Cost of f/r? 10 flats, 199 yr. leases, rising ground rent

[Bigfoot]

Please can anyone estimate the cost that we would have to pay to buy the freehold of our leasehold flats.

It is a block of 10 flats & most owners would like join in to buy the freehold.
We are also unsure of what the legal costs would be.

This is a new building & all flats were sold between November last year & March this year. All leases are back dated to Jan 07.
As we all purchased our flats at the top of the market their value may have gone down now.

Details
10 Flats. (just flats nothing else in building).
Ground Rent £150 per annum, per flat.
Term 199 years from January 2007.
Average price paid per flat £270,000

Rent reviews every 10 Years. Rent to increase by the same percentage that the value of the flats go up by, but this is capped at 5% per annum compound.
10 years at 5% compound is almost 63% but that is the maximum increase.

So in 2017 if the value of the flats has increased by say 30% the ground rent will go up by 30%, but if the value of the flats increases by say 70% it can only go up by 63%.

I have been told that our leases are unusual because of the the rent review details & the term of 199 years.

[jeffrey]

Other members will be along in due course, with financial information, but- at this stage- please advise whether:
a. L is wishing to sell f/r elsewhere (and, if so, whether it has yet served on lessees any statutory Notices under s.5 of 1987 Act);
b. L is likely to be willing to sell f/r to lessees; or
c. lessees will have to use statutory Notice procedure (s.13 of 1993 Act) in order to cajole L into sale.

[Bigfoot]

The freeholder is not trying to sell.

We have not asked them for a valuation because I don't think that they will be helpful or offer us a fair price.

They are a company that some of your members have had problems with, so we might have to use the law to make them sell.

To confirm the rent review info: It will go up every 10 years using the same method of calculation each time.

[jeffrey]

The freeholder is not trying to sell.

We have not asked them for a valuation because I don't think that they will be helpful or offer us a fair price.

They are a company that some of your members have had problems with, so we might have to use the law to make them sell.

To confirm the rent review info: It will go up every 10 years using the same method of calculation each time.

Sounds like you (or your solicitor) should start brushing-up on s.13 of 1993 Act, in this case. That's the only sure way to extract f/r from L.

[sgclacy]

The freehold will be in this case the capitalisation of the ground rent income only. The fact it is 199 years is not a complicating factor; in fact it makes it easier as we only have to consider the rental income

The key to the valuation here is what is the expected growth in House Prices in the long term

Obviously this answer is not available but it could probably be argued that there is a correlation between house prices and inflation.

What is the long term view of inflation? If we look at the yield on long dated gilts the yield is around 4.5% and the yield on Treasury Indexed linked gilts is around 1%. Therefore the market believes the long term inflation rate to be around 3.5%

You have a stream of income which needs to be discounted

First 10 years will be at £1500
Next ten years will be £1500 X (1.035^10) deferred for 10 years at 7.25%
Next ten years will be £1500 X (1.035^20) deferred for 20 years at 7.25%
Next ten years will be £1500 X (1.035^30) deferred for 30 years at 7.25%
Next ten years will be £1500 X (1.035^40) deferred for 40 years at 7.25%
Next ten years will be £1500 X (1.035^50) deferred for 50 years at 7.25%
Etc Etc
Last Nine years will be £1500 X (1.035^190) deferred for 190 years at 7.25%

The NPV value will be £34,540

In fact both parties may benefit from an RTM

The lessees would then be able to deal with the management and the freeholder would then have a particularly attractive investment in that it produces £1500 per annum indexed to property prices.

If you think that £1500 per annum represents say the 15% of the rental income of one of the flats . The person who owns it gets that income and the same rate of capital appreciation that a flat would achieve in the long term. With no agro or maintenance costs whatsoever . I would have thought a BTL investor should find this very attractive as all the management/responsibilities etc would be done by the RTM going forward

In 10 years time the rental income would be £2,115 (if 3.5% growth PA) Therefore its value should be £48,665

[jeffrey]

In fact, as the lessor is a less-than-popular company (it seems), perhaps the collective lessees will prefer to acquire the f/r (and save the escalating ground rent) as opposed to only RTM.

[Bigfoot]

Thats much more than we thought it would be.
We know from the Land Registry that the present freeholder only purchased it from the developer about a month ago (on a contract dating back about 12 months)

Price Paid £21,170
Could we use this knowledge as valuation evidence or will it make no difference.

[sgclacy]

The price calculated under The Act will invariably be much higher than a price paid by an investor. They got it at a bargin the market value for ground rent linked to the RPI is around 18-20yp they are very sought after as they give a hedge against inflation.

