Getting together with your fellow leaseholders to acquire the freehold interest in your building
Instinctively an attractive proposition which panders to the estate agent's mantra of "share of freehold". Indeed the incentives for making a statutory claim to acquire your freehold pursuant to the Leasehold, Reform, Housing and Urban Development Act 1993 are many. These include:
- Gaining control over the management and maintenance of the building and the level of service charges.
- Granting 999 year leases of your flats at a peppercorn rent, and so removing existing (and sometimes onerous) ground rents, noting of course that the landlord is entitled to be compensated for loss of ground rent in the price you pay for the freehold.
- Removing onerous provisions in your leases and otherwise improving the terms, thereby enhancing the marketability and mortgageability of your leases.
Onerous provisions typically include an absolute prohibition against alterations so that a landlord is entitled to charge a premium for giving consent to even the most modest alterations. Landlords are often willing to spite themselves by imposing restrictive alterations covenants, prohibiting even the most routine refurbishment and in turn potentially damaging the value of their own superior interest.
Your lease might include a requirement that any underlease is granted for a term of no less than three years. In the current rental market, a tenant who is willing to sign up for three years or more is likely to be difficult to find. Underletting is a notoriously emotive issue and in some blocks leaseholders are concerned about a high turnover of "strangers" in the building and so prefer to limit underlettings to a minimum term of one year.
Airbnb underlettings cause particular concern and the grant of new leases means that appropriate restrictions can be agreed between the leaseholders and be properly regulated. Airbnb arrangements have been held to constitute business use and so a breach of the usual covenant requiring a flat to be used as a single private dwelling (not to mention also needing mortgagee consent).
Noisy hardwood flooring is another emotive issue, especially in converted buildings. Your new leases could be drawn to require leaseholders to cover the floors in material that avoids the transmission of noise, which could either be carpeting or properly sound proofed hardwood or tiled flooring.
- Boasting a share of freehold.
- Removing the threat of the landlord developing the building, often with unwelcome disruption and an undesirable outcome.
- Securing the potential to develop the building yourselves, whether upwards, downwards, outwards or even internally, often with significant profit.
In a happy marriage of leaseholders these incentives are compelling. But relationships can flounder and strong personalities within the group can lead to disagreements and poor communication. Many leaseholders underestimate the time that needs to be spent in managing the building, even if managing agents are engaged. Very often management falls to one or two. This can cause resentment and tension, ultimately leading to breakdown and possibly even a hostile bid by a breakaway group to wrest the freehold from the remainder by making a further statutory claim.
Whilst in the main collective ownership is successful, as in any partnership, the parties must cooperate with each other, taking on board different points of view and be willing to compromise. Depths of pockets may vary and so it is unfair to expect other leaseholders to contribute towards a refurbishment that tips into extravagance, going beyond repair, maintenance and renewal. The common parts do not need to be adorned with silk sprung wallpaper or marble, unless everyone is willing and able to pay for it. Leaseholders often have different attitudes towards security. Some live in fear of intruders and want security gates and lighting installed. Others might not want the expense. The scope for disagreement is clear.
Occasionally there are reasons why it is better to leave the status quo and not claim the freehold. Many landlords are responsible and cooperative. Not all demand inflated service charges or benefit from insurance commission. Most want to protect the value of their interest and take a proactive role in management. Many, particularly the larger landlords, fiercely protect their reputation and put good stewardship at the top of their list of priorities.
Perhaps the most important thing to remember is that getting together to acquire your freehold should be born out of the desire to manage your building together as efficiently and cost effectively as possible. Although it can be an investment opportunity, particularly if the building has development potential, that should not be the driving force behind any freehold claim. It is about the common aim of managing the building in the best interests of all leaseholders and occupiers and so protecting the value of your interests to ensure that each flat is marketable and mortgageable.
Aside from development potential, there can be other investment opportunities. Not all of the leaseholders may want to join in and so there may be an opportunity to fund a non-participant's share in the freehold with the potential for a windfall if that non-participant subsequently claims an extended lease of their flat, with the investor receiving the premium.
Disincentives are minimal. As long as the leaseholders takes their responsibilities seriously, collective freehold ownership can be a very happy ship.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.