Offer to buy the freehold of my flat - should I take it?

Yawn

I own the leasehold of a two-bedroom flat, the upper half of a terraced house. There is about 80 years on the lease remaining, with an annual rent of 50 pounds. 

Downstairs needs to extend their lease and are keen to buy the freehold in the process (the previous owners of my flat extended before selling). 

They've been quoted £2,000 for the freehold (£1,000 per flat) and asked if I want to purchase jointly with them. (I have seen the offer letter.)

I'm trying to work out whether this is a) a good offer and b) whether any purchase makes financial sense.

Aside from the annual £50, we would save funds by taking out joint buildings insurance.

That said, I would expect to sell up in the next 2-3 years. I can see how the freehold could add value when I do move?

Any advice?

eddddy

What responsibilities does the freeholder have according to the lease? For example, is the freeholder responsible for insurance or maintenance / repairs of any part of the building?

If so, you and your neighbour will become jointly responsible for those things. Do you think you and your neighbour would work together well, cooperate and agree on things? Or are you likely to end up arguing about stuff?

Peter999_2

For £50 a year I very much doubt that they will provide insurance and any repairs/maintenance.

Grumpy_chap

Yawn said:

I own the leasehold of a two-bedroom flat, the upper half of a terraced house. There is about 80 years on the lease remaining, with an annual rent of 50 pounds. 

Downstairs needs to extend their lease and are keen to buy the freehold in the process (the previous owners of my flat extended before selling). 

They've been quoted £2,000 for the freehold (£1,000 per flat) and asked if I want to purchase jointly with them. (I have seen the offer letter.)

I'm trying to work out whether this is a) a good offer and b) whether any purchase makes financial sense.

Aside from the annual £50, we would save funds by taking out joint buildings insurance.

That said, I would expect to sell up in the next 2-3 years. I can see how the freehold could add value when I do move?

Any advice?

If you only have 80 years left on the lease, you will need to consider a lease extension in the near future.

Lease extensions can vary greatly but, to give just one example, our statutory lease extension cost £14k.  Against that, the £1k to buy share of freehold looks to be a bargain.

You will need to understand how the future leases and obligations of the freeholder will be processed.  Do the two shares of freehold go with the two flats when they are sold on?  OR, could it be possible that you and the other current owner have both moved elsewhere but both still own half the freehold?

eddddy

Peter999_2 said:

For £50 a year I very much doubt that they will provide insurance and any repairs/maintenance.

£50 a year is the ground rent.

Insurance and maintenance costs would be recovered by the service charge - which would be completely separate from the ground rent. 

Ground rent is taken into account when valuing a freehold.

Service charges are not taken into account when valuing a freehold.

Yawn

Grumpy_chap said:

If you only have 80 years left on the lease, you will need to consider a lease extension in the near future.

Lease extensions can vary greatly but, to give just one example, our statutory lease extension cost £14k.  Against that, the £1k to buy share of freehold looks to be a bargain.

Sorry, I misremembered. I just checked the paperwork, and the lease still has another 150 years left to run. 

The original house was converted into two flats in 1989 with a 99 year lease, with the original owner holding on to the freehold - I think because he knew he would receive additional payments for leasehold extensions in the future. The previous owners paid about 10k to extend it with another 90 years before selling to me. 

The lease specifies that we each need building insurance and that we are jointly responsible for the upkeep of the house - so we have shared bills for roof repair, etc. It was suggested that we could jointly get buildings insurance as part of the new lease structure and save money. 

I hadn't really thought about the practicalities. I guess there would be additional costs to setting all this up?

Any thoughts on whether owning the freehold would add much value to a property? It's worth about 190k-200k now if Zoopla is to be believed. 

twopenny

Is there any chance that the offer to purchase the freehold would still be available when you come to sell?
So you can either offer the flat with this option to potential buyers or purchase if you find buyers would prefer freehold from the get go.

eddddy

Yawn said:

Sorry, I misremembered. I just checked the paperwork, and the lease still has another 150 years left to run. 
...
...
The previous owners paid about 10k to extend it with another 90 years before selling to me. 