The freehold would be worth more if there were no management obligations as it could be held by a wider range of investors those who want a fairly passive investment where teh only requirement is to send out demands

As I said earlier, I think an RTM would solve your problems.

[Bigfoot]

I will have to discuss this with the other residents.

In the unlikely event that they will still want to go ahead to buy the freehold could you estimate what other costs would be involved (legals etc).
Do we have to pay stamp duty, & if so how much ?

If the builder had not just completed a contract from some time ago I understand that we could insist on buying it back at the price it was sold for because we were not informed.

We only know about the contract because when we spoke to the builder last month he told us about it.
Is there anyway we can be sure that it exists, or if they have just back dated a contract to cover themselves.

I asked my solicitor this question & he said contract dates as well as completion dates now have to be listed on the Land Registry Transaction Return. So if its not listed it might not count.

I rang up the Land Registry & they had never heard of a Transaction Return. They said contracts are never recorded just the completion date.

What was my solicitor talking about ?

[Bigfoot]

Hi sgclacy

To go back to your valuation.

I do not know the meaning of NPV value.
Are you saying that todays value is £34,540
& in 10 years it will be £48,665 or is it £48,665 now.

[sgclacy]

NPV means net present value.

What it means it is the present value of a future stream of income receipts

So a £1 today is worth more than a £1 in 5 years time

If we have a very high discount rate (because interest rates are high) the value of £1 in 5 years time will be worth less than a £1 in 5 years time where low discount rates apply.

The NPV today of the stream of income the freeholder will recieve over the next 198 years is worth at 7.25% around £34,450 assuming that on average over the term the income will rise by 3.5% per annum at 10 yearly steps compounding

Ground rent income is a very secure stream of income, its collection (as opposed to service charges) is far more straight forward. Investors have identified that these income streams on large blocks where there is no management and rises in line with inflation are very desirable and compared to long dated treasury indexed linked stocks very cheap indeed after allowing for the various risks and differences between the two.

If you try to buy the freehold in ten years time and the outlook for inflation is still 3.5% and the discount rate for ground rent income is around 7.25% then its value will have risen to £48,665. That the price the lessees would need to pay under the Act . The value has risen because the new rent will have kicked in the value of the freehold will rise each year from £34,450 to £48,665not in equal steps but in gradualy bigger stesp than the year before


Ground rents are useful for they provide a certain stream of income and a portfolio mixed with shortish leases also exposes you to certain defined growthas well as exposure to increases in underlying property inflation or deflation. The freehold to your block would be an attractive proposition to an investoor not seeking anything other than income and a hedge against property inflation

[sgclacy]

I will have to discuss this with the other residents.

In the unlikely event that they will still want to go ahead to buy the freehold could you estimate what other costs would be involved (legals etc).
Do we have to pay stamp duty, & if so how much ?

If the builder had not just completed a contract from some time ago I understand that we could insist on buying it back at the price it was sold for because we were not informed.

We only know about the contract because when we spoke to the builder last month he told us about it.
Is there anyway we can be sure that it exists, or if they have just back dated a contract to cover themselves.

I asked my solicitor this question & he said contract dates as well as completion dates now have to be listed on the Land Registry Transaction Return. So if its not listed it might not count.

I rang up the Land Registry & they had never heard of a Transaction Return. They said contracts are never recorded just the completion date.

What was my solicitor talking about ?

Stamp dulty would not be applicable as it would be below £125k

The costs of setting up a company and buying the freehold I would suggest you allow £1000

With regard to the contract being back dated it is possible that if the contract had been entered into before 50% of the flats had been sold it might have been disclosed in some of the pre-contract enquiries that you or your fellow lessees solicitors may have asked. I think you should ask your fellow lessees to get this information from their solicitors.

The land registry would have been sent a SDLT5 Certificate (called a Land Transaction Return) by the purchaser when the purchaser registers his interest at the Land Registry. To get the SDLT5 certificate a SDLT return has to be sent to HMRC who issue the certificate to the purchaser.

If it is the company I think you may be refering to they do advertise seeking to buy freehold from developers at the start of the development before the flats are sold. I think it is probably genuine. The clause about the rising ground rent would have probably been suggested at the outset by the now purchaser. Only an experienced investor in ground rents would come up with that clause

[Bigfoot]

Does that mean that if we were to buy it this year (using the act) the price we would pay would be around £34,450 plus legals

[jeffrey]

We know from the Land Registry that the present freeholder only purchased it from the developer about a month ago (on a contract dating back about 12 months)
Probably V entered into a Contract (for sale of f/r to the present registered proprietor) BEFORE it had granted the leases but the sale to be completed once they were all granted. Lessees would not have RFR (under LTA 1987) in this case: see final paragraph of post #12.