Deliberating selling our flat that has just had section 5B notice served

nrletting

We own a flat that is one of two in a house. The freeholder has just served the section 5B notice to as they are selling the freehold. The other flat already has an extended lease of 200 years and peppercorn ground rent. Our flat only has 86 years remaining and ground rent of £50 rising to £250. We don't know whether to sell our flat or to consider buying the freehold. The suggested value for the freehold is £5k however there are no potential earnings from buying this. It is being sold at auction so no gurantees that will be the price if we accept the offer. We are also aware that there may be delays with selling the freehold as the it has been suggested the other leaseholder owes money. We don't want to get caught up with the other leaseholder who we have not been able to reach and seemingly does not pay their fees. currently the service charge is only responsible for the insurance and a 15% add on management fee. Any helpful advice will be great. We have just had a flat valued and it is only 20 to 30k about what we pid for it four years ago.

gwynlas

You need to buy the freehold as this would be the simplest way of extending the lease and having control over what happens to the property.

It is unfortunate that the other lease was extended already as ideally you could have purchased it between you.

However owning the freehold means that you can insure the building and maintain the property billing the other leaseholder for their contribution.

ExEstateAgent

With only 86 years on the lease you will find it more difficult to sell. Buying the freehold means that you can extend your lease and it will probably be cheaper than the cost of a formal lease extension if someone else buys the freehold.

You will also be in control of costs. A new freeholder might impose higher service charges and take legal action against the other leaseholder (which you might have to partly pay for!).

Buy the freehold!

eddddy

On the plus side, it might be an opportunity to buy the freehold cheaply.

On the minus side…

it has been suggested the other leaseholder owes money.

• I guess that suggests that the other leaseholder is in financial difficulties and won't have any spare cash to put towards buying the freehold

• You might be buying yourself into a problem situation - i.e. you become a joint freeholder who has to chase the other joint freeholder / leaseholder who doesn't pay their service charges

We are also aware that there may be delays with selling the freehold as the it has been suggested the other leaseholder owes money.

That's not likely to cause delays. It's likely to mean that you have to buy the 'arrears' from the current freeholder.

For example, let's say the freehold costs £5k and the other leaseholder has £500 service charge arrears.

So you would jointly have to pay the current freeholder £5500, and then you have to chase the other leaseholder to settle their arrears of £500.

We don't want to get caught up with the other leaseholder who we have not been able to reach

If you want to buy the freehold in this way, the other leaseholder has to cooperate. You can't do it without their cooperation. (And if you want to extend your lease at the same time, that also needs the other leaseholder's cooperation.)

The other flat already has an extended lease of 200 years and peppercorn ground rent. Our flat only has 86 years remaining and ground rent of £50 rising to £250. 

Does the other leaseholder pay the same ground rent as you? If so, it sounds like you should really contribute a bigger chunk of money towards buying the freehold, because you have a shorter lease.

We don't know whether to sell our flat

Assuming the freehold sells at auction to somebody else, when you sell your flat, there will be no "history" with the new freeholder - i.e. nobody knows if they will turn out to be a "good freeholder" or a "bad freeholder".

The buyer's solicitor is likely to warn the buyer about this, and it might make the buyer nervious.

ExEstateAgent

https://forums.moneysavingexpert.com/discussion/comment/81922085#Comment_81922085

I would think they would be better off buying the freehold at the auction and owning it outright?

eddddy

ExEstateAgent said

I would think they would be better off buying the freehold at the auction and owning it outright?

Yes - but let's say the OP doesn't bid at auction, and Mr A wins the bidding at £5k.

Then the freehold has to be offered to the leaseholders for £5k.

But if the OP bids against Mr A at the auction, the bidding might reach £6k or £7k or more.

But maybe that's a risk the OP wants to take.

TBH, if the OP wants to own the freehold outright, the best solution would be if the OP and the other leaseholder cooperate and both "sign the forms" etc - with the understanding that the OP will pay the full £5k (or whatever) and get 100% ownership.

