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Leasehold Property Top Tips

March 2017

Listen to Alex Goldstein’s discussion on Leasehold Property Top Tips with Matthew Jones, a legal expert on leasehold and enfranchisement (the process of buying the freehold of a property). He explains the pros and cons of a leasehold versus freehold and explains the pitfalls and benefits of both.

Leasehold Property Top Tips

Alex: Great to be joined in the studio by Matthew Jones from LCF Law in Bradford. Matthew thanks very much for coming in. The department you’re part of is the Lease Extension and Enfranchisement Team. Can you actually just talk everyone through it, because again, these are these boss words that get thrown around fairly readily but no one actually understands it? Talk us through.

Matthew: Yeah, sure Alex. I work at LCF Law as you say in the Lease Extension and Enfranchisement Department. What that effectively is, lease extensions are when tenants want to extend their lease which they can do under legislation. Enfranchisement is when tenants want to collectively buy the freehold. That’s it in a nutshell. I mean there is more detail to that which I’m sure we’ll come on to.

Alex: And what again is parts of that? You’ve got the Leasehold Reform Act. What does that encompass and what does that actually mean?

Matthew: The act basically allows a leaseholder to extend their lease by an additional 90 years providing certain criteria on that. The main one is that they’ve owned the property for two years or more. Now they have to pay a premium for this and what they get is a new lease on the same terms and no ground run. So that’s the lease extension element. Now the enfranchisement side of it, that as I said before, allows a group of tenants in a building to join together and buy the freehold so the actual building in which those flats are located. And the rights are granted under an act.

Alex: Yeah, and talk to everyone, because we’ve slightly skipped over it but talk everyone through freehold property versus leasehold property and if you’ve got a leasehold property then as you said the cluster is more of a tenant rather than an owner, just talk everyone through the actual basic differences on that because again I think it’s commonly misunderstood.

Matthew: Yes, it is. It’s something that we get asked quite regularly. We’ll take leaseholder.

Alex: Yup.

Matthew: Basically, what that means is that you have your property on a lease for a set term. So for instance in flats that could be 90 years, 150 years, even 999 years. But there’s a set start date and an end date. For a free hold you own that property indefinitely until you part with it either through sale or you lose it by some other means, for instance, the bank claimed it back or something like that.

Alex: Yeah and you mentioned there a sort of a long lease, 999 years. Some people so say, “Well that’s as good as freehold.” Is that still the case nowadays?

Matthew: I mean no one’s gonna live that long to see it through to the very end.

Alex: You never know with modern technology croaking.

Matthew: It’s always better to have the freehold. It really is because at the end of the day even though you may have a 999-year lease, with a lease comes certain restrictions so you have to comply with certain requirements. So say if you owned a flat, that lease that you have will say that, I don’t know, for instance if you’ve got a balcony, you can’t put washing out on that balcony or you can’t play music after a certain time. Things like that.

Alex: And I guess this also comes into pets as well?

Matthew: Yeah, absolutely. Yeah, so if you were a big fan of hoarding iguanas or something like that then there might be a restriction preventing that. Dogs, cats, anything can be put into that lease.

Alex: Got you, so basically if you own the freehold you’re in charge effectively of your own destiny rather than being a lease holder. So talk us through the structure. If I’m a tenant, I’m a lease holder, I own the apartment under a lease, you’ve then got a freeholder above us. How does that actually work, that actual structure?

Matthew: So what you will have is you will have the freeholder who owns the building, the large building where all the flats are located. He will then grant individual leases to the tenants. Sometimes you can have a scenario where there’s a management company, so you’ll have a lease from the freeholder to the management company and then the management company will then grant further leases to the individual tenants. So it can get quite complicated.

Alex: Frankly that does get really complicated quite quickly, doesn’t it? And I mean everyone talks about the number of years left on your lease.

Matthew: Yes.

Alex: Why is that important? What number should people look out for and why?

Matthew: Right, well, anything around 90 years or less, I’d say that you really need to start thinking about extending that lease.

Alex: Is that extending the lease by the 90 year element?

Matthew: Yes, absolutely.

Alex: Can you ever do more than the 90 years?

Matthew: You can in certain instances. What you can do, under the act, you are allowed an extension for 90 years.

Alex: As the minimum?

Matthew: That’s it, that’s what you are allowed under the act that we referred to earlier.

Matthew: You can, in certain instances if you’ve got a very good relationship with your freeholder, your landlord, you can look to extend it for longer. If for instance as we mentioned earlier with the enfranchisement where collectively the tenants own the freehold, you can look to extend to 999 years because you own it together.

Alex: And how does it work when people hear that they want to buy the property. They’re a lease holder at the moment, they’re then to gearing up and they actually want to buy out the freeholder. How does that side of things work?

Matthew: Yes, well, how that works, I mean the first thing and I can’t stress this enough is that they need to instruct a specialist solicitor to do it because it’s a very complicated area of law. It really is. Quite often you see people who’ve instructed the local solicitor, the family solicitor and it goes wrong. The first step obviously once they’ve done that is they need to get evaluation and again there are specialist surveyors and valuers out there who can do that for them.

Alex: Just specifically because the fact it’s a leasehold property, it’s not a civil building survey necessarily or anything like that.

