by Julia Harling
Many flat-owners mistakenly believe they own a freehold flat. This may seem trivial, but it is important to understand the difference between a freehold and leasehold flat, and the importance of having a long lease.
Over the years I have had many clients instruct me to sell their freehold flat and whilst I have come across the odd freehold on occasion, these are quite rare. In fact, the majority of flats are leasehold. However, that doesn't mean the owner doesn't also have a share in the freehold.
The freehold may be owned by a company and the flat owner may have a share in that company or, the flat owner may simply own the freehold jointly with the other flat owners in the building. The latter option is mostly used when the property is a converted house and there are only a few flat owners, this is because the maximum number of names you can have on a legal title is four.Â With a bigger block of flats, it is sensible to form a company and for the company to own the freehold.
So why does it matter what you own?
If you own a flat, the length of the lease is crucial, even if you also own a share in the freehold. It can affect your ability to sell or re-mortgage your flat. Often flat owners do not see the need to extend their lease when they also own a share of the freehold. It is a common misconception that the lease is no longer relevant.
Where flat owners do not own a share in their freehold, the freeholder will charge them a premium for extending their lease. They will also have to pay the freeholder's legal costs as well as their own legal costs for drawing up the documentation.
The Premium is determined by a number of factors, but mainly the current length of the lease and the ground rent payable under the current lease. If the lease length has dropped below 80 years, the premium increases due to the level of compensation that has to be paid to the freeholder known as the 'marriage value'. If the freeholder is not willing to co-operate in granting a lease extension, the flat owner can rely on the statutory process but this can be slow and expensive.
If flat owners can agree a voluntary deal this is often the best option for them, but it does depend on the terms offered to them by the freeholder. Many freeholders take advantage of this request and try and increase the level of ground rent or add other clauses to the lease which are to their advantage under the guise that the lease needs to be modernised.
The legislation governing this process is the Leasehold Reform Housing and Urban Development Act 1993 as recently amended by the Common hold and Leasehold Reform Act 2002. The current government are looking at this legislation as they are aware that some landlords exploit this legislation to the detriment of flat owners.
So where residents own their own freehold do they need to worry about this 80 year threshold?
Well not in the same way, as the price they pay for the lease extension should be zero. They will usually only have to pay one set of legal fees unless the solicitor perceives any risk of a conflict of interest. Normally the lease is extended to 999 years and the ground rent is extinguished altogether. If the flat owner has a mortgage on their flat the lender's consent must be obtained, this is usually forthcoming but some lenders can be very slow to respond and some also make a charge for this consent.
If a flat owner wants to sell their flat, a buyer will still be concerned to know that they will be getting a long lease and lenders will only lend if the lease is long enough as they are not interested in the freehold. If you are thinking of selling or re-mortgaging it would be wise to proceed with the lease extension process sooner rather than later so that it does not cause a delay to your transaction.
The first step is to contact your freehold company or your joint freehold owners and discuss instructing solicitors to draft the required lease extension document. This is a relatively standard document but can incorporate changes to the lease other than just the length of the lease. Such changes can be discussed once the existing lease is reviewed.
If you want to find out more about extending the lease of your flat, contact Julia Harling.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.