If the previous owners extended the lease, are you sure that the ground rent is still £50?

If both flats have 150 year leases and £50 per year ground rent, £2k for the freehold is about right.

If both flats have 150 year leases and £0 per year ground rent, £2k for the freehold is a bit expensive.


Regarding insurance - presumably you realise that you'll need specialist insurance for a block of flats (even though there are only 2 flats in the building) which you'll need to arrange through a broker. You can't use the online quote websites.

WIAWSNB

Yawn said:

Grumpy_chap said:

If you only have 80 years left on the lease, you will need to consider a lease extension in the near future.

Lease extensions can vary greatly but, to give just one example, our statutory lease extension cost £14k.  Against that, the £1k to buy share of freehold looks to be a bargain.

The original house was converted into two flats in 1989 with a 99 year lease, with the original owner holding on to the freehold - I think because he knew he would receive additional payments for leasehold extensions in the future. The previous owners paid about 10k to extend it with another 90 years before selling to me. 

The lease specifies that we each need building insurance and that we are jointly responsible for the upkeep of the house - so we have shared bills for roof repair, etc. It was suggested that we could jointly get buildings insurance as part of the new lease structure and save money.

In general, it is a 'good thing'. Therefore it would tend to make a leasehold property more saleable. Whether you can put a figure on its presumably-increased value, I don't know, but I can't see you losing out.
You say you 'each need building insurance' and are 'jointly responsible for the repair and upkeep of the house'. Q - is that currently arranged by the Freeholder? Eg, does the FH arrange the insurance, or do you need to do so and then submit proof? And with these repairs - roof, etc - have the two of you sorted this (as well as paid for it), or has the FH arranged it, and then billed you?
As you clearly understand, all these tasks will become your joint responsibilities. There are pros and cons, but the former should easily outweigh the latter.
Pros: a combined policy should be a bit cheaper. You decide on a maintenance schedule, and you obtain the quotes from your preferred tradesfolks. You decide on any improvements that could suit you - I dunno, the addition of a charging port? Adding a porch? Parking? Landscaping? Any extensions?
Cons - there are only two of you, so 'stalemate' is clearly a possible outcome in any negotiations. When it comes to essential maintenance, this shouldn't be an issue as the lease will make clear the responsibilities on you both to keep the fabric in good order, but what if you disagree on the work that's required? Or one wishes to extend - say you into the loft space, or the other over the ground?
With a separate FH, they'd make these decisions. 
In general, tho', it's a plus, and should make your flat a bit more desirable.

Yawn

Thanks those comments are very helpful. 

Just to clarify - the freeholder has never done anything. The lease just states that upon request we need to show the freeholder proof that insurance has been taken out, and the few things that have come up since I moved in (fallen roof tiles, fallen TV aerial, outside lick of paint) have always been arranged between the leaseholders.

It's not been too conflictual - downstairs, being buy-to-let owners, have usually gone for cheaper rather than sustainable solutions, but they didn't say no when my roof was leaking...

I like the idea of delaying the decision until I come to sell, but it's not really one of the options. The choice I have basically is to buy my half of the freehold or let the downstairs owners buy the whole. (I believe I have the legal right to object, but in practice that won't help neighbourly relations!)  

eddddy

Yawn said:

I like the idea of delaying the decision until I come to sell, but it's not really one of the options. The choice I have basically is to buy my half of the freehold or let the downstairs owners buy the whole. (I believe I have the legal right to object, but in practice that won't help neighbourly relations!)  

TBH, if you're the upstairs flat owner and there is a loft above you - perhaps a better option for you is to make a higher bid, and buy the whole freehold yourself.

Then you should be able to convert the loft (e.g. to provide another bedroom) without having to pay a premium to anyone.


(Just to clarify - if the freeholder wants to sell the freehold to your neighbour, realistically you have no way of stopping them. Or if the freeholder wants to sell the freehold to you, your neighbour has no way of stopping them.)