Buying Your Freehold
You have the legal right to buy the freehold of your flat. Doing so will give you much more control. There are many benefits. You will:
- safeguard and potentially enhance the value of your flat
- make your flat more attractive to future buyers
- own the land under your flat (through a company that you and your fellow residents will set up as part of the freehold purchase process)
- get rid of the landlord (in most circumstances), who was previously charging you ground rent
- effectively no longer need to worry about lease length and the cost associated
- have much more say (in most circumstances) about how your block is run – you (and not a landlord) will get to hire and fire the tradesmen needed to maintain your block
- enjoy much greater peace of mind!
What Does Freehold Property Mean? What Am I Buying?
What’s the definition of ‘freehold’? It is the permanent and complete ownership of land – and the freedom to sell it when you want.
Freehold land ownership offers you much greater control than a leasehold tenure.
The differences between freehold and leasehold are very important. They can have a significant impact on the value of your flat and how much you will have to pay in outgoings.
If you have bought a flat on a leasehold basis then you do not own the land under your flat. All you have bought is the right to live in the property for however many years it says in your lease, along with any other rights referred to in the lease.
And as those years pass by, the length of your lease gradually decreases…making your flat worth less compared with a similar flat that has a longer lease…and also harder to sell because mortgage lenders do not like short leases.
But freehold ownership of a flat is a much more secure and stress-free experience.
It is like owning the freehold of a house – you and your fellow flat owners will own the land under your block (not just the leases).
Find out more here about the differences between freehold versus leasehold (such as why leasehold flat owners still have a landlord, even though they bought their flats instead of renting).
What Does A Share Of The Freehold Mean? What Will I Get?
Buying the freehold of your flat does not have to be complicated – as long as you take legal advice from a solicitor who specialises in residential leasehold law.
The legal process is known as ‘collective enfranchisement’ because it involves of group of flat owners banding together and forming a company to buy the freehold.
Each of you will be buying a share of the freehold (ie, a share in the company that owns the freehold). This will enable the company to:
- grant extended leases of 999 years at a peppercorn ground rent
- gain the power to amend any of the terms of the flat leases.
Yes, you will still have a lease – but at 999 years it will be so long that you will never need to worry about having to extend it. So mortgage lenders will be happier to lend against the property.
The peppercorn rent will be a token sum just to satisfy the legal process. You may save a lot of money compared with the ground rent that you were previously paying your landlord.
Who Can Buy The Freehold? Eligibility Criteria For Collective Enfranchisement
Put simply, fifty per cent of the flats within your block will need to participate. For example, in a block of 12 flats, six of those would be required to proceed. The matter can proceed whether the other six want it to go ahead or not.
It is worth noting that there are exceptions to this rule – such as when some of the leases are retained by the landlord, not let on long leases.
You do not need to live in your flat. For example, you may rent it out or it could be a holiday home. In these circumstances you are still able to be part of the process.
You do not need to have owned your property for any specific period of time. Therefore, you can buy a flat one day and become part of the freehold purchase process the next day.
The property in question must have two or more flats. The lease that you hold as a tenant must have been for at least 21 years when it was granted originally. You may also qualify with a property on a shorter lease if it contains a perpetual renewal clause.
Shared ownership leases qualify only if the tenant’s share is 100 per cent. Leases granted under Right To Buy or Right To Acquire On Rent To Mortgage Terms may also qualify.
When Can’t A Leaseholder Buy A Share Of The Freehold?
There are certain factors that will disqualify you from buying the freehold (even if you satisfy the criteria listed above). These include:
- the landlord is a charity housing trust and the flat is provided as part of the charity’s functions
- you own more than two flats in the building (either in your own name or jointly with others)
- your lease is a business or commercial lease.
How To Buy The Freehold
A limited company is formed to undertake the purchase on behalf of the participating flat owners. Each participating flat owner will become a shareholder in this company. At least two volunteers are appointed as company officers.
- The individual flat owners enter into a Participation Agreement with the company. The purpose of this agreement is to set out the rights and obligations of both the participants as individuals and the company.
- The agreement provides for all the participating flats to fund the freehold purchase in the agreed proportions. It also establishes a decision-making process if a vote is needed on a particular issue. This creates certainty throughout the entire process.
- An Initial Notice is prepared and served on the freeholder/landlord and any other relevant party. This notice will contain certain required information – including the offer figure your valuer will have recommended by this stage. You must give the freeholder at least two months to respond.
- The freeholder/landlord may send all the leaseholders a notice asking them to prove they own their property in the names specified in the Initial Notice.
At this stage, we would expect the freeholder to instruct their valuer for the purposes of inspecting and valuing the premises.
- The freeholder will serve a Counter Notice in response to your Initial Notice. The most important point in this will be the freeholder’s/landlord’s counter offer figure.
Your valuer will advise you concerning the likely sum to expect within the Counter Notice. The Counter Notice must be served by the date specified in the flat owners’ Initial Notice.
- Once a Counter Notice has been served, the parties’ valuers will open negotiations on price and attempt to agree a figure. In addition, the parties’ lawyers will open negotiations on the wording of the transfer and any leaseback documents.
(a) the matter can be settled by agreement then the transfer of the freehold will proceed in a similar way to a standard sale/purchase transaction.
