A Director of the Association of Leasehold Enfranchisement Practitioners (ALEP) has warned leaseholders that the cladding crisis is unlikely to reduce the cost of purchasing their freehold.
Up to 11 million people in Britain may live in properties with fire safety issues, facing not only physical fears for their wellbeing but financial concerns about paying for remediation work. For many, enfranchisement may seem like an appealing option, offering control of the service charge budget and choice of managing agent.
However, ALEP Director Mark Chick has suggested that despite the crisis meaning that many flat owners face uncertainty over the value of their properties, the long-term nature of enfranchisement valuations may actually lead to little reduction in the cost of buying a freehold.
Mark Chick said: “Enfranchisement valuations are for the longest term possible. This means that although the flats may have a lower or ‘no value’ because of this issue, the key factors in determining the enfranchisement cost will still be lease length and ground rent income, which are likely to be unchanged.”
Does the need for remedial work affect the cost of enfranchisement?
Despite the government’s announcement of £3.5 billion worth of grants to remove unsafe cladding from high-rise blocks of flats, many leaseholders will still have to pay for the removal of cladding themselves. Although this may increase service charge costs and prevent them from selling or re-mortgaging their property, it is unlikely to decrease the cost of enfranchisement.
Mark Chick continued: “Assuming that the cladding is of a type that needs replacing, there is going to be a short-term depression in value due to the need to find significant sums to contribute to the service charge. However, in the medium to long term, it can probably be assumed that these issues will have been resolved and the building will have returned to ‘normal’.
“If this view is taken, then the only questions to affect valuation are the risk that the freeholder may have to pay towards the cost of the remedial work, or the current uncertainty as to how this situation will be resolved. Looking to the longer term, the freeholder will argue that this position should not affect the valuation.”
How does a Section 5 notice change the situation?
A Section 5 Offer Notice is served on leaseholders by landlords who intend to sell the freehold. Landlords are legally obliged to offer first refusal to purchase the freehold to leaseholders by serving the notice on them before placing the property on the open market. The serving of the notice may simply be the result of a long-held intention to sell, but it may also signify a desire from the landlord to walk away from ongoing site liabilities.
Mark Chick warned: “Any Section 5 offer will have to be looked at carefully to ensure that it represents good value based on all the relevant factors of the case. Those looking to accept such an offer need to clearly understand the extent of the liabilities that their freehold company would inherit.
“For flat owners in this situation who want to proceed, it may well be that there is no other choice – as the terms of the offer will be fixed when made and cannot be revised – but the options will have to be properly explored before pressing ahead. If such a sale does proceed, there is little evidence that the purchase will be at a lesser price than the investor paid.”
Patience and specialist advice are essential
In assessing the options available to leaseholders looking to purchase a freehold, Mark Chick cautioned against proceeding without obtaining all the relevant information. He suggested that leaseholders would benefit from remaining patient and seeking professional help with assessing the circumstances surrounding the enfranchisement.
Mark Chick concluded: “The issues around cladding are an evolving situation, particularly given that the options for legislation around leaseholder contributions towards remedial work are still being played out in parliament.
“There may well be good reasons to proceed with buying the freehold, but all of the surrounding circumstances and liabilities will have to be properly understood in order to be able to proceed safely and sensibly. What certainly is clear is that detailed and specialist advice will be required.”