Two flats: lease extension v. freehold purchase?

[--Graham--]

Hi All

This is a similar question to a couple that have been posted recently, but for clarity i thought i would start a new thread.

The owner of my freehold is planning on selling it in the very near future, is there a formula for arriving at a price for the freehold? My downstairs neighbor got average figures of £160k and £175k from the local estate agents for the two flats. I will probably have to extend the lease if i sell the flat as it (along with the downstairs flat) is down to 73 years.

As i understand it one of the attractions of owning a freehold is the profit to be gained from management fees and service charges, which doesn't apply in this case as although i have the upstairs flat, i have my own entrance so there are no common areas. The ground rent is also quite low - £30 a year each for the two flats for the duration of the leases. Is there much of a market for freeholds like this, especially at the moment with property prices looking set to fall?

The property is in East London (East Ham), if that has any bearing on the situation.

[jeffrey]

The freehold reversion purchase would probably need to involve both leaseholders (you + downstairs) buying it jointly. The individual ownerships would remain leasehold but:
a. there would be a separate f/r ownership in two names;
b. the two would then re-grant each lease for an extended term and no ground rent;
c. ownership of the f/r would stay intact. Every change of leaseholder would yhen simply need to trigger a corresponding freehold change (e.g. if T1 sells flat to P, and T2 keeps other flat, T1 + T2 would transfer f/r to T2 + P; basic Transfer deed TR1; and HMLR fee of £40 probably payable by P).

[Corinne Tuplin]

Dear Graham,

If your freeholder is selling the freehold, I would not hesitate in recommending you to purchase your share.

Firstly, if you do not, it is likely that someone else, possibly even a commercial freeholder, will take on your freehold and manage the property in a very different way to your current freeholder. You may see service charges increase and property management fees to pay, etc. You may find you are dealing with a very unscrupulous freehold company who see the asset purely in terms of commercial investment.

Secondly, a lease extension may well cost the same amount as your freehold share.

Finally, there is a market for sale of freeholds, with some of the largest names regularly appearing in the Leasehold Valuation Tribunal and vigorously defending their assets.

Kind regards,


CORINNE TUPLIN
SOLICITOR
PRO-LEAGLE
www.proleagle.com

[--Graham--]

Hi Jeffrey

Thanks for your reply.

Initially my downstairs neighbor was interested in buying a share of the freehold, but has since cooled on the idea and i think it very unlikely he will change his mind. As long as my neighbor is offered the chance to buy 50% of the freehold and declines, am i then free to buy it?

Hi Corinne,

Thanks also for your reply.

At the moment the only money the freeholder receives is the annual ground rent (£30 per flat). This is why i am curious to know what interest there would be from a commercial source, as there are no other fees involved. Clearly when a lease reaches 70 or so years, any change in ownership is likely to net the freeholder a significant amount for extending the lease, but can any other fees be imposed when there is no actual management (or services) required?

If anyone can give me a rough idea of what a lease extension is likely to cost, i would appreciate it. I have an idea of the factors involved - flat value (£175k), years remaining on the lease (73) and ground rent (£30), but haven't got my head around the maths yet.

Many Thanks,
Graham.

[sgclacy]

1) Capitilisation of rent = £30 @ 7.5% = £400

2) Value of the reversion £175,000/ (1.05^73) = £4968

3) Relativity @ 73 years = say 93% £175,000 X (100-93) = 12,250 less £400 less £4968 = £6,882 @ 50% = £3441

Premium could be of the order of £400+£4968+£3441 = £8,809

Plus certian elements of teh landlords legal and surveyors costs budget for say £1k

[--Graham--]

Hi sgclacy

Many thanks for the figures. One point i am not sure on, how long an extension is this for?

[sgclacy]

That would be the cost for a 90 extentsion to the remaining term under the Act where the rent falls to a peppercorn