THE COSTS OF ENFRANCHISEMENT — WHAT TO BUDGET FOR AND WHAT TO BEAR IN MIND
When organising a collective enfranchisement project, one of the questions which will pop up time and time again from residents, concerns how much buying the freehold of the building is actually going to cost. The main problem with this is that there is no definitive figure or even any real guidelines which can be of assistance at this stage in the process.
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Enfranchisement costs – more than just the purchase price
Reasonable estimates can be made, although it must be made crystal clear to everyone involved in the process that they are just that: estimates. The costs involved in freehold purchase include, but are not limited to:
• The cost of buying the freehold itself from your freeholder
• Stamp duty on the freehold purchase
• The cost of your solicitor
• The costs of your surveyor in valuing the premium, or purchase price, due to the freeholder and assisting in the negotiation process
• Any “reasonable” legal and valuation costs incurred by your freeholder
• Land Registry fees
• Other costs: There may be other costs involved in the process, such as fees for arranging mortgage financing, or the cost of repairing any defects in the property.
Depending on your circumstances, you may also need to consider project management fees if you choose to appoint someone to manage the whole enfranchisement project for you and your fellow leaseholders.
What happens if we don’t feel that the freeholder’s legal or valuation costs are reasonable?
You can make an application to the First-Tier Property Tribunal to assess whether or not these costs are reasonable.
Calculating the premium
The valuation of the premium you need to pay to your freeholder to buy the freehold is a complex issue.
However, in short calculating that premium, the freeholder is entitled to compensation from the leaseholders with regard to;
1. loss of ground rent income due on the lease
2. compensation for not getting the flats back at the termination of the lease
3. an additional sum known as the ‘marriage value’
Marriage value is calculated at the rate of 50% of the related increase in the value of leases as a direct result of enfranchisement – but this only applies to leases with less than 80 years to run – a good reason for tenants to try to enfranchise whilst there have more than 80 years left on the lease [it’s worth noting at this stage that some unscrupulous landlords try to delay enfranchisement, often by agreeing to voluntarily enfranchise-and thus removing the need for tenants to make a formal application- until the leases have dropped below 80 years and therefore marriage value is due].
Costs estimates – and the importance of communication
It is vital when communicating costs and estimates to the residents that it is made very clear that they are only estimates and could be subject to great change. There are big costs to be paid upfront when engaging in collective enfranchisement. It is for this reason that particularly when it comes to large blocks, hiring a project manager worth considering to ensure the process is being managed by someone with specialist experience of freehold purchase.
Costs estimates – one of the biggest problems for leaseholders
When organising the enfranchisement, you’ll often come up against a chicken and egg situation in which some of your fellow l easeholders won’t sign up to participate in the enfranchisement until they’ve been given a definite cost for the project.
Asking fellow leaseholders to part with a deposit before they even know what the final cost of the freehold can prove really difficult – and one sensible solution is to provide an informal cost estimate with the guarantee that a paid freehold valuation will be carried out once over 50% of the flats have signed up and paid their deposit with the joining deadline passed. This will provide protection for both sides of the argument.
The costs of say a 90 year lease extension when compared with collective enfranchisement, can often be less different than you might expect. But collective enfranchisement, of course, has many benefits which lease extension doesn’t.
What’s more it’s always worth reminding your fellow leaseholders who decide not to join the freehold purchase, that they won’t be able to extend their own leases until the enfranchisement process is over – and once the freehold to the block has been purchased, they will also lose their right to participate in enfranchisement and the accompanying 999-year lease extension – leaving them with a 90-year lease extension as the most they will be able to insist upon.
With all of the information clearly laid out to residents, they should see that participation will be hugely beneficial to them.
Enfranchisement costs: How to limit the cost of negotiations
Negotiation is a vital and essential part of the collective enfranchisement process. Negotiations tend to be handled by specialist chartered surveyors, who, of course, you must pay for their time.
Most chartered surveyors will charge by the hour for their services so costs can often rack up quite quickly and easily, particularly if the negotiations are drawn out and protracted. It is for this reason that limiting the cost of negotiations is a vital part of enfranchisement.
Your valuer – agreeing a fee
Firstly, those organising the enfranchisement should consider agreeing a maximum number of hours with their chartered surveyor – after which negotiations will be deemed to have broken down and at which point an application to the First Tier Property Tribunal will need to be considered.
Usually, around 4 to 5 hours is sufficient for a surveyor to come to some sort of reasonable agreement with the surveyor hired by your freeholder. Remember: the freeholder will be paying for their surveyor too and will not want a large bill any more than you do.
It can be tempting to do away with the negotiation process altogether and try to avoid chartered surveyors’ negotiation bills if the freeholder has demanded an unrealistically high asking price in his or her Counter Offer – but you should not be tempted down this route.
The law provides significant protection for those seeking to buy the freehold of their block if the freeholder demands an extortionate asking price – so you should treat it simply as a tough opening stance from the freeholder.
Ultimately, of course, you can take the matter to the First Tier Property Tribunal where a fair and just asking price will be set.
Enfranchisement costs and specialist advice
Although costs can be difficult to estimate, having a specialist freehold purchase solicitor and surveyor on board who can detail the reasons why exact costs can’t be given can really help. Having someone with experience who might be able to provide some more insight and bring peace of mind to the residents who are considering signing up will likely see the rate of participation improve, particularly if the residents can see that the whole process is being managed professionally and within an approved legal framework.
Good legal advice doesn’t need to be expensive, either, and a professional and experienced collective enfranchisement solicitor can save you a lot of money and hassle in the long run.
Head leases and third-party management companies – possible additional costs
Please note that if there is an intermediate head leasehold title, known as a ‘Head Lease’, or a management company as a 3rd party to your existing leases, you will also be responsible for that head leaseholder’s or management company’s reasonable legal and valuation fees in the matter.
How can we pay for the costs of enfranchisement?
Buying the freehold should increase the value of your flat, as well as making it more attractive to sell.
Many lenders are happy to increase a mortgage to pay for the cost of extending a lease or purchasing a share of the freehold. but do beware if your lease is a really short one – say under 65 years. Most lenders are much more cautious when it comes to mortgage borrowing on really short lease property. and if you do manage to secure funding, you will properly have to give some form of security – because it’s likely that a very short lease won’t be sufficient security for many lenders. So instead you may have to give some other form of security – perhaps a personal guarantee over your assets and/or your home (that’s if you don’t live in the flat).
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