Increasing The Value Of Your Flat
Liz Hodgkinson is an experienced property developer, landlord and journalist. Over the past decade she has bought, renovated and rented out or lived in many flats of all kinds, from new-build to Victorian, from purpose-built 60s and 70s blocks, to conversions and mansion blocks. She contributes a regular landlord and tenant column to the Evening Standard and also writes for the Mail on Sunday, The Lady, Saga, The Independent and Daily Mail.
Most people hope that when they buy property its value will go up.
Unfortunately, when you buy a flat, or indeed any leasehold property, its value can go down instead as the years go by and the lease gets ever shorter. Indeed, if the length of the lease is edging dangerously near to 80 years, the value of the flat will rapidly decrease.
In the old days, this was a severe drawback to leasehold homes, and meant that anybody who had a choice, bought freehold properties instead.
Another serious drawback to buying leasehold flats was the often difficult relationship with the freeholder. Although all leases state that the freeholder has a duty to keep the property in good condition, this clause was frequently broken by freeholders who could no longer afford to maintain the building, who could not be bothered, who simply disappeared and went away or waited for leases to run down so that they would own the building again.
These factors are the main reasons why, eventually, even originally valuable flats lost a lot of value. It is still quite common to find leases of 54 years or less on older blocks, and the long-term residents have no idea their property is worth virtually nothing until they come to try to sell.
But where the lease is less than 80 years, you cannot sell your flat – or at least, only for a knockdown price to a cash buyer.
But fear not! There are now three ways of increasing the value of your property, even when the lease is getting short, the common parts are run down and the freeholder has absconded or completely lost interest in the building.
The options are:
- 1.You can extend your lease by 90 years.
- 2.You can exercise your right to manage.
- 3.You can buy the freehold by a process known as collective enfranchisement (CE).
All these are options you can force your landlord or freeholder into doing. There are exceptions for some kinds of property, but in the main, anybody who lives in a leasehold property can exercise one or all of these steps, which increase the amount of control you have over your own property.
But although you can extend your own lease individually and without reference to the other residents, in order to buy the freehold or exercise the right to manage, you need to take collective action, and get a majority of residents on your side. This is not always easy, especially as collective enfranchisement can cost each leaseholder a lot of money which, they feel, may not be realised in extra value on the fiat.
There is also a common attitude among older residents that the lease, however short, will ‘see them out’ and they may not want to spend their remaining savings on something that may only benefit their heirs or, more likely these days, the taxman.
Where this is the case, it may not be possible to get enough support to enfranchise, and extending your lease may be the only answer.
WHAT YOU NEED TO KNOW BEFORE YOU BUY
Whenever considering buying a leasehold property, first look at the length of the lease on the agent’s particulars. If this information is not there, as is often the case, ask before going any further with the purchase. When the lease is 80 years or less, ask whether this term can be extended, and about how much it would cost. Very often estate agents fudge the length of the lease by putting something like ‘lease 125 years from 1986’ or something, which may lull you into a false sense of security.
Although buyers can now legally force the freeholder to grant them a 90-year lease extension on most types of leasehold properties, not all leases can be extended. Specialist properties such as those held on crown leases, National Trust properties, and those within cathedral precincts are exempt from this legislation. But, in practice, few people are likely to live in these apartments.
In any case, freeholders of these properties have expressed a desire to go with the prevailing legislation, which means that in practice, crown leases, for instance, often can be extended. So, if you are considering buying one of these ‘exempt’ properties, find out what the leasehold/freehold/lease extension situation is before buying.
For most other privately-owned buildings, all or any of the above three options can be exercised, although there is a standard procedure which must be followed in each case. For instance, even if you want to extend the lease, you would normally have to wait two years after buying before doing so. You would not be able to extend the lease before buying, but if you know that it can be extended, and what it is likely to cost, this knowledge can form part of your negotiations on the asking price of the property.
If you have fallen in love with a particular flat, but the leasehold arrangements leave much to be desired, what do the various value-increasing options have to offer and what do they entail?
