Offered to buy a freehold of four flats

cherry76

My brother is going to view a flat in London. The ground rent is £250 and will double in 2041. The EA said the seller who is the freeholder is willing to sell the freehold for £8000, not sure whether it’s the whole building or share of the freehold. What are the pro and con of buying the freeholder? And his responsibilities? 4 flats in the building. Not too keen about ground rent, the lease is 115 yrs. £500 service charge mainly building insurance.  Thanks

poseidon1

cherry76 said:

My brother is going to view a flat in London. The ground rent is £250 and will double in 2041. The EA said the seller who is the freeholder is willing to sell the freehold for £8000, not sure whether it’s the whole building or share of the freehold. What are the pro and con of buying the freeholder? And his responsibilities? 4 flats in the building. Not too keen about ground rent, the lease is 115 yrs. £500 service charge mainly building insurance.  Thanks

Sounds to me that this is a house converted to 4 flats, where the vendor of the flat may have retained the freehold of the entire building. 

If this is the case ( your brother's solicitor should confirm ),  your brother will acquire the benefits and obligations that go along with the freehold title. The benefit would be receipt of the ground rents from the other 3 flats. However it's taxable income.

 The obligations could be lengthy. If there is no intermediate management company, the freeholder is responsible for organising the annual buildings insurance, responsibility for maintenance of any common parts not demised under the leases. There is also the issue of organising any future remedial work to the fabric of the building such as roof repairs, repairs to guttering,  possibly brick repointing etc. The freeholder is also responsible for enforcing covenants under the various leases and  handling any disputes between leaseholders.

Ideally your brother would not want to take on these obligations even if on the plus side he would receive  £750 annual ground rents ( less tax!).

Ideally, your brother acquires his flat on the basis that all leaseholders of the building jointly buy the freehold title so that management of the building is a joint enterprise between all 4 leaseholders going forward. Your brother could ask why this is not already the case.

If the freehold title remains with the current vendor, I would be concerned about the future efficient running of the building by a no longer resident freeholder.

gwynlas

If your brother buys the freehold he will at least be in the best position to set up a management company and if he wishes appoint a managing agent,
From there they can build up a sinking fund to pay for potentially expensive repairs in the future and also a schedule of works to cover on going routine maintenance.
He can also sell shares of freehold to other flat ownwers and they can grant themselves lease extensions.
For £8000 it would be foolish to miss this opportunity

cherry76

Very good points. He is not experienced enough to buy the freehold and manage th building. It can prove costly to an appoint a management company. The other option is to ask for a lease extension up to 990 and zero ground rent for a nominal fees. You do not have to wait for two years to apply for lease extension, new rules come into force on 31st Jan but not sure whether he can ask for 990 yrs. The lease is 115 yrs but ground rent £250 and doubling up every 24 yrs. Thanks

poseidon1

cherry76 said:

Very good points. He is not experienced enough to buy the freehold and manage th building. It can prove costly to an appoint a management company. The other option is to ask for a lease extension up to 990 and zero ground rent for a nominal fees. You do not have to wait for two years to apply for lease extension, new rules come into force on 31st Jan but not sure whether he can ask for 990 yrs. The lease is 115 yrs but ground rent £250 and doubling up every 24 yrs. Thanks

With regard to implementation of the outstanding leasehold reform act, the devil ( as usual ) is in the detail.

See below an explanatory article covering the main points.

https://homehold.org/standard-article/leasehold-reform/#deferment-rate-reduction

 Worth noting from the preamble to the article, that the lease your brother intends buying ( 115 years) may not quite meet the legislative  criteria for a long extension with ground rent reduced to zero,  all at nominal cost. As the article suggests, those with longer leases may find they have a more expensive outcome on extension, compared to the current ( complex) rules.

 You will see from the link below, that a new leasehold extension online calculator is due to be launched which would have been helpful at this point. Sadly it does not yet exsist and a launch date has not been provided.


https://www.lease-advice.org/advice-guide/government-announces-reforms-to-make-it-easier-and-cheaper-for-leaseholders-to-buy their-homes-and-to-prepare-homeowners-and-the-market-for-the-widespread-take-up-of-commonhold/#:~:text=of a flat.-,My ground rent rises a great deal during the term,purposes of calculating the premium.

Your brother could of course ask for the lease to be extended as a condition of his purchase, but difficult to see why the freeholder would agree to this until precise details of how the new rules will operate for leases above 100 years. He is unlikely to want to set a precedent for your brother's benefit when he has 3 other leases in the building to consider. 

cherry76

poseidon1 said:

cherry76 said:

Very good points. He is not experienced enough to buy the freehold and manage th building. It can prove costly to an appoint a management company. The other option is to ask for a lease extension up to 990 and zero ground rent for a nominal fees. You do not have to wait for two years to apply for lease extension, new rules come into force on 31st Jan but not sure whether he can ask for 990 yrs. The lease is 115 yrs but ground rent £250 and doubling up every 24 yrs. Thanks

With regard to implementation of the outstanding leasehold reform act, the devil ( as usual ) is in the detail.