But both these options might mean the OP ends up as a freeholder of a difficult leaseholder. Is that a good idea?

And the OP wants to sell their flat - would an "average buyer" want to buy the whole freehold as well and become a freeholder (with a difficult leaseholder)?

WIAWSNB

Who is the current FH'er, nrletting?

I don't understand some comments made above that suggest the other leaseholder has any input into this decision; this is surely just for you to make, and amen to that.

You have a £5k ballpark sum - we don't know if that is reasonable since we don't know the value of your flat. But, unless I'm missing summat, I'd leave it to auction, where there is every chance it'll go for less - who on earth would want to buy just a FH, and with one LH who is in arrears? (Unless they plan to try and evict them)

Ie, why would anyone who is not connected to this property want to pay £5k or more for the FH?

From what also has been said above - I didn't know this - seemingly the LH'ers are given the chance to buy at the close of auction rate? So, worst case scenario is that it sells for more than £5k, so you'd then have to match this. Or just let the auction buyer proceed, and negotiate an extension after.

I'd do some research into how much a lease extension would cost you - I understand there are calculators for this? And take it from there.

Yorkie1

Ie, why would anyone who is not connected to this property want to pay £5k or more for the FH?

I recall various posts on here where freeholds have been sold to large organisations / businesses, whose corporate strategy appears to be to squeeze ever increasing costs out of leaseholders (albeit I think this was in the context of housing estates rather than flats). If my memory is accurate, then you couldn't necessarily rule out a bid from an unknown.

eddddy

WIAWSNB said

Ie, why would anyone who is not connected to this property want to pay £5k or more for the FH?

Typically, there are 2 reasons.

1. Investment

• Ground rent income is guaranteed for the next 78 and 200 years. (Subject to government reforms!)

• Probable lease extension income - the OP is likely to extend their lease within the next few years. (e.g. if the lease extension is likely to generate £10k - paying £5k now for the freehold is probably a good investment)

2. Because the new freeholder is in the building management business

• By buying the freehold, the buyer can take over the management of the building, and charge management fees.
• i.e. Instead of chasing around after freeholders saying "Please employ me as your management company" - the buyer pays £5k for the freehold, and they get the job automatically

Or a combination of both 1 and 2… investment income and the management job.

WIAWSNB

Thanks Eddddy and Yorkie, I was aware of folk doing this in the past, but hasn't the opportunity for this sort of 'exploitation' reduced considerably with changes in the law, likely to be followed with more? And this is just one flat.

Really, what could a FHer get out of this? Surely a trivial sum for their investment?

eddddy

WIAWSNB said

Thanks Eddddy and Yorkie, I was aware of folk doing this in the past, but hasn't the opportunity for this sort of 'exploitation' reduced considerably with changes in the law, likely to be followed with more? 

Which changes in the law are reducing the scope for exploitation?

Perhaps you're referring more to @Yorkie1's comment more than mine, but property management is a legitimate business which generates legitimate income for companies that do it.

I agree that some bad freeholders / property management companies try to exploit leaseholders, but some bad plumbers try to exploit people. It doesn't mean that plumbing isn't a legitimate business.

WIAWSNB said

And this is just one flat

It's actually 2 flats in one building. But it sounds like the freeholder probably has very few responsibilities, so I agree that the scope for charging management fees is limited in this case

WIAWSNB said

Really, what could a FHer get out of this? Surely a trivial sum for their investment?

As I mentioned, in this case the income from granting a lease extension might be significant.

More generally, if you put £5k into a bank account at the moment you might get 4.3% interest guaranteed for 2 years.

If you used that £5k to buy a suitable freehold, you might aim to get 6% returns guaranteed for 87 years.

So if you have £50k to invest, you might buy 10 freeholds at £5k each.

Before the legislation changed, if there was a development of 200 flats with 999 year leases, each paying a ground rent of £250 per year - so £50k a year in total…

… a pension company might have paid around £700k for the freehold, in order to get a guaranteed income of £50k per year.