Should I buy my freehold? Is a question we’re often asked by leaseholders. But of course, it all depends on what you’re looking to achieve. Thus, you will need to carefully consider all aspects of owning a freehold and the responsibilities that come with it.
The freehold asset
Firstly, it’s important to understand that the freehold is a completely separate asset to any of the leases in the building. The leases are essentially contracts that set out the responsibilities and obligations that fall on both the leaseholder and freeholder.
A freeholder owns the land and any structures upon it. Whereas a leaseholder owns a lease to a property, which gives them the right to hold the demised premises, for the specified number of years. At the end of the lease term, the leaseholder must return the property to the freeholder (also referred to as a “landlord”) unless they pay a premium to extend the term of the lease.
However, if leaseholders buy the freehold, they will have outright ownership of the building and the land on which it stands. They will also be entitled to receive any income from ground rents, service fees, premiums for alterations, or the grant of new leases within the building.
It’s important to note that leaseholders must obtain consent from the freeholder in order to make any alterations to the building or to the structure of the flats. And in some cases, they may be required to obtain a licence for the alterations, for which, the freeholder can request that the leaseholder pay a premium together with any reasonable costs incurred by the freeholder.
A typical example of when leaseholders will need to obtain consent is when they would like to extend their property or convert the loft space into a habitable area. Leaseholders may need to pay a premium to the freeholder for the purchase of this space. However, if the space is already demised, the premium payable may be less.
Leaseholders should bear in mind that the freeholder will need to utilise their resources in order to consider, process, and accommodate the consent for alteration request. Therefore, freeholders will typically charge for their time, expenses, and for the additional rights granted at the property.
The ability to take control of the management responsibilities for the building, is a point that leaseholders often consider when asking, should I buy my freehold?
When the leases specify that the landlord is responsible for maintenance and insurance for the building, leaseholders may be required to pay further sums for the cost of the management, such as administration fees and the cost of employing a managing agent.
Conversely, if leaseholders buy the freehold, they will have greater control over the management costs. For example, they can appoint an agent of their choice, or choose to manage the property themselves and remove this additional cost.
The building will require maintenance or periodic repairs, and will also need to comply with any legal requirements, such as fire risk and health and safety. Quite often, significant costs are likely to be incurred when carrying out any major repairs, such as roofing works, windows, or structural repairs.
Furthermore, freeholders are required to follow the Section 20 consultation procedure before proceeding with any such works, where the cost to any one leaseholder would exceed £250. However, if leaseholders own the freehold and agree to the cost of the works, they may be able to execute the process much faster.
Consequently, there may be a positive impact on the overall cost of the works, as further deterioration would be minimised. For example, repairs to the structure of the building as a result of an ingress of water, which would inevitably cause greater damage over time.
Subject to the leases, leasehold properties can be the most valuable aspect of a building. Therefore, it’s in the leaseholder’s interest to ensure that maintenance is carried out safely, efficiently, and cost-effectively. Having ownership of the freehold will put them in the best position to manage this successfully.
Leaseholders often require assistance and clarification from the freeholder over the contents of their lease. Whilst the freeholder does have certain obligations, which are set out in the lease, they will want to charge for their time in providing assistance outside of their contractual responsibilities.
The freeholder is often required to provide additional services to leaseholders. This can include, assisting with enquiries when they’re selling their lease to another party. Leaseholders are typically required to pay a service fee to the freeholder in return for their assistance, as one might expect with any time-consuming request.
It is also very common for each lease to specify a fee payable to the landlord upon each and every assignment or charge on the lease, such as a sale to another party or a mortgage.
Furthermore, if there are areas of dispute within the property or amongst the leaseholders, subject to the terms of the leases, leaseholders are usually obliged to indemnify the landlord against any costs for enforcing the covenants within the leases.
Therefore, leaseholders who buy the freehold may be able to significantly reduce the liability of such costs.
