How Do We Value a Lease? (and do we need to?)

[Cheshire~Rose]

Hi everyone,

I am a bit of a novice at being a landlord, I initially rented out my flat when I moved in with my fella 2 years ago and that has been successful so now I have bought two more properties to rent out so I have a portfolio. My problem has come about because the freehold on one of my flats is owned and managed by a property management company which I am a director in.

Let me try and explain.

It is a block of four purpose built maisonette flats. When I purchased the flat it was explained to me that the freehold for the flat is owned by the property management company and I must agree to become a director in that company to purchase the flat. The owners of the flats basically manage the freehold themsleves. There is no ground rent payable. Any costs arising from maintaining the fabric of the properties is shared between the owners as and when necessary.

The problem has arisen because before my flat went on the market there was a very short lease on all 4 flats and as no one would have got a mortgage it was decided by the management company to extend all the leases to a new 200 year lease. The legal costs for doing so were supposed to be borne by all four parties equally. In fact half way through the lprocess the owner of one of the flats decided to pull out. He got legal advice advsing him not to pull out but he still went ahead and did so. At that point the new leases were drawn up for the three remaining flats and the owners of those flats bore the legal costs (including the additional work caused by the fourth party pulling out) between them. The fourth party was no longer part of the managment company.

It later turned out the gentleman in the fourth flat was in the early stages of demetia. His health has become worse and he has gone into a nursing home. It would appear that this may have been at the root of his reluctance to proceed with the legal transactions.

Now his flat has gone on the market. It has a 42 year lease and so no one will ever get a mortgage to buy it. The advertised price of this flat is £10,000 less than the original advertised price of the flat we purchased last autumn with a 200 year lease. (We did pay less than the advertised price but this will give and indication of how much difference in value the lease might be making to the property value)

The gentlemans representative has now approached the management company to ask for a new lease for the property.

On the face of it (and I am certain people who know a lot more than me will soon be along to put me straight on this) we have a couple of options:

We can sell him a new lease and set a ground rent to go with it.

or

We can sell him a new lease and stipulate the owner of the flat needs become a director of the property management company again.

Basically there are two couples and a single lady who form the property management company. All of us are just ordinary home owners and have no relevant experience to know how we should proceed.

What we would like to do is to charge a small amount for the lease (maybe a couple of thousand pounds?) which we will use to get all 4 flats cavity wall insulated. We have no idea if there are any rules about how much one can or should charge for a lease and I want to be certain we are not unwittingly breaking any laws. I know I probably need to seek some proper legal advice but I don't even know what questions to start asking and we have a meeting of the management company this evening so I would love to have a marginally better understanding of where we are before that so we may make some progress at the meeting without it being the blind leading the blind.

I know there are going to be all sorts of potential pitfalls and legal problems and I am hoping that someone here has a bit of knowledge and can point me in the right direction.

many thanks in advance

[Mortitia]

Usually within such a management company one member acts as company secretary and that person usually organises the granting of new leases, submission of accounts etc..

It is not necessary for everyone to be a director, a share of the freehold owner could just be a member of the company.

it is very simple and straighforward to extend the lease on this flat and the solicitor acting for the seller should instigate this to maximise the potential selling price.

The usual charge for such a lease is NO MORE than £30-£50.

If you want to do work on the block then a 'sinking fund' is usually set up with all freeholders paying in the SAME AMOUNT each year to pay for works.You cannot charge one freeholder more than another.- does this company already have a bank account and submit accounts?

[Cheshire~Rose]

We do have one member acting as company secretary and we do file accounts and have a bank account.

At present the 4th party is not a freeholder nor part of the management company. When he dropped out of the initial process it caused additional cost for the other 3 parties. While we have no wish to profiteer from his illness it does seem unfair if he were now to get something for free which the other 3 parties had to pay for and indeed had to pay extra for because of his silly decision in the past, we had thought that if the sale of the lease raised a small sum of money it could be ploughed back into improving all 4 properties for the benefit of all the residents.

It does seem odd that the charge might only be £50 when I read elswhere that to get a replacement lease when the existing one is very short can cost a lot of money. Indded a few years back I had to buy one on my fathers property to allow it to be sold when I wound up his estate. It still had over 80 years to run and yet the charge was £7000

There is clearly something I am not understanding about the differences between these transactions.

Perhaps I should just bite the bullet and pay for some legal advice.