See below an explanatory article covering the main points.

https://homehold.org/standard-article/leasehold-reform/#deferment-rate-reduction

 Worth noting from the preamble to the article, that the lease your brother intends buying ( 115 years) may not quite meet the legislative  criteria for a long extension with ground rent reduced to zero,  all at nominal cost. As the article suggests, those with longer leases may find they have a more expensive outcome on extension, compared to the current ( complex) rules.

 You will see from the link below, that a new leasehold extension online calculator is due to be launched which would have been helpful at this point. Sadly it does not yet exsist and a launch date has not been provided.


https://www.lease-advice.org/advice-guide/government-announces-reforms-to-make-it-easier-and-cheaper-for-leaseholders-to-buy their-homes-and-to-prepare-homeowners-and-the-market-for-the-widespread-take-up-of-commonhold/#:~:text=of a flat.-,My ground rent rises a great deal during the term,purposes of calculating the premium.

Your brother could of course ask for the lease to be extended as a condition of his purchase, but difficult to see why the freeholder would agree to this until precise details of how the new rules will operate for leases above 100 years. He is unlikely to want to set a precedent for your brother's benefit when he has 3 other leases in the building to consider. 

Thanks for the links, have read the articles am still at a loss, do not understand it. Will you kindly clarify these queries for me please. Brother is going to make an offer at the asking but will ask the seller to have the option of buying a share of the freeholder or if he can extend the lease to 990 and reduce the ground rent to pepper corn for a nominal fee. Can he do that now or is the reform not yet implanted for him to do so. Am aware of 2 yrs rules being scrapped on 31st Jan. Thanks.

poseidon1

cherry76 said:

poseidon1 said:

cherry76 said:

Very good points. He is not experienced enough to buy the freehold and manage th building. It can prove costly to an appoint a management company. The other option is to ask for a lease extension up to 990 and zero ground rent for a nominal fees. You do not have to wait for two years to apply for lease extension, new rules come into force on 31st Jan but not sure whether he can ask for 990 yrs. The lease is 115 yrs but ground rent £250 and doubling up every 24 yrs. Thanks

With regard to implementation of the outstanding leasehold reform act, the devil ( as usual ) is in the detail.

See below an explanatory article covering the main points.

https://homehold.org/standard-article/leasehold-reform/#deferment-rate-reduction

 Worth noting from the preamble to the article, that the lease your brother intends buying ( 115 years) may not quite meet the legislative  criteria for a long extension with ground rent reduced to zero,  all at nominal cost. As the article suggests, those with longer leases may find they have a more expensive outcome on extension, compared to the current ( complex) rules.

 You will see from the link below, that a new leasehold extension online calculator is due to be launched which would have been helpful at this point. Sadly it does not yet exsist and a launch date has not been provided.


https://www.lease-advice.org/advice-guide/government-announces-reforms-to-make-it-easier-and-cheaper-for-leaseholders-to-buy their-homes-and-to-prepare-homeowners-and-the-market-for-the-widespread-take-up-of-commonhold/#:~:text=of a flat.-,My ground rent rises a great deal during the term,purposes of calculating the premium.

Your brother could of course ask for the lease to be extended as a condition of his purchase, but difficult to see why the freeholder would agree to this until precise details of how the new rules will operate for leases above 100 years. He is unlikely to want to set a precedent for your brother's benefit when he has 3 other leases in the building to consider. 

Thanks for the links, have read the articles am still at a loss, do not understand it. Will you kindly clarify these queries for me please. Brother is going to make an offer at the asking but will ask the seller to have the option of buying a share of the freeholder or if he can extend the lease to 990 and reduce the ground rent to pepper corn for a nominal fee. Can he do that now or is the reform not yet implanted for him to do so. Am aware of 2 yrs rules being scrapped on 31st Jan. Thanks.

Yes I do agree the position is not particularly clear. My impression is as follows:

1) At the end of January 2025 the 2 year ownership period to negotiate to extend leases will cease. In your brother's case after purchasing the 125 year lease he can immediately negotiate an extension as of right, by virtue of last year's legislative enactment.

2) The good news in 1) above seems for the moment to end there for your brother since the operative aspects of the act to permit 900 year extensions at nominal cost is still being consulted on, a process likely to continue throughout summer 2025 with subsidiary legislation expected in 2026. So in your brother's case he has no legislative support to request the freeholder grant him an extension for nominal fee sooner rather than later

3) in view of 2) it appears should your brother wish to negotiate with the Freeholder for early removal of the £250 rising ground rent plus 900 year extension ( prior to full implementation of the new legislation in 2026 ) he effectively falls back on current principles enshrined in the Sportelli case mentioned in the  first article which could  meaning a comparatively substantial payment for the extension.

4) Finally, even if your brother buys and defers any action until after further legislation in force in 2026, since his lease is clearly well above 80 years the only other basis to obtain extension at nominal price is if his ground rent is more than 0.1% of the current market value of the flat. Currently, ( and since this is a London flat ) we can assume at £250 ground rent he will not meet the 0.1% threshold. However, since it is rising over the lease term, this might tilt things back in his favour but uncertain to what extent since the Freeholder has to be compensated for loss of ground rent in some way, a conundrum the government has to address so as not to be faced with breach of human rights actions from the powerful corporate freeholder lobby group.