EXTENDING THE LEASE
This is in many ways the easiest option to exercise, as you can do it on your own without involving any of the other residents; all other options need the consent of at least 50 per cent of owners to proceed.
A lease of less than 80 years is a fast-wasting asset, mainly because few mortgage companies will advance loans. This makes the property difficult to re-sell. So if you are interested in buying an apparently bargain-price flat with a short lease, check first that (a) the lease is theoretically extendable and (b) that it will not cost you a punitively high sum. In general, the shorter the lease, the more it costs to extend.
Although you can legally extend a lease these days by 90 years, freeholders can drive a ridiculously hard bargain, so do not imagine it will always be a simple option.
The relevant legislation states that the lease extension must be bought at the current market price – don’t imagine you will get it for nothing, or nearly nothing, because you are already living there. Also, working out the numbers can be horrendously complicated.
The moral of the above story is: if you do not accept the price the freeholder states for your lease extension, be prepared for an almighty battle that you may lose.
In general though, if the case does go to the LVT, they will usually rule that the lease extension is worth something between the valuation put it on it by the freeholder (selling) and the leaseholder (buying).
Here is the outcome of a more typical situation
Length of lease:
The term ‘marriage value’ describes the extra value created by ‘marrying up’ the leasehold and freehold elements or, in this case, the difference between the value of the property with the short lease and the extended lease. The term ‘marriage value is one you have to constantly keep in mind when extending leases or buying the freehold. The shorter the lease, the higher the marriage value.
For instance, a flat with 62 years left on the lease is valued at £140,000 on the open market. With a 90-year lease extension, it is valued at £150,000. Therefore, the ‘marriage value’ is £10,000.
The term ‘marriage value’ does not apply where the lease has 80 or more years to run. For the purposes of negotiation, an 85-year lease is as valuable as a 999-year lease.
Although you do not buy the freehold when extending a lease, you will certainly increase the value of the flat when it comes to selling, and sometimes going it alone is the easier option. It can be difficult persuading the other leaseholders to join forces with you.
The cost of a lease extension mainly depends on how tough a bargain the freeholder wants to drive, although offers on both sides must be supported by hard evidence, and not just be figures plucked out of the air. If the freeholder is prepared to extend the lease for nothing, or nearly nothing (which sometimes happens) there will be no need to take the case to the LVT. Likewise, if you can agree a figure between you, there will be no need to take the case to the LVT.
Nowadays, though, there are few ways the freeholder can make money out of the lessees, and selling lease extensions can be highly profitable, so don’t be surprised if your freeholder rubs his hands together and demands a large amount when you apply to extend the lease.
A typical example
A one-bedroom flat was on the market for £155,000, with a 63-year lease. In this case, the lease could be extended by 90 years, at a cost of £10,000. The price is non-negotiable, according to the freeholder.
In my view, it would be well worth paying the extra £10,000, as the lease had become too short for the value of the property to be maintained.
With the 90-year extension, making a total lease length of 153 years, the flat would rise in value in accordance with the market.
The relevant legislation here is Chapter 11 of the Leasehold Reform Housing and Urban Development Act. Assuming you qualify for a lease extension, the first thing is to get the property professionally valued. This valuation does not just assess the resale value of the property but also the loss to the freeholder, as he will not get the flat back as quickly as he had hoped. Thus, it would cost considerably more to extend a lease with 16 years remaining, than one with 80 years remaining.
The valuer will do all the necessary sums, which can be quite complicated, as the valuation of the freeholder’s interest has to be calculated as well.
This valuation is based on the rental income, i.e. ground rent for however many years, the reversion (the eventual vacant possession of the property) and any other parts that may be included, such as a garage, outbuilding, garden or roof terrace.
Expert leasehold valuer Stewart Gray, of the firm Austin Gray says:
It is very important to obtain expert guidance on valuation, as any missed information will automatically invalidate the notice.
Because the implications for short leases are now very serious, anybody contemplating selling their flat should get the lease extended before they sell.
But if you are desperate to buy a flat which has a worryingly short lease, the fact that you are legally allowed to extend the lease (apart from those properties excluded from the legislation) may give some comfort.