Thanks for your help

[Grampa]

A Lease and freehold are 2 separate entities normally when you buy a leasehold property you have the lease only but sometimes you have a share of the freehold as well which can make the property more desirable to buy because you are not paying ground rent and you have more control of the service charges. The freeholders can then form a limited company to manage the block and if they wish they can instruct a property management company to deal with any maintenance, insurance, etc.
I have come across a few leaseholders who also have a share of the freehold who have then extended their lease to 999 years or similar and the cost has been a few hundred pound each.
But if you are a leaseholder only and want an extension that is different and below is a general bit of info I put together for a friend/client

Lease extension
Two ways to go, either extension by agreement with the freeholder (have to pay F/H legal fees) when the F/H can just pluck a figure out of the air and it could be to only bring the lease back up to 99/125 years and maybe increased ground rent.
Or the leaseholder serves a section 42 notice on the F/Holder which gives them the statutory right to 90 years added to remaining years and a zero/peppercorn rent. The freeholder must reply to the section 42 notice by serving a section 45 counter notice which will show the premium they would like you to pay. If the freeholder fails to serve their section 45 counter notice within 2 months, they are obliged to accept your proposed premium. If they submit their section 45 counter notice within the required 2 months and you do not agree with their proposed premium, then you need to get your and their surveyor to negotiate the price. If you still can't agree, then you can make an application to the LVT (Leasehold Valuation Tribunal) which will determine and impose the price on both parties. You have 4 months maximum to apply to the LVT from the date the freeholder has served their section 45 counter notice. This route may cost more than the above. The rough cost of this as a guide is around 11.6% of the flats value. The flats value would be based on what it is worth if it had a very long lease.
If the statuary route figure is a lot more than just going for an increase to 99/125 years you have to weight up whether:

1: Purchasing the freehold will offer more benefits than exercising Right To Manage ( where you take over virtually all of the FH's functions)
2: Whether the terms of the extension are materially better than a statutory extension of 90 years and peppercorn rent. How much extra value is put on the lease for a +90 than increase to 99/125 years or is there. Also how long are you planning to keep the property?

[Grampa]

I have just brought a flat ( a couple of month ago) that only had about 70 years left on the lease, The flat cost 50k but it cost an extra 7k plus 1500 quid of legals to go down the section 42 route (lease now 160 years). But I now have a flat that has no ground rent and a value of about 70-75k.

Though I should have asked what the cost would have been for an extention by agreement back up to 99/125 years which could have been a lot less but with a higher ground rent. This could have been a better choice if I was planning to sell in the next few years.

Remember as soon as the lease goes below 80 years the percentage goes up by quite a bit to extend the lease as it put value on the property/lease.

[Gee]

Cheshire-Rose

This subject is not my specialist area of surveying, however basically as Grampa says you have 2 choices.

Ask for a figure which you are prepared to sell a lease extension, Rather than just making up a figure , it would be more reasonable to consider the increase in value of the flat caused by granting an extension of the lease ( New value with longer lease less old value with short Lease.) If the resulatant figure was for example £15000, then it would be reasonable to ask for half that figure ie £7500. This way you get £7500 and the buyer gets a flat worth £15,000 more at only £7500 cost. Everyone is a winner.

Life of course is not that simple. The buyer (if he knows) can ask for a lease extension under the Leasehold Reform Act. This entitles the purchase price to be calculated in a way laid down by statute. If the figure cannot be agreed then it can be referred to the Local Valuation Tribunal for determination.

There is nothing illegal about trying to about obtain a figure using the first method, however if you are too greedy then the buyer will moan and someone will point out that he can apply under the Act and buy it cheaper.

Obviously the above can be a bit bewildering when you just want to do the right thing. Might I suggest that rather than speaking to a solicitor that you contact a Chartered Surveyor experienced with Leashold Enfranchisement and he can advise you both on your alternatives and likely values. You will of course have to pay for such advise, but I think it is worth it in the long run. If you ask a solicitor, he would only refer it to a surveyor anyway.

To find a local surveyor experienced in Leasehold Enfranchisement, log onto the RICS website. Do not just ask a local estate agent.

Good Luck

Gee

[Mortitia]

Am I missing something? Cheshire Rose and her 3 other maisonette owners all own part of the freehold in this block of 4 I would argue.

3 of the lessors went ahead with renewing their leases to give nice long terms. The 4th lessor pulled out.

I cannot see how this 4th person does not own part of the freehold too unless the 3 others own his lease.

I am secretary of a similar block of 4 flats, we all own a 25% stake in the freehold. Last year 2 freeholders got together and lengthened their leases to 999 years using the same solicitor. Later that year I did the same using a different solicitor - it cost me £270.

This is not the same as buying a leasehold flat with a short lease and then approaching the freeholder who could be a property company or an individual living in Timbuktoo who can then charge a much larger amount to renew the lease and still charge a ground rent as he still owns the freehold.

Cheshire Rose states in a round about way that she and her fellow lessors own the freehold. Maybe all will become clearer at her meeting this evening.