All in all a difficult situation for your brother to navigate, and I suspect he will not get much help from his solicitor on the best approach to take.  He could of course try to obtain a rough calculation of the cost of  a standard 90 year lease extension, using the calculators available on line to get a rough idea of the cost under current rules. However such calculators cannot accommodate rising ground  rent scenarios, so of limited help.

See below example of a calculator.

https://www.bradysolicitors.com/lease-extension-calculator/?utm_campaign=19263701644&utm_source=g&utm_medium=cpc&utm_content=&utm_term=lease extension calculator&ad_id=641430449977&gad_source=1&gclid=Cj0KCQiA19e8BhCVARIsALpFMgGWEYwRx__3v7BDtrxJwbumVvVfMLm2LPCXHZ6A9ahHvmgSOvZLaPAaAny4EALw_wcB

cherry76

Thank you very much for these useful information. He has two options, request a lease extension of 90 yrs and reduce ground rent. Ground rent doubles up every 24 yrs. Wait for the lease reform to be fully implemented and then ask for lease extension to 990 yrs. The seller is also the freeholder, wait and see whether the other three leaseholders will buy a share if freehold. My concerns is who will be responsible to manage the freehold and how to go about setting it. He is a follower. I doubt whether his solicitor will be able to offer advice. Thanks a lot for your advice, much appreciated.

ThisIsWeird

I think the first point to have clarified, Cherry, is whether the £8k is for the full FH, or just the quarter FH share for just this flat.
For the former, it surely sounds cheap, and I think would be considered by many/most to be a very good opportunity, tho' it'll come with the initial concern for your bro of having to fulfill the FHer's obligations. That should, in most cases, be only a temporary situation, as the other three LHers would be nuts to not take up your bro's immediate offer of letting them buy their respective quarters for, say, £2-3k each - peanuts - and this should be enough to cover your bro's expenses. All four* then set up a Limited management company (I understand very cheap - £100 or so? - and usually named after the property); each flat owner a director, equal vote, and then you all have full control over the building - things like repairs, maintenance, and now-trivial matters like lease extensions, 'cos you just grant them to yourselves for the legal cost.
If it's the latter scenario - only just your share - and assuming that the other three flats already own their quarter-FH share, then the cost seems possibly high, since - really - this FH share should go with the flat, I think? Ie, if the situation is that the 4 flat owners also own the Freehold Co, each being a director, and this flat owner is selling their flat but may hold on to their flat's FH (remaining a director), then I would not entertain that for a nano. Not even sure that's possible - I guess it's whatever is written into the ManCo's T&Cs.

So, assuming this flat's current owner also owns the whole FH, I'd suggest your bro really does want to grab it at that price. But, it would make sense for him to knock on the other 3 doors first, and chat about the way forward; they should show willing to grab the opportunity afterwards of buying their share, and forming a Co to manage it.

NB - I have no idea how the proposed FH/LH changes could impinge on this decision. But it strikes me that if you can all have the FH for £8k, then you are good to go - each director takes a role ("I'll arrange the insurance, and keep an eye on each person's service charge contribution. You know about buildings - so you can be responsible for getting repair quotes when required. You are an accountant - so, guess what?..." You meet regularly - every couple of months or so? - and agree things like any service charge change, sink fund level, making the ground rent 'peppercorn', a schedule for maintenance, and even when to grant yourselves a 999-year lease extension for only the legal change-of-records cost.

As said by others, I wouldn't want a non-resident (your vendor) to hold on to these rights and responsibilities after they have departed.

As part of the conveyancing, I think you should be given all the records held by the FHer, so you should have a good idea of how well run it has been before you make your final commitment.

The above are my thoughts. I did become one of 4 directors of a FH Co with my first flat in an old Edwardian house, when the existing FHer offered to sell it to us. It worked a treat, tho' the occupants were all professionals and switched on. Obviously my share - directorship? - was sold with my flat when I moved on; that was automatic, and I don't recall even considering any other option.

* If one flat owner doesn't want to, then fair enough; form the Co with 3 (or two!), and make it clear to the 4th that their lease extension will then be at market value when it occurs. It'll also affect the saleability of their flat - the only one without a 'say'.

NameUnavailable

I don't think the FH can just sell the freehold - right of first refusal should apply and it should be offered jointly to all leaseholders.

Of course it depends if that's what is being discussed, the full freehold or just a share.

However, if it is the full FH and you/the others don't buy it, the current owner could sell it to any Tom !!!!!! or Harry and they might slap a large service charge onto you all!

cherry76

The freehold will be offered at £2,000 each 25% plus vat and solicitors fees.The freeholder will serve section 5 if there are no takers it will go to auction. The flat has generated loads of interest. EA said similar offers, brother offered asking price but was asked to submit final,offer.He likes the flat but not sure whether he should go above asking price. The freeholder is renting the flat and lives elsewhere.