why would the council be offering to sell the freehold, if it reduced the value of their adjacent land?)