Costs for lease extensions are one of the most commonly disputed matters between leaseholders and freeholders. And so it’s no surprise that when faced with this arduous process, leaseholders often ask, should I buy my freehold?.
Subject to owning the property for two years, leaseholders have the right to extend their lease. In order to do so, a valuation will be required to determine the premium payable to the freeholder. However, both party’s expectations of the premium payable can be miles apart, which can often be difficult and costly to resolve.
In fact, leaseholders have complained for years that freeholders demand unreasonable premiums. Furthermore, leaseholders also have significant cost liabilities, as they are required to pay for the freeholder’s legal and valuation fees, as well as their own. Consequently, such costs can range anywhere from a few thousand pounds, although this could be two or three times the amount depending on whether they are proceeding with a voluntary or a statutory lease extension.
However, if leaseholders were to buy the freehold, they would obtain the ability to control these costs and agree more favourable premiums for the grant of new leases.
Leases are complicated legal documents, containing a range of strict terms that must be adhered to in order to avoid a breach. So, any discrepancies can cause problems.
For example, a lease may have been granted against a specific floor plan but during the term, this floor plan may have been altered by one of the occupants. If the alterations were not agreed upon by the freeholder, disputes can arise. Consequently, mortgage lenders may be unwilling to lend on the property as they will not want to jeopardise their investment.
In order to remedy this, mortgage lenders or legal representatives may require a variation to the existing lease, to reflect the accurate layout of the property. Of course, any administration costs incurred by the freeholder will be payable by the leaseholder together with a premium, if requested.
Another example (and a very common issue), is that when leases are originally granted, they often stipulate that the leaseholders must insure their properties. Each lease will demise a part of the building to each leaseholder, and where the building has multiple occupants, there will undoubtedly be common areas, such as an entrance hall, front or rear gardens, the foundations of the property, the main structure, and the roof.
If these areas are not demised to a leaseholder, then they are, in fact, owned by the landlord, which means that leaseholders are not able to insure them. So, while insurance companies will consider reinstating the insured premises in the event of a disaster, these common areas would not be included.
This is a major concern as leaseholders may find themselves in the very difficult position of having to find additional sums to pay toward the reinstatement of the common areas, which could amount to tens of thousands of pounds.
These issues are increasingly being uncovered, as both legal representatives and mortgage lenders often review and tighten their criteria and diligence when assessing leasehold properties. Consequently, freeholders are being asked to vary the terms of the lease, in order to alter their obligations to include taking out a building’s insurance policy.
Again, leaseholders will be liable for the freeholder’s costs in complying with such requests. This can be a costly process as all leases in the building must contain similar covenants. Therefore, if one lease is to be altered, all other leaseholders will need to agree to vary their terms in the same way.
In the absence of being able to vary the lease, leaseholders may have the option to purchase an indemnity insurance policy. This can protect against problems or claims that may arise, however, it is not an ideal solution. Nevertheless, if leaseholders do not own the freehold, or are unable to agree on terms with the freeholder, this may be the only option available.
In our opinion, all leaseholders ought to ask themselves, ‘should I buy my freehold?’. As subject to the costs involved, we believe that leaseholders should take advantage of the option to buy the freehold if it is available to them. Owning the freehold will offer more control, and will often make it quicker and more cost-effective to overcome certain issues that may arise from time to time.
It’s also worth bearing in mind, that to many prospective buyers of leasehold properties, knowing that they have the option to buy the freehold or a share of the freehold with the purchase of a flat, makes the property more desirable and valuable.
If leaseholders decide to proceed with the purchase of the freehold, it can be considerably cheaper to do so under voluntary terms. However, if the freeholder is unwilling to sell, or if a reasonable agreement cannot be reached, leaseholders who meet a range of qualification criteria, may have a legal right to force the sale, under a collection enfranchisement claim.
Leaseholders should seek independent legal advice to ensure that they understand the responsibilities and obligations set out in the leases. They should also consider all of the financial and accounting responsibilities before committing to buy the freehold.