Another example of a typical set of figures for a lease extension
A flat where the leaseholder sought to extend the lease had 48 years remaining. The value put on this flat with its short lease was £116,000. The value after lease extension was calculated at £145,000, making an uplift in value of 24.5 per cent. The premium paid by the leaseholder for the extension was £16,800, and the case did not go to the LVT as there was no dispute over the figures.
If there is no dispute and the matter proceeds smoothly, a lease extension should take seven or eight months to complete. Where the amounts are disputed, it could take more than a year, with fees building up all the time.
Before embarking on a lease extension, check what the professional fees are likely to be as, of course, these will be in addition to the cost of the lease extension itself.
The first thing is to get the flat valued, at both its present value and at its new value with the lease extension. For this you will need an estate agent or a chartered surveyor; it is not enough to just guess the old and new values, although valuations are not an exact science and there will always be some degree of guesswork. These papers should be presented to your solicitor, who will serve the requisite Section 41 notice on the landlord.
If you do not know who the freeholder is, and these days it is not always easy as freeholds can change hands very quickly, you must find out before the notices can be served. This information is now available at www.landregisteronline.gov.uk. If your building has managing agents, they will more than likely have details of the freeholder or overall owner. Your solicitor will also need a copy of your original lease.
Your solicitor then has to convey your offer price to the freeholder, who will probably come back with a counter (higher) offer price. The landlord has to reply to the notice within two months, and he can also inspect the flat in this time, to carry out his own valuation of the place.
If the landlord does not come back within the statutory time, the lessee can buy the lease extension at the original offer price by applying to the County Court for a ‘vesting order’.
However, don’t bank on the landlord forgetting all about it and missing the deadline! In reality this hardly ever happens, as selling lease extensions is a lucrative business.
The landlord’s response
The next step is that the landlord, or his representative on earth, will respond, usually with a (higher) counter offer. There will very likely also be a demand for a deposit of, typically, £250, from you to show that you are serious.
Unless the landlord and lessee can reach agreement on the amounts, one or other party will have to apply to the LVT. This will normally be done by the leaseholder’s solicitor and is another reason why it is important to instruct a solicitor fully conversant with the process.
If agreement cannot be reached
The LVT hearing is held, usually three to four months after receiving the application. There will be three people on the LVT panel, such as a lawyer, surveyor and layperson. The leaseholder can be present at the hearing, and I would advise it, but this is not a legal requirement and you can be represented by your solicitor.
If your landlord is a large corporation, it will almost always be represented by a fierce solicitor used to this kind of thing. The LVT panel will listen carefully to both sides, then go away to assess all the evidence and pronounce, sending details of its decision to each side.
If the lessee finds the eventual price too high, he can walk away from the deal and not pursue the request for a lease extension. The landlord can also appeal if he considers the price too low. In either case, the appeal must be lodged within 28 days of the original decision and it will now be heard by the Lands Tribunal.
If the landlord believes the lessee’s offer is ridiculously low, he can apply to the County Court to have the notice declared invalid.
This will have the effect of stopping the lease extension process for at least another year.
So, you can see how the business can drag on and on when parties cannot reach agreement. And every extra letter, phone call, email or fax means a fatter fee for the lawyers.
Assuming agreement is reached, either privately or at the LVT, the term of the extension is entered on the lease and the money paid by the lessee.
How long does it all take?
If the valuation put on the lease extension is challenged by the landlord at the LVT, you are looking at a timeframe of at least a year, by which time values could have changed.
How much does it cost?
This is where it pays to do your sums very carefully indeed, before proceeding with an extension. There are several cost elements, such as the cost of the lease extension itself; the solicitor’s and surveyor’s costs – payable whether or not the application succeeds – and the landlord’s solicitor and surveyor fees. In general, it costs about the same to extend the lease as to enfranchise collectively. Legal and other fees alone could easily come to £3-4,000.
