Freehold purchase - being realistic

[Dolly]

I live in a block comprising 42 flats. About half the residents are pensioners. The property has been mismanaged for years and is looking very shabby. The freeholder died recently and the other directors have gone AWOL and stopped paying our groundsman/caretaker.

We have a good team on the resident's committee, and I'm thinking of putting forward a case for buying the freehold, which seems a good way forward and out of this mess for good.

I'm wondering if enfranchisement is a realistic idea for a larger block like this.

Also, how would I go about getting a ballpark cost of the freehold?

Thanks,
Dolly

[tenant29]

1. You can start by buying a copy of the freehold title from Land Registry and check how many leasehold properties are under the freehold, the number of years remaining and what are the amounts of annual ground rent to pay. The value of the freehold depends on the ground rent receivable and if under 80 years then for compulsory purchase , the caculation of the compensation may include marriage value.

2. You could post the ground rent details on this forum and someone may volunteer to calculate the cost. Or you can ask LEASE ( www.lease-advice.org.uk).

3. Then you have to persuade 50% or more of the leaseholders to collectively finance the purchase. But often, pensioners are not interested in buying the freehold because raising money is difficult for people on limited income.

[jeffrey]

On item 3: slant introductory letter to explain v. clearly:
a. why it's [essential/good]- depends on term left- to buy; AND that
b. family members may agree to help financially (e.g. if they are the OAP's likely beneficiaries).

[Dolly]

Thanks for the advice.

[Dolly]

I've downloaded the Freehold title (didn't know you could do this, thanks for that!) and 39 out of the 42 leases are over 88 years.

Seeing at the landlords interest is smaller the longer the lease is, I'm assuming this is good news as far as a valuation is concerned?

Thanks.

[tenant29]

Good start . Does the freehold title show the last sale date and price ? Any mortgage charge against the property ?

Is the freeholder a company ? Does the name match the landlord's name shown on the annual ground rent demand ?

[jeffrey]

I've downloaded the Freehold title (didn't know you could do this, thanks for that!) and 39 out of the 42 leases are over 88 years.

Seeing as the landlords interest is smaller the longer the lease is, I'm assuming this is good news as far as a valuation is concerned?
Yes. When unexpired terms exceed 80 yrs., value of f/r is almost just value of yearly rent receivable.
Take total rent p.a., multiply by anything from 12.5 to 20 (representing interest rate of 8% to 5%), and product is the effective value of f/r.

[Dolly]

Our ground rent is £50 per year. This is good news, thanks.

[Dolly]

Good start . Does the freehold title show the last sale date and price ? Any mortgage charge against the property ?

Is the freeholder a company ? Does the name match the landlord's name shown on the annual ground rent demand ?

The downloaded document doesn't show the sale price. There's no Lender.

Under the heading 'Title Absolute' it says the freehold company's name and a date 21.06.1991. Is that the date of the last sale?

The ground rent demands come from the Managing Agent company (run by the same person as the Freehold company, gone AWOL).

Does any of this have an effect on buying the freehold?

[sgclacy]

So 39 out of 42 have 88 years and I assume the rent is £50 per annum each please advise as to the value of each flat.

At present based on the info you have provided the value of teh freehold in respect of the above flats could be of teh order of

39 X 50 = £1,950 capitilised at 7.5% = £26000

plus the discounted value of the reversion. We are not told what the value of the flats are but discounting back 5% over 88 years is the equivelent of taking 1.36% of the market value of the flats

So if the value per flat is £175,000 then 39 flats = £6,825,000 X 1.36% = £92,820

Total would be £118,820 or £3,046 per flat

What are the lease terms of the other three flats

[jeffrey]

That date (21.06.1991) is, unless otherwise stated, the date of registration: usually soon after completion of purchase.
No- none of your info impacts adversely on Right to Enfranchise.

[jeffrey]

So 39 out of 42 have 88 years and I assume the rent is £50 per annum each...
Total would be £118,820 or £3,046 per flat.
That's over 60YP. It does sound rather high as a multiple; I would have guessed 30-40 YP as a maximum.
Still, you know better than I...