Matthew: It’s because of the act and there are special calculations that need to be worked out. I’m not ofay[SP] with those simply because it’s so specialist and as solicitors we can’t advise on those kind of things. It’s something that the surveyor would do. Once that’s done, they obviously need to see who’s interested in collectively buying that freehold. Once they’ve done that, usually you’ll set up a company to acquire that freehold then formal notice is served on the landlord, the freeholder, and provided they accept the right, then effectively it’s a conveyance so a sale or purchase…

Alex: Transaction.

Matthew: Yeah, transaction to acquire that freehold.

Alex: And does the freeholder always have to sell? Are there any circumstances whereby the leaseholders collectively or singularly approached the freeholder and said, “We want to buy this?” And where do the rights lie? Where does the law actually reside or it’s up to negotiations?

Matthew: That’s why it’s very important as I said to instruct a specialist because there are certain criteria involved. That’s why the investigation stage is so important. So when those tenants come to myself, come to our team, it’s very important for us to do those investigations thoroughly and that’s looking at the act, looking at the requirements, seeing the individual tenants, their leases, things like that and then saying, “Right, yes, we can go ahead and do this. You qualify under the act. We’ll get notice served.”

Alex: And why is it beneficial. I know when we talked about extending the lease and you said, “Well, look, the critical number Alex, it’s around 80 to 90 years left or remaining on the lease?” Why don’t I just sort of leave it to there, 5 to 10 years on the lease and then I extend it for another 90. Why wouldn’t you play it like that?

Matthew: Simply because if it gets below the magic year which is effectively 80 years, once it gets below that, then it’s gonna be even more expensive for you to extend that lease.

Alex: Why?

Matthew: Something called marriage value. Now it’s very complicated, I’m not gonna bore you with the details because it’ll fry the noodles of the vast majority of people probably who are listening. But once it gets below that magic line then it becomes incredibly expensive to do so. Now why you would want to extend your lease. Clients come to us for a number of reasons, firstly, they’re looking to sell, perhaps they’re flat, mortgage lenders, banks, they will want to see a long term you.

Alex: Yeah, it’s low risk.

Matthew: Exactly. Another reason perhaps if people are looking to put their affairs in order, they’re coming up to a time and [inaudible 00:08:45] or older, they want to make sure their beneficiaries have got no worries basically when they look to sell the flat as part of the estate. Another reason it protects the interest that you’ve got and the money that you’ve invested in that flat. You know you want to make sure that you’ve got something that’s gonna just increase in value. You don’t want something that’s gonna depreciate.

Alex: Yeah, an asset. You want to ensure that your property remains an asset and that’s very important.

Matthew: Exactly.

Alex: In terms of costs, to be mindful. Obviously you’ve actually got the, I suppose the pure finances of actually sort of extending the lease or indeed looking to buy the freehold. You’ve obviously got your cost as well. Is there anything else one needs to be mindful of when going down this route at all?

Matthew: Yes, obviously as you say there are your own solicitor’s costs, there will be your own surveyors’ costs for them carrying out the valuation. You will also have to bear in mind the premium that you’re paying. So you have to factor that into your budgeting. There’s also the landlord’s surveyor’s cost that you have to pay.

Alex: Really?

Matthew: Yes and also the landlord’s solicitor’s cost. But they can only claim so much.

Alex: Oh, okay. I envisaged a lot of zeros all of a sudden there but you put my mind at rest.

Matthew: Yeah, yeah absolutely. And yeah though there’ll also be other things such as land registry fee and if you’ve got a mortgage, your mortgage lender might have a charge for transferring that across.

Alex: So it’s actually quite an expensive thing to go through.

Matthew: It can be but it’s certainly worth it.

Alex: But of course there’s no stamp duty on that, is there, unless you’re buying the freehold?

Matthew: No basically the stamp duty, you don’t have to worry about that if you’re extending the lease. So as I said the only things that you have to worry about are those I outlined earlier?

Alex: And what happens if you’re buying the freehold? Sorry.

Matthew: If you’re buying the freehold, again, no, you don’t need to worry about the STLT but you do have to worry about those costs and things that I mentioned earlier.

Alex: Okay, now it’s all in balance. So Matthew we’ve talked through if I’m a tenant and I’ve got the apartment under a lease, what happens if it’s the other way around? How can you guys help and it’s actually on the landlord at the end of the day?

Matthew: Yeah, and we do have a number of clients who are landlords themselves and what we can do is when tenants come to them with formal notice, exercising their right to either extend their lease or collectively purchase the freehold, we can act for them and see it from the other side and act from the landlord’s perspective. So doing the investigations to see whether those tenants qualify, if they do then we can work with the landlord effectively to make sure that they can get the best premium and things like that. Interestingly we have won a number of awards, acting for landlords and tenants alike.

Alex: Have you? Okay.

Matthew: Yeah we’ve actually won The Young Professional Enfranchisement Lawyer of the Year. We were also nominated for the Regional Professional Enfranchisement Lawyer of the Year. Surprisingly you know there are awards for these things.

Alex: There are must’ve been fun to you, that one.

Matthew: Not as glamorous perhaps as the Brits or the Oscars but nevertheless, you know…

Alex: A close second.

Matthew: Absolutely.

Alex: Matthew, if anyone wants to sort of touch base with you when it comes to your lease extensions, the enfranchisement or indeed the leasehold reform act, how are people going to best reach you?

Matthew: Well the best thing is just pick up the phone. Our Bradford office is 01274848800. So you can give them a call and you can also email me at mjones@lcf.co.uk and visit our website and go through that way as well.

Alex: Matthew thanks so much. Some great tips and advice there.