There is no application fee to the LVT, and if the case proceeds to an LVT hearing, each side pays its own costs. Because many landlords hate paying out, most lease extensions are concluded before getting to the LVT stage. As ever, it depends on how much money is involved. In Eileen’s case on page 108, the sum was so large that it was worth the landlord’s while to pay legal costs for an LVT hearing.
WHICH IS BETTER, A LEASE EXTENSION OR
Collective enfranchisement is definitely the better option. Most experts advise that, wherever you can, it is better to enfranchise collectively than just extend your own lease. Flats which come with a share of the freehold are always more valuable than even the longest lease.
Why is this?
Because it means that there is no outside freeholder to impose control. Not only that, but there is a uniformity about the building. If you have extended your lease to, say, 138 years, yet all the other flats in the building have leases of 48 years, you will be a high-value flat surrounded by low-value flats in the same building.
Also, once the building has collectively enfranchised, there is nobody making any money out of the leaseholders, and leases can be extended very cheaply.
VERY SHORT LEASES
Where the leases on all the flats in a building have become very short, say 30 years or less, check whether it is actually worth trying to extend or enfranchise. I once received particulars on a property with only a 35-year lease left. The reason the leases were running down was that the building was not expected to last much longer, and was scheduled to be pulled down when the leases finally ran out.
Because the building was right on the seafront, with a fabulous view, I would have secured a wonderful location at a very cheap price – but only for a certain length of time. I decided not to buy, but in some instances it could still be worth it if you regard the lease as a cheap and never-increasing rent for the remaining life of the building.
It is possible, in this case, that the land on which the building stands will eventually be more valuable than the actual units. But 35 years is a long time to wait to find out.
RIGHT TO MANAGE
All blocks of flats have to be managed by somebody, and it is very common for individual lessees to moan continuously about the inferior way the building is managed, and how everybody is being overcharged for very poor services.
The Commonhold and Leasehold Reform Act of 2002 allows leaseholders to take over the management of their building, even when it is owned by an outside freeholder, and without having to prove any dereliction on the part of the landlord.
In fact, lessees have not been overwhelmingly keen to take over the management themselves where there is an outside freeholder, maybe because managing a block of flats is quite hard work, and requires a level of expertise that residents may not possess. It is quite a big responsibility, especially when residents are managing the building voluntarily.
Also, setting up a Right to Manage (RTM) company is complicated in itself, and you have to get at least half the owners agreeing before it can be taken any further. It is not always easy to overcome apathy. Reluctant residents have to be persuaded that services will become both better and cheaper when the flat owners are in charge – and they may not be convinced that this will necessarily happen.
In some cases though, gaining RTM may be a first step towards collective enfranchisement, especially if the landlord is trying to charge a huge amount to let go of the freehold to the residents. But before ever deciding on this step, it is essential for interested residents to read the lease very carefully, and ensure they can fulfil all its provisions themselves.
Once the residents gain an RTM, there is really no way the landlord can continue to make money out of them, except by selling them the freehold.
HOW TO GO ABOUT SETTING UP AN RTM
So long as the building itself qualifies – and again, local authority and many housing association properties are not included – an RTM company may be set up and registered with Companies House. This is a company limited by guarantee, and means that the RTM must keep proper accounts which are submitted to Companies House every year, and anybody is entitled to look up the company. The RTM must also have a Memorandum and Articles of Association – you can get copies of the MemArts, as it is called, from the Stationery Office.
In fact, it is relatively easy to set up a limited company, as all the rules and regulations are in place, and the Companies House website will guide you through it. But once the company has been set up, you have to abide by Company law. The fact that the RTM is non-profit making, and just run by residents, does not mean it escapes the strictures. For instance, the company must hold an AGM, appoint directors and submit proper accounts every year. Otherwise, the company can be struck off, even though it is not trading in any way.
You cannot just make it all up as you go along!
When trying to set up an RTM, all residents must be invited to become members, and sent the right forms, even if you may not want some occupants to be included. You are not allowed to exclude any of them, even known troublemakers. Then, once at least 50 per cent of the flats become members, the RTM company is deemed to be set up, and can apply for RTM.