[Dolly]

So 39 out of 42 have 88 years and I assume the rent is £50 per annum each please advise as to the value of each flat.

What are the lease terms of the other three flats

The flats are worth from £200k up to £250k. The other three leases are 49 years each.

[Dolly]

To be precise, we have:

3x 49 years
28x 88 years
2x 89 years
4x 90 years
3x 93 years
2x 139 years

[jeffrey]

To be precise, we have:

3x 49 years
28x 88 years
2x 89 years
4x 90 years
3x 93 years
2x 139 years

This is very odd, I must say. Nearly all flats developments involve every lease being granted for the same term (running from the same commencement date), no matter on what date each lease is actually completed. Have any already been re-granted (e.g. were the '139' yr. leases originally the same as the '49' yr. leases, but now inc. a statutory 90-yr. extension)?

[Dolly]

I am quoting the years left on the lease, not the years granted.
The leases all start from 1958, but most were extended in 1997 to 138 years from 99 years. Three leasholders didn't extend.

[sgclacy]

To be precise, we have:

3x 49 years
28x 88 years
2x 89 years
4x 90 years
3x 93 years
2x 139 years

The value of the freehold could be in the region of £239,164
This is calculated as follows:-

Capitalisation of Ground Rent

39 Flat paying £50 per annum = £1950 and three flats whose ground rent is very low so say £2,000 in total

£2,000 @ a capitalisation rate of 7.25% = £26,667

Value of the reversion

3x 49 years - 3 X £225,000 = £675,000/ (1.05^49) = £61,805
28x 88 years – 28 X 225,000 = £6,300,000/(1.05^88) = £86,036
2x 89 years – 2 X 225,000 = £450,000/(1.05^89) = £5,852
4x 90 years – 4 X £225,000 = £900,000/(1.05^90) = £11,148
3x 93 years – 3 X £225,000 = £675,000/(1.05^93) = £7,223
2x 139 years – 2 X £225,000 = £450,000/(1.05^139) = £510

Total = £172,574


Marriage Value

Only applicable on sub 80 year leases

3 flats at £225,000 = £675,000
Relativity at 49 years = 79%
£675,000 X (100% - 79%) = ............£141,750

Less ground rent capitalisation..............(£100) (est)
Less Value of reversion.....................(61,805)

Marriage Value.................................£79,845

50% thereof = £39,923

Total price on enfranchisement = £26,667 + £172,574 + £39,923 = £239,164

HOWEVER the marriage value element is apportioned according to the number of participators

[Dolly]

How much consideration is given to dilapidation? The building has been so neglected, any new freeholder would have to spend a huge amount on putting things right.

Thanks
Dolly

[jeffrey]

How much consideration is given to dilapidation? The building has been so neglected, any new freeholder would have to spend a huge amount on putting things right.
Is that value reduction not already reflected in the market value element used in calculations above?

[sgclacy]

The valuation method assumes the property to be in good order even if it is not.

The argument being that the lessees have a seperate action against the landlord for breach of covenant

[sgclacy]

That's over 60YP. It does sound rather high as a multiple; I would have guessed 30-40 YP as a maximum.
Still, you know better than I...

I know why you might think it very high

The market value is often in the range of 15-18 YP for non revesionary leases (ie well in excess of 80 years)

However the valuation under the the Act the price will be at the level I have indicated due mainly of course to Cadogan and Sportelli. Because at even 90 years the impact of Cadogan and Sportelli is noticeable

Take a flat worth say £225k with a £50 pa annum ground rent with 90 years remaining

Under the Act they would pay:-

1) Cap of ground rent = £50 at 7.25% = £690

2) Value of the reversion £225k/ (1.05^90) = £2787

Total = £3,477 = 70 times!

In this case highlighted by Dolly the lease term is closing in on 80 years the ground rent value is low compared to the flat value

[Dolly]

Thanks for this. What does ^ mean? And what is the 1.05 figure? I'd at least like to get a vague idea of how this valuation thing works.