Mortitia

[Cheshire~Rose]

Sorry if my way of explaining things is a bit convoluted. It does make it obvious I have not got a clue!

The freehold for all 4 properties is owned by the property management company - which is run by the owners of the three flats. I now realise that the lease we have on the 3 flats is 997 years.

The fourth flat owner who pulled out has a lease of 42 years remaining and there was a ground rent payable of £5 a year I understand. There is some question over whther this has actually been paid for the last couple of years but that is not relevant (I think?)

To further complicate matter I heard at the meeting this evening that it is thought the owner of the fourth flat has now died and so I suspect whoever is dealing with the sale will be trying to get probate as well.

We are going to make an appointment to speak to the solicitor as soon as possible to get some legal advice. his is the solicitor who dealt with the original extension to the lease for the 3 flats. I have made contact with one chartered surveyor who will be getting back to me in the next couple of days. We will also ask the solitor if there is someone they usually deal with or can recommend.

Thanks everyone for your help

[Richlist]

I don't read it like that......being a director of the company that manages the property doesn't automatically mean that the person owns (or part owns) the freehold.

Perhaps the OP can clarify ?

[Cheshire~Rose]

yes the freehold for all 4 properties is owned by the managment company

[Richlist]

Thats not the question. We know the management company owns the freehold & that you are a director of that company.

The question is......do you own a part of the freehold ?

[Cheshire~Rose]

Not me as an individual, no, it is owned by the managment company

[Richlist]

It might be that your best way forward is to seek professional advice both now .....for this particulat issue and ongoing ......for the smooth running of the management company.

I'm also a 'director' of a management company with a similar set up to yours. We employ on a 'as & when needed' basis......

* Solicitor, for legal aspects.

* Chartered Surveyors/ Property Managers, for their expertise in building maintenance, housing & company law.

* Accountants

Service charges are aroud £700 per property per annum.

[Cheshire~Rose]

Thank you,

We are approaching the solicitor that drew up the extended lease for the company. for legal advise on this (as they have first hand knowledge of the lease it should help!)

We already have an accountant. It is really just the chartered surveyor we need for this and I have set the ball rolling on that one. £700 per property per annum sounds a huge amount of money but perhaps there is a lot more involved with your set up.

I will just add in case anyone else stumbles upon this thread who is looking for similar information - I have found the information on The Leasehold Advisory Service website invaluable. It manages to explain things in tems that the layman can understand. There is a link to it here: http://www.lease-advice.org/

[Grampa]

Normally a everyone would have a equal share of the freehold but it is not uncommon for some leaseholders to only have a lease. What is the history of the freehold? Was it at one time owned by a independent freeholder and the leaseholders excises their right to buy the freehold but only 3 of the 4 was prepared to be involved and pay? The freeholders then form a ltd company to manage the freehold.

This would explain why it appears you only had a 99 or 125 lease when the leases were created and you now have extended 3 to 999 or what ever years.

If we assume the above is correct you should be able to charge a few thousand for a extension to their lease (see my earlier post) if they request it. If they are not a freeholder you dont want them as a director.

If the management company raise a budget each year and send out service charge demands it should be equal for all leaseholder unless the leases state otherwise but you have the chance to get few extra quid each year in ground from the 4th L/H who doesn’t own a share of the F/H. If the estate or new owner requests an extension by agreement (not section 42, see earlier post) you can change the terms of the ground rent payment to say anything between 50-150 per year.

Or for a similar cost of a lease extension you sell a portion of the freehold to the new owner so everyone has a equal share

[Chestnut]

£700 p.a. is not a high figure if it includes buildings insurance, cyclic external painting, maintenance and painting of common areas, regular site inspections, management fee, and solving odd issues like refuse collection information, car parking etc. organised by your management group.

I'm no expert (although member of a management group) but would be surprised if either (1) one of the four properties is not within corporate freehold group or (2) has a different lease from other three, (or both 1 & 2)

I would recommend you and your member/director colleagues dig out all your deeds and, with professional help, check very carefully what the situation should be. It sounds like you are are doing this.

It might be just a case of advising the (and any) new purchaser that they have to become a member of your group and meet the conditions, and for the property in question charging them a one-off fee for the professional assistance you need to engage to regularise its position with the others.

I broadly concur with other advice given.

[Grampa]

http://www.myleasehold.co.uk/lease-extension-calculator To get a rough idea for a lease extention cost

http://www.alep.org.uk/membership To find a solicitor in your area who specialises in freehold, leasehold law and lease extensions etc.

Be very careful about using an high street solicitor who doesn’t specialise otherwise you are likely to get incorrect info or not all of the options available to you.