After this, the landlord is sent an RTM claim notice and has a minimum of one month to reply. He may decide to serve a counter-notice on the RTM company, either admitting their right to manage, or disputing such. If he does not send a counter-notice, the RTM company can begin managing without further ado.
Otherwise, the LVT is involved – again. If the RTM claim is disputed, the company applies to the LVT, which makes a decision as to whether the RTM notice is valid and whether the RTM company actually has the right to take over the management.
Assuming the LVT upholds the RTM decision, the landlord can then become a member, if desired. In any case, he must provide the RTM company with a list of all contractors and any other matters concerning the management of the building such as lift operators, maintenance people, fire safety regulations and insurance.
The RTM is not bound to continue using the same contractors or service providers.
How long does setting up the RTM take?
Even if everything proceeds smoothly, it will still take about a year from start to finish. The shortest timescale is probably eight or nine months, so it cannot just be a decision by a few disgruntled residents objecting to what they have to pay.
It also costs something to set up an RTM, to register with Companies House and comply with the strictures of the Companies Act. The new company must also bear the costs of the landlord in handing over or disputing the claim although should the case proceed to the LVT, each side will pay its own costs, unless the LVT decides the RTM is not eligible, when it will have to pay the costs of the other side as well.
Setting up an RTM is not something to be entered into lightly, then!
Also, establishing an RTM does not mean that the residents now own the block. Unless they have also collectively enfranchised, the landlord can sell on the freehold to somebody else, although where an RTM exists, he must offer the residents the right of first refusal.
What the RTM has to do
Once set up, the RTM is responsible for carrying out all the provisions of the lease such as insurance, cleaning, renovations, day-to-day repairs and major works.
Is it better for residents, having gained RTM, to manage the building themselves, or go for outside management?
On balance, it is probably better to go for professional management in a building of any size. However, specific management issues are discussed in the following chapter.
Be aware of the problems associated with RTMs
RTMs may sound a good idea but be warned. They do not always work smoothly by any means. This is because an overwhelming problem with a block of flats is that it is rare for all to think alike, and it is common for residents to squabble among themselves after gaining RTM. I would emphatically not recommend going for RTM where there are already disputes and disagreements among residents. You need a sense of community, for all to think as one, for RTM to work. If there are warring factions, as there frequently are, it may be better to stick with the existing management structure.
Because residents can demand to see accounts, it is becoming increasingly difficult for freeholders to rip off residents through service charges, levies and other fees. Also, residents often do not realise just how much it costs to run a building satisfactorily; insurance alone can take up half the annual charges.
In fact, RTM is not proving as popular as expected, possibly because the whole thing involves quite a lot of work and you don’t even own your building at the end of it.
Peter Haler, chief executive of LEASE, the government’s leasehold advisory service, has this to say about RTMs:
Over the past few years, there has been a drastic decline in enquiries about RTM and it’s hard to understand why. Only six per cent of enquiries to LEASE are about RTM, yet to us at LEASE it is often the answer. It does not cost anything, unlike extending your lease or collective enfranchisement, and given that concern about quality of management and level of service charges is the commonest reason for wanting to buy the freehold, one would expect us to be deluged with enquiries.
As it gives the leaseholders the management, it would seem the obvious way to improve your building.
LEASE provides free legal advice to leaseholders, landlords, managers and anybody else connected with issues affecting residential leasehold properties.
Many firms of managing agents also now handle RTMs. A list can be obtained by logging onto the ARMA website www.arma.org.uk. Individual entries by members will indicate whether or not they handle setting up an RTM.
BUYING THE FREEHOLD, OR, COLLECTIVE
There is no doubt that this is by far the best option, if you can get enough residents to agree and if you qualify. Most importantly, ensure you can all afford it, as buying the freehold can be expensive in itself, not to mention the legal and professional costs involved, even when the whole thing goes smoothly – which it rarely does.
In practice, most residential blocks of flats where occupants have leases in excess of 21 years remaining will qualify for CE (collective enfranchisement). But there must be at least 50 per cent of the leaseholders (not subtenants, but long leaseholders) who agree in principal to the enfranchisement.