(b) any aspects of your freehold purchase cannot be agreed then one of the parties will need to make an application to an independent tribunal. This tribunal is an expert body specialising in these transactions and other similar matters. You may apply to this tribunal only after two months from the date of the Counter Notice. You must apply within six months after the date of the Counter Notice, otherwise your Initial Notice will be deemed withdrawn and you will not be able to serve another for 12 months.
Most cases settle by agreement and without having to go to a tribunal hearing.
How Long Does It Take To Buy The Freehold?
The initial investigatory and preparatory work usually takes between one and three months.
Once the Initial Notice is served the landlord has two months to respond with a Counter Notice. It can take longer if you allowed them more time in the Initial Notice you served.
Following the Counter Notice, there is a two-month window in which to negotiate the terms of the purchase.
Then after that, either party may apply to the tribunal to seek a determination on the terms.
If the terms remain in dispute, you must apply to the tribunal within a further four months (ie six months from the Counter Notice) – failing this, the leaseholder’s claim is deemed withdrawn.
Once the terms are agreed or determined, there must be a completion within four months.
Failing a completion within four months, there must be an application to the court to deal with completion. If not, the leaseholder’s claim is deemed withdrawn.
Following this, the leaseholders may (through their purchase of the freehold) deal with lease extensions on a voluntary basis. This process usually takes between two and six months.
How Much Does It Cost To Buy The Freehold?
The cost of buying the freehold can vary greatly, depending on the block and other factors listed below.
By far the biggest cost element is the price that you and your fellow leaseholders are prepared to pay the landlord for the freehold (rather than legal costs).
You will need to seek advice from an expert valuer with experience in residential leasehold matters.
Legal costs can also vary considerably depending on the:
- size and complexity of the block
- leasehold structure – whether there is a head lease (in which case you would have a sub-lease…and you would have to deal with a head leaseholder as well as a freeholder).
In rare cases, there may also be Stamp Duty Land Tax (SDLT) to consider but most purchases will fall below the threshold. Find out more about Stamp Duty Land Tax.
Worried about the cost? Book a free chat with one of our leasehold lawyers and we can talk you through some typical scenarios to give you a better idea.
How Are The Legal And Other Professional Costs Broken Down?
Aside from the purchase price of the freehold, you will also need to budget for:
- your group’s solicitor’s fees plus VAT
- your group’s valuer’s fees plus VAT
- your group’s expenses, Land Registry searches, company formation fees (and possibly tribunal application fees if negotiations fail and terms cannot be agreed)
- the landlord’s lawyer’s costs plus VAT
- the landlord’s valuer’s costs plus VAT
- any intermediate landlord’s solicitor’s costs plus VAT
- any intermediate landlord’s valuer’s costs plus VAT
- any barristers’ fees associated with any proceedings.
The rules governing what costs are recoverable from the landlord and any intermediate landlord are outlined in Section 33 of the Leasehold Reform, Housing and Urban Development Act 1993. Book a free chat to find out more about what this means for you.
What Can Add Extra Costs? How Can This Be Avoided?
Various factors can make the purchase process longer and more expensive:
- the length and complexity of the negotiations
- the complexity of the lease structure and the development
- if the landlord wants to retain any parts of the block
- any leasebacks of unlet units or parts
- disorganisation or lack of communication between the group of purchasers.
The best ways to reduce costs are:
- keep communication to a minimum, while ensuring that all participants are fully informed throughout the process
- use spokespersons to channel instructions to avoid large numbers of participants corresponding about the same things
- be organised – agree matters within participation agreements before embarking on the purchase
- with your valuer’s assistance, agree in advance the lower and upper negotiation limits before any voting.
Problems With Owning A Share Of The Freehold
You will still have to pay maintenance and a share of the building insurance.
You will still have to abide by the covenants (rules) of your lease unless you can get them removed or amended by a deed of variation.
Just because you are now a freeholder, you do not have the right to break the original leasehold covenants governing matters such as noise, anti-social behaviour, owning pets, playing musical instruments, hanging out washing or running a business from your flat.
It is also worth noting that with greater freedom comes greater responsibility. Remember all those things that your old landlord and their managing agents used to sort out for you? Such as window cleaning, gardening, repairs and maintenance, servicing the lift? They’re all down to you and your fellow residents now.
Your two (or more) nominated company directors can take on most of the responsibilities. And you can choose your preferred tradespeople to do all the manual work – instead of having to put up with the contractors that your old landlord chose.
In short – you will have much more control of what happens at your block. That’s not a problem; that’s a potential opportunity to enjoy a better and less stressful life.
Will I Have To Pay Freehold Ground Rent?
Subject to agreement among the participants, yes, but it will be a peppercorn – a tiny token amount just to satisfy the legal process.
You will pay this peppercorn rent to the new freeholder, ie the new management company of which you are a shareholder. So in reality you are paying the money to yourself.
What Is ‘Leasehold Enfranchisement’?
You will sometimes hear people talking about so-called ‘leasehold enfranchisement’. This is a misnomer – there is no such thing as leasehold enfranchisement.
The correct term is ‘collective enfranchisement’ (the legal right to buy a share of the freehold under the Leasehold Reform, Housing and Urban Development Act 1993).
Get Expert Legal Advice
Buying the freehold involves an upfront investment in your property but it can save you a great deal of money in the long run – and bring you greater freedom of choice and peace of mind.
Find out more by booking a free initial chat with one of our expert residential leasehold property solicitors.