Buying the Freehold of a Leasehold House

16/05/2018
It's understandable that you might consider buying the freehold of a leasehold house you've bought - being free from having to pay ever-increasing ground rent and even having to pay the freehold owner for permission to switch your mortgage every time you do so are obvious incentives - but you should be aware from the outset that you might have to pay a high price. The questions are, what's the process and what are the pros and cons?

The process of converting any leasehold to freehold is known as enfranchisement and, in common with other types of enfranchisement, such as collective enfranchisement (click to find out more), how much you'll pay to convert depends on the result of a RICS freehold valuation, which you have to pay for. Additionally you'll need to instruct a solicitor to carry out the conveyancing for you.

Leasehold Houses Scandal

The Government has indicated that it would consider banning the sale of houses on a leasehold basis because of the unbalanced nature of the leasehold contracts involved, which frequently require ground rent to double, sometimes even in the space of 10 years, and the obligation for leaseholders to contact the freeholder for permission to carry out minor changes, such as building an extension, for which they are charged exorbitant fees.

At the other end, leasehold house owners have often found that there's a very high price to pay to convert to freehold to escape the claws of their leases. Plainly some housing developers involved have clearly seen how much of a cash cow leasehold houses can be and so require a large pay-off if someone wants to 'escape'.

Situations have frequently been exacerbated by developers selling on leases to other concerns who see the profitable nature of things like doubling tenants' ground rent; this can only lead to even higher charges for the leasehold house owners themselves.


This article examines freehold conversion of leasehold houses and looks at:





Need Help Buying the Freehold of your Leasehold House?

Your RICS freehold valuation is all-important - and our experienced RICS Surveyors, with their local knowledge, can carry this out for you.

Additionally our experienced solicitors carry out the conveyancing to complete the conversion which ends with you becoming a full freeholder of your home.

* RICS Surveyors - Local Knowledge - Same Week Availability - Competitive Prices
** Fixed Fee – No Sale No Fee – On all Mortgage Lender Panels


    1
    What is a leasehold house?
The concept of a leasehold house, or at least the numbers of such properties, has grown considerably in very recent times.

Essentially, when you buy such a house, legally it's structured such that your contract is for a long lease of it, like for a flat. Developers of such properties reason that, because you're only getting a lease, you'll pay less than you would have hypothetically if the house was freehold, and as such, there lies the attraction for a potential buyer.

The flip side is that like a flat, your lease starts to run down as soon as you take up residence and whoever owns it when the lease term reduces to under 90 years would normally have to consider paying to extend the lease.

If you don't extend your lease at this point you risk:
  • Lenders refusing you a remortgage (not enough value left in the property); and
  • Problems with selling - lenders won't lend to potential buyers (not enough value left in the property again).
valuation-for-buying-the-freehold-of-a-leasehold-house
Additionally, you have to pay ground rent, like you would for a flat and your contract might include any numbers of restrictive covenants or rules which require you to pay if you want to carry out certain activities - as stated, this can even include just changing your mortgage lender.

You can generally buy the freehold for such a house, and thus enjoy all the rights of a freeholder, like not having to extend your lease ever, but many leaseholder house owners have found that the developers charge a very high price for doing this. This is discussed below.

Aren't houses always freehold and flats leasehold?

As a general rule, up until recently, a house has been regarded as freehold (and the vast majority are) because it has foundations in the ground itself and if you own a house, you'll own the land it stands on. 

In the same way, flats are leasehold, because they're always part of a larger structure - the whole block - which is freehold and the owner of the freehold owns the land the block sits on. Individual flats are always leasehold - you can own a share of freehold, which means you can buy a share of the whole freehold block, but if you own a flat in it, that flat will always be subject to a lease, however long.

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    2
    What are the Pros and Cons of buying the freehold of a leasehold house?