The reasons are obvious: you, the residents, gain control and ownership of the building, which then belongs to a company you have created and in which you all have a share. This means you can decide on policy, appoint managing agents or manage the building yourselves, decide on service charge rates, major and minor works, appoint your own contractors and generally, not be beholden to the freeholder any more.
The trouble is, many residents talk about enfranchising when they are dissatisfied with the existing structure, or service charge payments. Kat Callo, whose company Rosetta Consulting, specialises in collective enfranchisement, advises:
It is very important for residents to move forward rather than fight yesterday’s battles.
They are over. When enfranchising, you have to put your emotions, and any feelings of revenge or anger, to one side and proceed in a positive direction. Collective enfranchisement is a complicated procedure with many ways of being tripped up. To make it work, you need all your focus and resources in one place.
MAKING IT WORK
Each participant must at an early stage sign a Participation Agreement. This is not required by law but binds you all together at the beginning of negotiations, and also ensures some commitment from those interested. Unless this is done, you find that people start changing their minds and you get nowhere.
After agreement is reached, and enfranchisement is theoretically possible – and this will usually depend on the hard work of the one or two people pushing the agreement forward – a Right to Enfranchise Company has to be set up. This is, like the Right to Manage company, a Company Limited by Guarantee, which must be registered at Companies House.
After the Company has been set up, each participant will be a shareholder in the new company. Non-participants are not shareholders. Obviously, each participant has to advance some money, which should be put in a separate, dedicated, account, as there will be costs at the outset, and ongoing costs as the matter proceeds. It is not cheap to enfranchise.
Gaining a formal valuation
The next step is to get a formal valuation of each flat within the building. The building itself minus the flats is worth nothing, but that does not mean there is no value to the freeholder. Depending on the length of the lease, the main value may be in the reversion, which is when the property reverts to the landlord. And the shorter the lease, the higher the reversion value.
There is also value in the ground rents, and to arrive at this, the surveyor will have to add up the total price paid in ground rents over the years the leases still have left to run. A simple example would be: in a block of 100 flats, each leaseholder pays £100 a year in ground rent, and the leases have 70 years to run. Assuming no increase, the total ground rent comes to £700,000 over that 70 years. Now you can start to see how small sums add up, and why collective enfranchisement is rarely simple.
Valuation of the enfranchisement
Where there is a marriage value, which there will be when leases are less than 80 years, the freeholder’s share is set at 50 per cent of this. Where the leases all have more than 80 years to run, the marriage value does not apply.
A lease of 80 years is considered as valuable as one of 125 years; there is no difference in purchase price when flats are sold on after enfranchisement. The ‘share of the freehold’ is the magic term which automatically increases the value of the flat.
The valuation is made up of each leaseholder’s interest (the value of each flat on the open market, now and after enfranchisement) and the freeholder’s interest. In other words, by buying the freehold, how are you depriving the freeholder?
There is also the expected appreciation in value once the freehold is bought, to take into account.
Some buildings may have garages, outbuildings, communal gardens. There may be some flats over shops, and also the freeholder may own some flats which are rented out on a monthly basis. There may be a caretaker’s flat or there may be a head leaseholder, who comes halfway between the landlord and the leaseholders. This happens in many blocks of flats in prime Central London, such as Belgravia and Knightsbridge. In all, there are many variables, and all have to be taken into account when totting up the value of the building as no two blocks of flats are exactly alike.
The right of first refusal
There may also be the ‘right of first refusal’ to consider. Many freeholders sell on their interest to other freeholders, and there is much exchange of this kind in the property market. When this happens, they must now by law offer the freehold to the leaseholders first, at the same price. This happens mainly with new blocks, where developers own the freehold for a few years, then move on.
In addition, there may be ‘hope’ value, where the freeholder hopes to build a couple of storeys on top, for instance, or development value, where there is spare land owned by the freeholder on which he intends to build. When Marion Mathews and Renske Mann sold the freehold of their building in London, Wll, they retained ‘air rights’ which means they can, if they should ever want to, build another storey on top of the existing building.
Solicitors conversant with CE should know all about possible future development value.