Reply to: 90 Leasehold Extension On London Flat

[mcquiggd]

In summary, I refer to my earlier post:

Personally, I would never buy leasehold.

If leasehold, you are not really 'buying', you are 'long term renting' - and speculating that you can sell for a reasonable value later to offset your costs.

Doesn't seem a very good idea at the moment, frankly.

[MobileCheese]

I sold my flat back in June this year and that had 75 years to run and shifting it was a nightmare.

Things start to get very expensive once you have less than 80 years on the lease to run, once you hit this point the freeholder is deemed to be entitled to something called 'Marriage Value'. This basically means that if you have less than 80years to run to increase the lease the freeholder is entitled to 50% of the value of what the property would increase by if it were to be sold with the lease extension, plus you have to buy out your ground rent. If you have greater than 80years lease you just have to buy out the ground rent.

My flat sold int end for £165k, the freeholder wanted £18k (£17k marriage val plus £1K ground rent buyout) plus all his legal fees paid. If I had 81years on this lease I could of just done it for the £1k plus fees. You can challenge the freeholders valuation by going to the Lease Holders Valuation Tribunal but problem is even if thier decision is in your favour you still have to take him to court to enforce it. Pretty sure the same cost applies to buying the freeholder though to that you need a lot of the other recidences to also want to buy theres, can remeber the minimum you need, but again it isnt cheap with less than 80 years.

My solicitor when I bought the place didnt advice me well as the month I completed on the purchase was the month the new 80year law came in, I wouldnt have proceeded if I known.

I managed to sell the flat in the end, but even that was a mare as the freeholder wanted £500 for a license, and if the sale fell through and I got a new buyer I had to pay the £500 again. I lost 2 buyers in total when they found out the cost of the lease extension In the end though some body did buy it but to this day though I dont why she did though. She paid a price that didnt really reflect how much it would cost to extend the lease, may be her solicitor didnt ask about the lease... I dont care though Im so glad to be out of it.

In the end over 4 yrs I did make some money on the flat, no were near what I would have made though had I put the same cash into a flat with a long lease or a freehold.

Bottom line a flat or house with less than 80yrs lease becomes a fast depreciating asset and could turn out to be a real pain in the ass. You better off going for a smaller place with a bigger lease than a large place with a short lease. If I were honest I wouldnt touch leasehold again unless you have some wapping 999 year lease.

[tim123]

One thing though I was talking to the Estate Agent and I do not know if he was bullsh*tting me (probably was) .. but he told me that Share of Free Hold
flats in london virtually cost peanuts to extend the lease say 400 quid or 99 years more....

Does this sound correct to you ?

Yep that's exactly right. You are simply paying money from yourself into a pot that you own. It would be pointless doing this, so all you have to pay are the legal fees involved.

btw:

The extension on the lease is valued according to many factors including a compensation cost to the landlord based on the remaining ground rent he will forgoe on the remainder of the existing lease (this I think is calculated using a yield figure based on local empirical evidence), marrriage value ie you pay 50% of the INCREASE in market value to the property that the extension will create and then reversion cost which is like a compensatory cost to the land lord for not being able to claim the property which you have been paying the mortgage on ..(hmmmmmmm).... Also I think you have to pay the landlords legal fees during any valuation associated with the leasehold extension (hmmmmmmm x 2)...

fair on the homeownder ...? I don't think so...

You are right. The owners of these properties think that it's a right rip off that the tenants can forcibly have their lease extended for such a small amount of money.

tim

[mcquiggd]

Actually there is a residents comittee here, and they arrange the contracts for cleaning and maintenance (lifts etc) paid for from an annual management charge. Its been the same in each flat ive lived in in Scotland. Everything seems to run smoothly.

[TinTin]

Scotland

When you have tenements in Scotland, the owners are obliged to share the costs of maintainance and even taking turns to do some of the chores, ie clean the stairways (as they are too stingy to employ a cleaning company). Fairer yes, but still does not absolve the flat owner of his/hers responsibilities.

[TinTin]

Fair ?

It's an extension of the feudal property laws. AFAIK the only leasehold houses are in Belgravia/Mayfair which is Duke of Westminster's territory and as he is a cousin of the Queen, he's managed to hold on to these privileges. Anywhere else is freehold. Flats are different and as a freeholder you have rights as well as obligations, ie to maintain the property to a reasonable standard. Since you've done your homework, I would say a short lease flat is a good investment if you are a cash or almost cash-buyer since the cost of the leasehold extension in most cases can not be raised by a mortgage.

[mcquiggd]

Personally I would never buy leasehold.

Flats in Scotland are, I understand, actually freehold...

[messiah]

Ok I get all your points and I have done some research and the property seems to be reasonably priced at 650K + 190K (extension of lease by 90 years) for the general area.

One thing though I was talking to the Estate Agent and I do not know if he was bullsh*tting me (probably was) .. but he told me that Share of Free Hold
flats in london virtually cost peanuts to extend the lease say 400 quid or 99 years more....

Does this sound correct to you ?

btw:

The extension on the lease is valued according to many factors including a compensation cost to the landlord based on the remaining ground rent he will forgoe on the remainder of the existing lease (this I think is calculated using a yield figure based on local empirical evidence), marrriage value ie you pay 50% of the INCREASE in market value to the property that the extension will create and then reversion cost which is like a compensatory cost to the land lord for not being able to claim the property which you have been paying the mortgage on ..(hmmmmmmm).... Also I think you have to pay the landlords legal fees during any valuation associated with the leasehold extension (hmmmmmmm x 2)...

fair on the homeownder ...? I don't think so...

[Nipple Clamp]

In England a "house" will already be freehold, and a flat-owner will usually own only a share of the freehold, if anything.

