Freehold Valuation for Collective Enfranchisement
20/05/2019
2,529
5 min read
Freehold valuation, or as otherwise known the collective enfranchisement valuation, refers to a valuation report of a freehold that contains 2 or more leasehold flats when qualifying leaseholders are seeking to buying the freehold from the current freeholder through collective enfranchisement. Besides considering the state of repair of the property overall and local prices and factors, there are a number of complex factors which must be included in the valuation, by law, which are examined below.
Click to read our simple step by step guide to purchase your freehold under the formal Collective Enfranchisement Route
Why do you need a freehold valuation?
You need an expert freehold valuation because even though your freeholder has to negotiate with you by law, the valuation has to take into account their perspective otherwise the process will be drawn out and become more expensive.
Also, the valuation, by law, must take several factors into account, such as the uplift in the value of the leaseholds which accompanies collective enfranchisement (this is because the new share of freeholders are likely to grant themselves much longer leases than they had before).
Under the law, the freeholder is entitled to receive 50% of the uplift described above. There are other matters like this which also have to be factored in: these are considered below.
Who carries out the freehold valuation?
A RICS surveyor with freehold valuation experience and who is registered as a RICS valuer is the only qualified person who can undertake freehold valuations.
How much does a freehold valuation cost?
It depends on how big the freehold is. If there are only 2 leaseholders, i.e. there are only 2 flats in the block, then it might cost £600 - £900. If there 14 flats, it might cost £6,000 - £11,000.
Do you have to have a freehold valuation?
Although you may be able to agree informally with your freeholder a premium to pay to purchase the freehold, in most cases a freehold valuation will be required; especially if you cannot agree on a premium to pay the freeholder.
If you have to negotiate further; if for example the landlord agrees to collective enfranchisement in their Counter Notice but wants to negotiate on the premium, which is highly common, your valuer can do this on your behalf and has the experience and knowledge to do so effectively.
You will always need a valuation if you have an absentee freeholder - to find more about this, please read: What to do when you have an absentee freeholder
What laws govern the collective enfranchisement valuation?
Schedule 6, Part II of the Leasehold Reform, Housing and Urban Development Act 1993, sets out the formula to calculate the value to purchase the freehold:
- income received from ground rents (the term)
- reversionary value of the freehold on expiry of the leases (the reversion)
- the marriage value
- value of other interests, e.g. commercial properties, garages ies, commercial properties, garages
- injurious affection (compensation for other losses)
What is the marriage value?
This is the increase in value which accompanies the ‘marriage’ of the freehold with the leasehold and the Act rules that this potential profit is split 50/50 between the freeholder and the nominee purchaser company.
Local knowledge and experience is key here for a valuer, who has to estimate how much the flats’ value might increase because the new share of freeholders will have the potential ability to give themselves leases of up to 999 years with no premium to pay.
Why is the term important in the valuation?
The term is the nominal ground rent, normally a small figure, which each leaseholder has to pay the freeholder each year to rent their lease. You can see that the longer the lease has left to run then the larger the total pot of money will be from rent collected during that time.
Looked at from this perspective, the freeholder stands to lose more in ground rent the longer the lease lengths hence the legal requirement for any collective enfranchisement valuation to factor this in.
Why is the reversion important in the valuation?
Leases run down over time to the point where the freeholder takes back full legal and financial ownership of properties leased. If a lease has 999 years to run, it will be scores of generations before the freeholder can benefit and so the reversionary value tends to zero.
Conversely if a lease has 2 years to run, the reversionary value will be very large, because in normal circumstances the full ownership is set to revert to the freeholder in a comparatively short period of time. You can see that the movement of term and reversion are opposite over time.
What is injurious affection in relation to the freehold valuation?
Injurious affection concerns compensation paid to the freeholder because of matters like decrease in value of other properties or denial of a development opportunity because of the forced sale.
You can imagine, for example, that a freeholder of a two-storey block of flats could, if planning permission allows it, build a third storey and sell further leaseholds as a result. Equally, if a freeholder were to lose the property in question, they might lose further value as a result if the property allowed access to another building they own.
Why would you choose collective enfranchisement?
You effectively get a share of the freehold, you don't have to pay ground rent anymore, you can increase your own lease (thus making it more valuable) and you no longer have to pay service charges - you run matters solely with the other share of freeholders. The other side of the coin is that you have to then ensure that you maintain your property, which requires work and finance.
How much does collective - or leasehold - enfranchisement cost?
Read the following article for more information: Collective Enfranchisement Costs
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