How to purchase the freehold - the leaseholder's options

The purchase of the freehold by the leaseholder(s) is a straightforward process. It can go wrong, but the risk is reduced by choosing the right experts to assist you.

There are a number of routes to purchasing the freehold.

• An agreement with the freeholder to purchase
• Reserving rights
• Forcing the sale of the freehold

An agreement with the freeholder to purchase

This is by far the simplest method though still requiring the services of various experts.

Where there is a mutual agreement that the current freeholder will sell to the leaseholders, the key barrier to going forward is agreeing the price.

Setting the price is best left to a surveyor who is expert in freehold price determinations. The surveyor will take into account the value of the property, the ground rent, the number of lease years left on each flat, a matter called the marriage value (where lease years are below 80).

From this the surveyor will work out what lump sum would be required such that the freeholder can invest that amount and gain a similar income from that investment at an agreed interest rate.

It is likely that the valuation process will be gone through by both the freeholder and the leaseholder(s), two set sof surveyors, two sets of costs - its the leaseholder who should expect to pay.

When there is a mutual agreement on the price the transaction can go through.

Reserving rights

Whenever a freehold comes up for sale, the leaseholders have a legal right to purchase at the price asked. A freeholder may not sell to another person without the freehold being made available at that price to the leaseholders.

In most cases, the freehold will be offerred for sale at auction, this is largely due to the difficulty of setting an optimum or highest sellable price. Where the freehold is placed in an auction the leaseholders have the option of 'reserving their rights'. Very simply, this means that where the lease holders have reserved their rights, they have the right to purchase the freehold at whatever price is stated as the hammer falls.

If the leaseholders do not reserve their rights, they give up the option of purchasing at the price agreed at auction, which will invariably be far less than any price that might be negotiated or forced subsequent to the auction.

With the rights reserved, it is likely that the final bid price will be lower than without the rights being reserved, after all the potential purchaser will know that they are unlikley to end up owning the freehold, thus fewer will plan to bid.

Even with the rights reserved, you do not have to go through with a purchase. Reserving rights to purchase is cheap and easy. The safest way forward is to instruct a solicitor to make sure that it is done absolutely correctly.

Do not rely on a friend of a friend, goodwill or simple assurances. This is a vitally important activity that will potentially have far reaching effects on your leasehold ownership.

With the rights reserved, you can sit back, wait to see what the final price is and then decide how to proceed. At that point you will need to work out how best to finance the purchase.

Forcing the Sale of the Freehold

50% or more of the leaseholders of a property can get together and force the sale of the freehold of that property.

For whatever reason, the leaseholders of a property can get together to force the sale to them of the freehold of their property. This is known as collective enfranchisement, the overall process is covered very well on the lease-advice website . Below I have summarised part of this and provided additional practical advice, knowing what should be done is only half the battle.

Step one is getting agreement, this will amost certainly end up being down to an individual who is willing to go the extra mile in getting the process moving. Things to consider - this is generally aimed at properties where there are over say 10 flats, less than this and the task might be easier / harder :

There is likely to be a mix of leaseholders who:

• Live in their property
• Sublet their property - buy to let
• Have no spare money
• Are a business
• Just aren't interested

There will almost certainly be 50% who will express an interest, in particular if there is a general problem with the freeholder. The important thing is to get them on board in a practical sense, this going to cost money, it is a serious business proposition so getting to the point of practical commitment is vital.

Ask for a deposit of £200. This needs to be held in a neutral trusted bank account, it should not go into a personal bank account.

You will need to create a company to own the freehold, this might be done early on, the company can then have a bank account and can hold the money.

Work hard to get 100% of the leaseholders involved, it will keep the costs per person down and then everybody has an incentive to ensure the process goes through smoothly.

Payments / Costs: There will be 4 significant payments during the enfranchisement process:

• The surveyor
• The lawyer / specialist solicitor
• The freeholders costs
• The cost of the freehold

The size of these amounts will vary depending on the nature and value of the property. In 2007 the costs associated with a relatively new 20 flat block, each flat being worth about £120,000 with 83 lease years left were estimated respectively as:

• The surveyor - £1,200
• The lawyer / specialist solicitor - £2,500
• The freeholders costs - £4,000
• The cost of the freehold - £65,000

The two biggest costs come at the very end of the process. The initial costs of surveyor and solicitor should be paid out of ongoing funds collected from the leaseholders, the amounts will almost certainly be less than £500. The final costs which will run into £thousands will almost certainly be a stumbling block and invariably the reason that freehold purchase by leaseholders is still rare.

The usual advice is to have the leaseholders individually extend their mortgage and all contribute a lump sum into a 'pot'. This is a messy and risky option, in a large group of individuals, the tendency will be for too many to give up on the whole process.

There is another way, please see our web page dealing with a simpler and safer way forward when it comes to Funding the purchase the purchase of the freehold.

Funding the purchase of the freehold

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