Pros

  • You never have to extend your lease again.
  • You never have to pay ground rent again.
  • You'll never have to pay a freeholder additional sums for things like changing your mortgage, developing your property, keeping pets etc. (NB Whether you have to pay for these things at present depends on the terms of your lease).
  • Your property increases in value; it becomes more attractive to sell as a freehold, particularly if it's widely known that the lease terms are very expensive to comply with.

Cons

  • Costs of the conversion (valuation and conveyancing).
You have to carefully compare the costs of conversion with your projection of future costs of maintaining your lease, including increases in ground rent and other costs you might incur as mentioned. Bear in mind that this isn't just the premium (what you pay for gaining the freehold) but your freeholder's reasonable legal and surveying costs. If you have to go to the First-tier Tribunal (Property Chamber), costs may rise considerably further (see below). 


    3
    What's the issue with ground rent?buying-the-freehold-of-a-leasehold-house-calculator.png
Simply put, typically you might have a clause in your lease which states that your ground rent doubles every 25 years.

Let's assume you had to pay £250 for the first 25 years; within 300 years, the ground rent would exceed £1,000,000(!)


Additionally, if you opt to extend your lease, if you don't opt for a formal (Section 42) lease extension, where you are granted a 'peppercorn' (nil) ground rent along with a 90-year extension at the end of the process, your freeholder might include a rent doubling clause as part of the contract.

This occurrence is by no means infrequent. People selling their leaseholds conclude that their property is worth more with a lease extension and seek one from their freeholder before they sell their property. The freeholder makes the premium attractive i.e. cheap to encourage the seller to extend the lease informally, but a buyer then ends up buying the leasehold with an extended lease...but with a rent doubling clause.

This subject is covered in much more informative depth in Ground rent increases every 25 years - What can you do? (click to read).


    4
    What is the process for buying freehold of your leasehold house?
You have the right under the Leasehold Reform Act 1967 to buy your freehold (enfranchisement). 

NB A freeholder might in theory sell the freehold without you having to make a formal claim - and this would most likely work out far cheaper than taking the formal route - but you should always take professional advice and get an idea what the cost might be.

You must first be a qualifying tenant in order to make your claim.

What are the criteria for you to be a qualifying tenant?

You must:
  • have a long lease*; or
  • have the lease of the whole house; and
  • have owned the lease for two years
[Exception is if you're a tenant of the whole house and the head-lessee of a house divided into flats, you don't qualify unless you live in a flat in the house and have done so for 2 years (or periods amounting to 2 years in the last 10)].

*What is a long lease?

  • a lease of a term of years absolute in excess of 21 years (not the present unexpired term) from the date of grant (the lease runs from the date of grant not from the commencement date of the term).
  • a shorter lease which contains a clause providing a right of perpetual renewal.
  • a shared ownership lease where the leasehold tenant’s share is 100%. However, such a lease does not qualify for enfranchisement under the 1967 Act if it includes a provision for the freehold to be transferred on the purchase of the remaining share in the property. Other exemptions apply if the house was provided for the elderly or within a designated area referred to as a protected area.

Qualifying tenant dies?

If you are the personal representative of a tenant who qualified for freehold conversion of their leasehold house but suddenly died, you yourself can serve a notice of purchase within 2 years of the grant of probate or letters of administration.


Gathering Information

You need to gather various pieces of information such that your RICS valuer/surveyor can confirm that you have the right to claim (i.e. you are a 'qualifying tenant') and which valuation method to use.

buying-a-leasehold-house-problems.png1 - Details of the Lease
  • The date of the lease, or the commencement date if this is different (this is the date of the original lease, not always the same as the date on which you acquired the lease).
  • The amount of the original ground rent payable at the start of the lease, if any.
  • The amount of any premium included in the lease.
You'll find all this information on the first page of the lease document. If you don't possess your lease, you'll need to get a copy of it from your lender or solicitor or failing that, you can obtain it from the Land Registry (click to find out more, you have to pay a fee).

2 - Rateable Values
You'll need:
  • The rateable value of the house on the first day of the lease (if it had one), or 23rd March 1965, whichever is the later; and
  • The rateable value on 31st March 1990.
You should be able to get this information from your local authority or water company.

