Diminishing interest is a leaseholder’s major problem, as leases are set for a term of years that, by definition, reduce in length and is outside of anyone’s control. In order to essentially buy time leaseholders can either individually extend their leases by a further 90 years on top of the unexpired term paying a peppercorn ground rent going forward, or collectively purchase the freehold with their fellow leaseholders within the building they cohabit. The collective option would transfer the current leasehold tenure of a property to a share of freehold tenure, undoubtedly being the most widely recognised (short of having a freehold) beneficial tenure, thus being the ultimate protection for your investment and making it more desirable and therefore more marketable. Leaseholders of houses have similar options.

There is current legislation that allows these rights, which freeholders cannot escape, subject to the various requirements and qualifications under the current legislation.

So why start the process?

Yes, you may think this will all cost money, – it will, but like an hourglass and the sand within, once the length of the lease has started to diminish (and without using your rights) there is nothing that can be done to stop this. The longer it is ignored the cost of either extending the lease or buying the freehold will increase on a daily basis. On the other hand, the professional costs involved remain fairly static. As the residential market is in a docile state, making your property more attractive in physical and legal tenure form has never been more important. Clearly a property with a short lease is far less desirable. The audience for such a small interest is lower; notwithstanding the fact many financial institutions will not offer residential mortgages. Sensitivity to lending is already sharper on the back of the current economic environment. From a potential purchaser’s perspective the idea of buying an interest in land, paying a certain price for this land while knowing that a further premium will have to be paid to enhance its interest yet again, the level of which can not be guaranteed, will breed further uncertainty. This could be enough to encourage purchasers to focus on long lease or share of freehold properties.

The law as discussed above, masquerades behind the Leasehold Reform, Housing and Urban Development Act 1993 (1993 Act), as amended by the Commonhold and Leasehold Reform Act 2002 (2002 Act). For an individual lease extension or a collective enfranchisement of the whole building, the process is started by obtaining the professional advice of a valuer to inspect the property in order to undertake all the usual due diligences in part of the valuation to advise the client. The freehold of a house can also be purchased under the Leasehold Reform Act 1967 (1967 Act).

80 years is an important number to remember, as once a lease falls beneath this term, the costs of either extending the lease or buying the freehold increase significantly.

Correctly drafted

If the leaseholders qualify, the premium quoted in the initial notice was not too low, the notice was correctly drafted and served, then in essence the freeholder cannot escape the leaseholders claim and rights. The freeholder is then in a position where a response must be made to the claim within two months or as stated within the notice served by the leaseholders. The implications for the freeholders not complying with this can be catastrophic, as it is possible for the leaseholder to apply to the courts to obtain the lease extension or freehold at the price contained in their initial notice. Assuming the freeholder is well advised, it is highly unlikely they will fall foul to this. However, they and their legal advisers have in the past overlooked the requested time lines. The freeholder will respond with a similar prescribed notice, being served on the leaseholders, confirming that the freeholder does or does not accept the claim and; does or does not accept the price contained within. Ordinarily the latter is always disputed.

The surveyors representing both parties will then enter into negotiations and exchange valuations to see where the differences lie in the statutory valuation process. There is then a limited period of time for both parties’ valuation experts to either agree the premium or move the matter forward to the Leasehold Valuation Tribunal (LVT), where the premium is then determined by a third party who will consider the evidence produced by either side. This process can be expensive and no one can guarantee the outcome. Therefore in order to take this final option there needs to be a significant reason for doing so.

Leasehold enfranchisement surveyors and those with the appropriate experience to deal with the legal notices and conveyance come from a relatively small pool, and it is essential that the chosen advisors have the necessary experience in order that the many pitfalls that surround leasehold reform can be avoided.

Surveyors are regulated by the Royal Institution of Chartered Surveyors (RICS) and this is a world wide recognised qualification as is the Law Society that regulates Solicitors. Savills are proud to announce that we have recently been accepted to be members of the Association of Leasehold Enfranchisement Practitioners (ALEP) who are a new body that Surveyors, Solicitors and Intermediaries, who have the relevant experience, can now choose to be regulated by to demonstrate their experience in this specialist field.

Pitfalls

One of the requirements to qualify in order to purchase a lease extension is that the lease must have been owned for two years before a notice can be served. Ownership is determined from the date of registration on the Land Registry (not physical occupation), this can lead to further delays if registration is not dealt with swiftly. We have come across many leaseholders who have been ill-advised when purchasing leasehold property. For example, if the current leaseholders have indeed met this requirement, the incoming purchaser can request the vendor to serve the relevant notice and therefore later assign this, thereby saving two years of a diminishing lease. The financial implications of such a mistake are clearly best well avoided. On the other hand, while this qualification period does exist for individual lease extensions, for collective enfranchisement of whole buildings this does not exist. Therefore, incoming leaseholders can immediately join in any collective enfranchisement activity. While collectively purchasing the freehold from the freeholder is the most ideal scenario, the organisation of such a matter and the effort required in order to start the process can be huge. We have advised many leaseholders within blocks, where the initial idea of enfranchisement has been suggested, however many years can pass before the process actually comes to fruition. This is human nature, as people are not always good at making decisions. For those within the block trying to organise this around their already busy lifestyles, this puts further strain on the matter. If this is the case and as a leaseholder you are frustrated watching your own investment diminish in value, as the costs in order to rectify this rise daily you might be well advised to look after number one for once!

You could individually, or with a group of other leaseholders, apply to extend your lease, thus protecting your interest almost immediately. Once this process is complete, you will at least then have a far longer interest in your residential property. However, it is important to remember that this will not exclude you from any potential leasehold enfranchisement processed at a later stage, it would just mean that your contribution overall would be far lower as your interest would have already been extended. The only downside to this is there maybe some doubling up of costs. Depending on the gap between the two, this is likely to be minimal, compared to the amount that you could have otherwise paid. Furthermore, as soon as the notices are served on the freeholder, this crystallises the position by fixing the valuation date and the diminishing lease term. Savills have a team of Chartered Surveyors who are involved in all aspects of the Central London market and we undertake all types of residential valuation. Furthermore we have a specialist team who focus purely on leasehold enfranchisement, and being supported by our strong residential agents’ network we make an expert team providing the highest level of service, advice and therefore results.

We do hope you enjoy the rest of this supplement, of which we are proud sponsors and are delighted to be associated with the many experts within this even more specialist field.

The editor would like to thank Savills for their support of this publication. Please contact Alastair Stimson on +44 (0) 20 7016 3728 or at astimson@savills.com