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Leasehold and freehold explained

Leasehold residential properties are often sold as having a ‘share of the freehold’. This doesn’t mean that the flat is a freehold, rather that it is “carved out” of the freehold. Sometimes, although unusually, one flat in a converted flat will have the freehold title attached to it although it may be that 1 individual flat in a block, usually a conversion. It is worth remembering that with residential leases, typically the leasehold interests are the far more valuable and legally significant interest in the property and the freehold typically has only a residual value.

How freehold and leasehold interests interact with long residential leases

A lease of a converted flat will typically provide that rent must be paid but at a nominal or very low level. Older leases may require no more than a peppercorn rent, though not many peppercorns change hands these days. Rent will be payable to the freeholder and the “covenants” in the lease must be observed. Lease covenants are contract clauses by landlord and tenant that each will behave in particular ways in particular circumstances for the benefit of each and for the other leaseholders in the building.  A good example relates to common parts, i.e. those areas that do not form part of one of the flats but are required, for instance to enable flat owners and their guests to pass from the street to the front door of the building and once inside to make the journey to the individual apartment. These are generally parts of the building which stay as the freehold and are not leased. Sometimes, they are now owned by a limited company set up by the freeholder or which is owned by all the leaseholders as a management company.

Problems with older leases

Purchasers of residential leasehold properties should ensure that their solicitors properly investigate the lease and the ownership of the freehold in order to ensure that there is no confusion or potential for future problems. Problems can arise particularly with leases which were granted some decades ago, since clause in leases which were considered suitable according to property law decades ago will often not be legally suitable or compliant under more recent law or accepted practice for mortgage lenders.

As an example, older residential leases often fail to provide for the leaseholders to grant each other, amongst other things, mutually enforceable covenants. In practical terms, each leaseholder only has a contract (the lease) with the freeholder and not with other leaseholders. So what if the leaseholder updaters is playing rock music at full blast day and night ? A mutual enforceable clause would allow the leaseholder suffering to compel the freeholder to take action against the other leaseholder creating the noise nuisance.

Share of freehold

Leaseholders who together own the freehold of the block via a limited company have more chance to come to an agreement with the owners of the other leasehold flats because they have a common interest in maintaining the common parts and they will be able to remove the profit incentive and manage the freehold more efficiently and cost effectively because if they don’t like the lease, they have the option to modify it. Even though the flat you are thinking of buying does come with share of freehold, changing the lease may not be very easy because you will not be able to take action alone and agreement with your new neighbours would still be a requisite. They may also find it easier to amend their leases both as to length and onerous covenants because there is no profit motivated freeholder who will negotiate hard for the price to buy an extended lease and may have no interest in relieving onerous lease terms.

All in all, take good legal advice !

Extending a residential lease of flat – the basics

Legal right to extend

To have the statutory right to extend :-

• The leaseholder must have owned (but not necessarily lived in) the property for at least 2 years
• The lease must originally have had a term of at least 21 years
• Leaseholder will have to pay a premium which is calculated according to a formula to extend and to have complied with the statutory procedure
• Note that in most cases it is in neither leaseholder or freeholder’s interests to go the whole way down the statutory procedure. Most extensions are agreed by consent after some negotiation

Why do leaseholders extend leases ?

The most common reason now for extending leases is in preparation for selling a lease and when it is getting near to only having 80 years left to run, This is because below that level, it becomes more expensive to extend, some lenders for potential buyers have become more fussy about the length of leases and buyers psychologically like a long lease. Extending a lease in preparation for sale can enhance value but careful consideration of the pros and cons is always advisable

But bear in mind that if you wait until you have less than 80 years to go, buying an extension becomes more expensive (under 80 years and you have to pay so-called Marriage Value – more on this below).

How long does an extension take ?

The process can take anything from weeks to over a year. If you have a particularly intransigent or badly advised freeholder, you may have to follow the statutory procedure and this takes time. If you have a sensible freeholder who understands that there are certain quite easily parameters for the negotiations on premium and/or other matters, the process can be quick. Some freeholders seek to include other aspects in the extension negotiations, which are not strictly their rights under the statutory provisions. A classic example of this is seeking to agree an increased ground rent as part of the negotiations and for a quick resolution. To speed things up you should seek advice from experienced lease extension solicitors and potentially a surveyor at an early stage.

Freeholders can be particularly difficult and seek to extract extra concessions and even a much higher premium if they are aware that the leaseholder is urgently trying to sell and the buyer insists on a longer lease being in place. Be wary of this type of situation and see below for one type of solution.

What happens if an agreement can’t be reached with the freeholder and a buyer is being difficult ?

One problem can be the statutory requirement for 2 years ownership before extending the lease. If the freeholder is already known to be difficult, a common option is for a seller who has owned for 2 years to start the formal statutory process and then to assign (transfer) the benefit of the already started procedure to  a buyer. This will sidestep the 2 year ownership problem.

How to start the lease extension process ?

Firstly, we would suggest getting a good conveyancing solicitor on board (there are many solicitors in London, where lease extensions are particularly common, who can help) and a surveyor possibly for valuation purposes. There are then some statutory forms that need to be completed. It is very important to be careful about making any early offers to the freeholder as a parallel process to the statutory procedure and all communications should be expressly “without prejudice”

Any guidelines for what it may cost in terms of premium to extend ?

In legal terms, the value is based on 3 elements. The first two are to compensate the landlord for loss of ground rent during the rest of the existing term of the lease, and for not receiving possession of the property at the end of the term. As stated above, it is important, when possible to extend before the lease has less than 80 years to run, because then the freeholder becomes entitled to marriage value, a complicated and technical calculation of an extra, possibly significant amount more. Typically, in London, with a lease of perhaps 85 years left, valued at about £250k, the amount to extend could be around 7.5k purely as a guideline figure. Be aware also that, under the statutory procedure to extend a lease, the starting point is that the leaseholder is liable for both parties’ legal and valuation costs, and this can easily end up adding an extra 3k plus vat of additional costs if the matter goes some way down the statutory path.

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