The valuation is your first step and all-important in determining overall costs. You get this by instructing a RICS valuer - we can provide this, call 0333 344 3234 (local call charges apply) if you'd like to quote.

What's your RICS surveyor's role?

We've already advised more than once that you should instruct a RICS surveyor who has experience in carrying out the required valuation and knowing what the calculation process involves.

As with lease extensions, your surveyor can actually help in a variety of ways:
  • They can advise you on whether you qualify and which valuation method is to be used.
  • They carry out the valuation.
  • They can advise you on the possible purchase price with best and worst case limits.
  • They can negotiate on your behalf with your freeholder.
  • They can, if required, provide expert advice at the First-tier tribunal (although it should not come to this and even though you won't have to pay freeholder costs from this point, your surveyor costs may rise considerably).

The valuation process required by the law is complicated - and there are two valuation methods - so it is often difficult to form a clear view of the price at the beginning of the process.

Two Valuation Methods

Both of these are covered in sections under the 1967 Act mentioned:

    1
    Section 9 (1)
Your house is valued according to the original valuation basis, i.e. the value of the site.

    2
    Section 9 (1A), 9 (1C)
Your house is valued according to the special valuation basis, i.e. the value of the house, including a share of the marriage value.

Most houses qualifying under the legislation will be valued according to the Special Valuation Basis, including the marriage value (the uplift from converting to freehold, which must be shared between you and the freeholder), and the premium (what you must pay for the freehold) will be more expensive as a result.

Who decides which valuation method is used?

Neither the landlord nor you chooses the valuation method; it is down to qualification criteria:
  • if the lease satisfies the original low rent test and the house satisfies the value limits, then it will be eligible under Section 9(1) and will be valued according to the original valuation basis.

  • in all other cases, including cases where the original lease had been extended under the provisions of Section 14 of the 1967 Act, it will be valued according to the special valuation basis.
There's no doubting that this is subject is complex, which is why we recommend you take professional advice and instruct an appropriately qualified RICS valuer.

What can be said, however, is that if the special valuation basis applies, which is normally the case, it generally means that the price is much higher than that which would be payable under the original valuation basis.

Both valuation methods require the freeholder’s interest to be valued as if it were being sold in the open market by a willing seller to a willing purchaser.

As with formal lease extensions and collective enfranchisement, both you and the freeholder can apply to the First-tier Tribunal (Property Chamber) to arbitrate if you can't successfully negotiate a price with each other.

Click if you wish to see a worked example for each of the original valuation basis and the special valuation basis


Enfranchisement Process

If you negotiate buying your freehold informally, you agree the premium with your freeholder and can then proceed straight to final conveyancing (see below).

You've no right to buy the freehold informally

...and as a consequence you can't use the services of the First-tier Tribunal to arbitrate.

Serve notice on Freeholder
The formal enfranchisement process itself starts with you serving a formal notice of claim on your freeholder; note that once you've done this, as with lease extension and collective enfranchisement, you're responsible for your freeholder's reasonable costs (getting their own survey and their legal fees).

NB Unlike the lease extension and collective enfranchisement process, there's no clearly set out time lines.

You serve your tenant's notice on your freeholder claiming your right to conversion. If you are joint tenants, you both sign this notice. If there are any intermediate landlords, you have to serve notice on these as well. Your RICS surveyor helps you with serving the notice correctly (there is a prescribed form) and ensuring that it is valid.

There's actually no requirement to include your proposed price (worked out from the valuation) in your notice, although your RICS surveyor will advise you on whether they'll do this.

Can't find your freeholder?

You may have to apply to County Court for a Vesting Order. Click on Absentee Freeholder to find out more.

Landlord Respondsis-it-worth-buying-the-freehold-of-my-house.png
Your landlord can serve a 'notice in reply' and should do so within 2 months of the date you served your notice. If they don't, it doesn't stop them negotiating over the valuation figure or challenging the validity of your notice, although if matter goes to court, their failure to do so may result in their having to pay additional costs as a result.

