As an estate agent involved in selling leasehold flats you may be asked to advise clients about leasehold extensions or freehold enfranchisement with other lessees. A short lease can severely reduce the value of a flat, the chances of selling and obtaining a mortgage or re-mortgaging.

Under the Leasehold Reform, Housing & Urban Development Act 1993, a lessee who has owned their flat for at least two years, irrespective of whether they have actually lived in it themselves, is entitled to serve a formal notice, known as a section 42 notice, on the freeholder.

The notice is served to extend the lease by an extra 90 years with no further ground rent payable for the entire term, subject to payment of compensation to the freeholder as well as the freeholder’s reasonable legal and valuation costs. Alternatively there is nothing to stop the freeholder and the lessee agreeing terms outside the Act by mutual agreement.

High management fees can have an effect on the buyer’s mortgage limit.

If an eligible lessee serves a valid section 42 notice, a new owner can continue with the process of extending the lease even if they have just bought the property, as long as the notice was served in the previous owner’s name. This can increase the value and marketability of a flat with a short lease even if the vendor does not have sufficient funds to extend the lease.

AGREEING TERMS

When a lease falls below 80 years, the cost of purchasing a lease extension rises as an extra element, known as ‘marriage value’, needs to be taken into account. If a lease has just over 80 years to run it is important that a lessee takes appropriate action rather delaying.

If a lessee is keen to sell their flat they may consider trying to reach an agreement with the freeholder to reduce time and possibly save costs. It may speed things up but in some cases freeholders propose new leases with onerous lease terms or high ground rents with frequent rent increases. A high ground rent doubling, say, every ten years could make the property virtually unsaleable.

THE RIGHT ADVICE

It is important to obtain proper advice from a Chartered Surveyor who specialises in carrying out valuations under the Act although on line calculators may provide a rough initial guide. Alternatively, lessees in a block or converted house may wish to join forces to buy the freehold. If there are only two flats in a building then both lessees will need to buy the freehold. In a larger building you will just need 50 per cent of the lessees to join, although if there are more participants the cost per participant will fall. Blocks with a commercial element exceeding 25 per cent of the total are not eligible for collective enfranchisement. There is no statutory obligation on lessees seeking to acquire their freehold to invite all qualifying lessees to participate.

Service charges can be unnecessarily high because of incompetent or unscrupulous freeholders as well as managing agents wasting money or earning commission on insurance premiums or other expenditure. Luxury blocks of flats constructed from the Victorian period up to the 1930s were popular for the high quality of service they provided including porterage, lifts, large landscaped gardens, communal heating and hot water. In some cases, these areas became less fashionable and the standard of maintenance declined but service charges remained at a fairly high level due to the provision of communal services which reduced their marketability.

Highly serviced blocks were rarer in the second half of the 20th century but have recently re-appeared within some residential developments providing communal gyms, swimming pools and 24 hours concierge services with new blocks often emulating luxury hotels.

The lifestyle which these new developments portray in their glossy brochures, often featuring beautiful people displaying high levels of conspicuous consumption, may be attractive but come at a price: high service charges which could have a negative effect on future saleability and capital value. It is not just leaseholders who may be subject to payment of service charges. Many new build houses are on private estates with service charges being levied for the upkeep of private roads, communal gardens, security etc.

THE AGENT’S DUTY

High service and management charges can also make it more difficult to obtain a mortgage as lenders are increasingly taking them into account when calculating a borrower’s ability to pay.

When acting as a selling agent or for a prospective purchaser, it makes sense to be well informed about the lease terms, ground rent, service charges and scheduled major works. Consistently low services charges can appear attractive but not if that is due to an unacceptably low level of maintenance.

The message is clear – prospective buyers of leasehold properties need to understand the complexities of leasehold properties.