There are legal procedures whereby if a majority of flat owners agree they can get together and form a company and force the freeholder to sell the freehold to them. This is probably what would cost each of them 10K in your example. I think to have the right do this one of the criteria is that the leases have to be of more than a certain length - not sure if it is 15 years as mentioned above or 21 as I've read elsewhere.

Having done that, the flat owners can get the freehold company they own to extend their leases for free, whenever they want.

Not all houses are freehold - For example I think those posh terraced houses owned by the Duke of Westminster in Belgravia are let on short (21 yearish) leases and the Duke retains the freehold. Likewise, houses on country estates and once occupied by forelock tugging estate workers are still often retained in the freehold of the estate.

Also, it can cost a heck of a lot more than a nominal price (such as the 10K figure you quoted) because a so-called "marriage value" must be added, to compensate the freeholder for what they would otherwise receive when the lease expires and beneficial ownership of the property reverts to the freehold. This is roughly the full value of the property scaled by a factor between 0 and 1 which varies linearly for remaining lease terms between 50 and 0 years. The same thing applies to extending leases.

[IR35 Avoider]

I've never heard of a house being leasehold in England - it must be extremely rare.

in any case this leasehold/freehold is a load of bull - the house is either yours or it is not, if it's leasehold then you might as well rent.

A sentiment often expressed by those unfamiliar with English legal structures, but so over-simplistic that it's wrong. (My father said the same thing. He thought of himself as a freeholder when actually, as my mother repeatedly tried to remind him, his house at the time was equivalent of UK commonhold. One UK lawyer's web-site I checked this morning said there was little practical difference between commonhold and leasehold with a share of the freehold.)

Owning a long lease is much more similar to being a freeholder than a renter, especially now that there's a right to buy a share of the freehold. On a sliding scale, where renting scores 0 and freehold scores 100, a long lease must score somewhere in the nineties.

At the end of the day any property's value is just the value of a set of legal rights. Freeholders tend to think they have absolute ownership of a piece of land and the bricks and mortar on it, but it is not entirely right to think that way. Their property can be taken away by the government, if it decides to build a motorway through it. What they can do with the property (and hence it's value) is constrained by planning law. Like leashold, even freehold ownership is just a set of legal rights, with a price-tag attached.

[AtW]

I was under the impression from friend of mine who bought house that was leasehold but he turned it into freehold that any owner can express desire to buy out freehold and the price is pretty much capped and can't exceed said value. I suppose 10k is valid (if true) for 200k house, in any case this leasehold/freehold is a load of bull - the house is either yours or it is not, if it's leasehold then you might as well rent.

[IR35 Avoider]

I very much doubt if anyone would give you a mortgage on such a fast depreciating asset, except at an extortionate rate.

This is a good point - I think lots of mortgage lenders used not to like leases of less than 60 years. I don't know if your right to extend the lease (if there is one in this case) will make them look more kindly on the situation.

The problem of short leases mostly occurs in older (generally posher and more expensive) flats.

[IR35 Avoider]

In England a "house" will already be freehold, and a flat-owner will usually own only a share of the freehold, if anything.

There are legal procedures whereby if a majority of flat owners agree they can get together and form a company and force the freeholder to sell the freehold to them. This is probably what would cost each of them 10K in your example. I think to have the right do this one of the criteria is that the leases have to be of more than a certain length - not sure if it is 15 years as mentioned above or 21 as I've read elsewhere.

Having done that, the flat owners can get the freehold company they own to extend their leases for free, whenever they want.

[AtW]

And I was told that freehold normally adds around 10 grand onto a price (for average house of 200k), and can be easily purchased - perhaps this applies only if remaining lease is very long anyway?

[IR35 Avoider]

I saw a really nice London chelsea flat for 650K with only 21 years left on the leasehold (100 sq/meters), I discovered from the agent that the typical cost to me to extend the leasehold for 90 years on top of the market value of 650K would be 190K !!!!!

In other words, you are able to "own" the flat for 21 years for £650K or for 111 years for 840K. The latter sounds like a better offer. Whether or not this is good value depends on what else you can get for similar money in the area, and also on whether housing is generally a bit over-priced at the moment.

Actually I find the English system of leasehold for flats quite sensible, and the extra rights the government has given flat-owners to forcibly acquire a share of the freehold surely makes the system of ownership almost as good as anything to be found elsewhere?

The one reservation I have about the system is that the "rules" of how a building is run are fixed for all time by the lease and cannot easily be varied. For example, where I live we have to pay management charges twice a year in advance, rather than spread over twelve monthly payments by direct debit as most people would prefer, because that's what the lease says. We have been categorically told that it is not legally possible to change this. When we wanted to install Sky the management company (owned and run by residents) couldn't pay for it because the leases do not allow it to make improvements, as opposed to doing maintenance. In the end the company that owns the freehold (also owned and run by residents) coughed up. I suspect that was a legally dubious decision by the directors, since the freehold company won't in reality get any economic return from this "enhancement" to its property. I'm glad they did it though, even though it was my money they were spending. (I'm among the one third of residents with shares in the freehold company.)

I'm aware that in other countries it is possible for rules to be created/changed/repealed by majority vote at any residents (owners) meeting. This is one element that is missing from the English system, though I am aware that it does also lead to its own set of problem because (where residents are running everything themselves) you have in effect "laws" being drafted and enforced by people who aren't lawyers and who don't understand the legal pitfalls. (My parents have just moved out of such a development: impractical rules passed weren't enforced, which opened up residents collectively to being sued by one of the residents who wanted the rules enforced.)

Edit: It seems that there has been an attempt to introduce something like the above with the introduction in 2002 of "commonhold" as an alternative form of flat ownership in England. I'm still not clear if it allows you to change the "rules" though.