If they choose to serve a notice in reply, they should state whether they admit your claim and if they don't, their grounds for denying it. If they admit your claim, they can require a deposit to be paid of three times the annual rent of the property.

1 - Freeholder admits your claim
If your freeholder admits your claim via return notice, and you both agree on the price, regulations state that completion must take place at least 4 weeks after.
If you and your freeholder cannot agree on the price, you must then apply to the First-tier Tribunal (Property Chamber) (or the Leasehold Valuation Tribunal if in Wales). The Tribunal decides the price you'll have to pay and also rules on any disputes about e.g. the extent of the house or premises or the rights or covenants to be included in the conveyance.

Your costs rise if you have to apply to the Tribunal, but you no longer have to pay your freeholder's costs regarding the Tribunal. At press time, you'll have to pay £100 for your application and £200 for the actual hearing itself (£300 in total); this doesn't include any fees you'll have to pay for expert witness reports etc.

2 - Freeholder denies your claim
Should your freeholder not admit your claim, either in the notice in reply or by not giving a reply), you have to apply to the County Court to assert your right.

Your costs rise considerably if you have to take your claim to court.

This is why an accurate valuation which is reasonable to both sides is critically important: if it doesn't take your freeholder's interests into full account, there's a much higher likelihood that your freeholder won't agree to your claim, meaning that you'll face further costs before you can achieve your aim.


Completion

According to the rules, as stated, completion has to be on a date at least 4 weeks after the agreement on price, but either you or your freeholder can give a notice to the other which specifies the first working day after the price agreement as the date of completion.

If either you or your freeholder don't comply with the obligations arising from your tenant's notice or statutory conditions, then the aggrieved party can serve a 2 month default notice which states what the breach is and require the breaching party to make it good before the 2 month period expires.

If you fail to comply with the default notice, the contract is discharged and your freeholder can keep your deposit.

If, on the other hand, the freeholder doesn't comply, the contract is discharged and you don't have to pay the freeholder's costs and your deposit is returned.

In most circumstances, you'll want the contract to be completed (after all, you want to buy your freehold(!)), but you might seek other remedies such as seeking specific performance of the contract (you obtain a court order forcing your landlord to complete).


    5
    What happens if you can't locate your freeholder?
You can apply to the County Court to acquire the freehold.

freehold-purchase-solicitors-fees.pngNote that you will be required to demonstrate that you've made all reasonable attempts to locate the freeholder. This might involve hiring an enquiry agent/private detective to carry out a search and to produce a report which can be used as evidence that the freeholder is indeed missing.
Click on What to do when you have an Absentee Freeholder to find out more about what happens in this scenario.


    6
    How much is your freehold enfranchisement likely to cost?
Your RICS valuer/surveyor can best guide you as to price

Bear in mind that you may have to obtain the rateable value of the house in 1965 (or the first day of the lease, if later), and in 1990. These guide your surveyor as to whether to use the Original Valuation Basis or the Special Valuation Basis (see above).



    7
    How long is the process likely to take?
If you negotiate privately with your freeholder and you mutually agree on price etc., the whole process might in theory take a few weeks, however there's no guarantee that you will be able to agree and your freeholder will be under no legal obligation to bargain. Additionally, as stated above, you won't be able to use the services of the tribunal.

If you take the statutory route set out in the Leasehold Reform Act 1967, the process can take considerably longer; it's not unusual for it to take more than 12 months.


Need Help Buying the Freehold of your Leasehold House?

Your RICS freehold valuation is all-important - and our experienced RICS Surveyors, with their local knowledge, can carry this out for you.

Additionally our experienced solicitors carry out the conveyancing to complete the conversion which ends with you becoming a full freeholder of your home.

* RICS Surveyors - Local Knowledge - Same Week Availability - Competitive Prices
** Fixed Fee – No Sale No Fee – On all Mortgage Lender Panels


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