Buying your block of flats - The new legislation

Obviously in a brief review of the legislation it is not possible to go into all the detail of what has to be done. Looking at the key issues we can see that the price that has to be paid will be made up of three separate elements. First there is the value of the Freeholder’s present interest. This is the value of the ground rents payable under each Lease and the value of the reversion at the end of the leases. The reversion is the right to inherit the property. Second you have to add one half of what is called marriage value, which is generated by the merger of the two interests – freehold and leasehold. Third you have to pay compensation to the Freeholder for the loss of any other valuable rights or interests held by the Freeholder. For example, the Freeholder may have planning permission to build penthouses on the roof or erect garages at the rear of the premises. The loss of the freehold will prevent the Freeholder taking advantage of that. The potential for further development has to be looked at quite carefully. They might also include the ability to incorporate unused parts of the building into existing flats or perhaps use them for storage.

The valuation figure will be different depending on whether or not all the Lessees are participating in the acquisition or not. In respect of those Lessees that do not participate their half share of marriage value will not be payable. Something called hope value has to be paid instead but is usually between 15% and 25%. It is of prime importance to get a Valuer knowledgeable in the workings of the legislation to work out the likely cost on different assumptions of participation.

The Valuer will want to read the standard lease or the different types of leases in the block and will also need to inspect both the block and some of the individual flats. He will need to know the value of the ground rents. Having completed an inspection he should be able to work out the areas of flats and would probably look at maintenance expenditure. The individual flats will need to have some approximate value attributed to them. If the Valuer has to inspect every flat it obviously will increase the costs considerably. The Valuer has to assume that the values of both the share of the freehold and the existing leases are based on their current state without any effect of the right to buy a lease extension. The Leasehold Valuation Tribunal and the Lands Tribunal, which hears appeals from the former body, publish their decisions. These decisions are usually helpful in giving an idea on how the price is to be finalised. The Valuer then has to try and value the Landlord’s current interest, which is largely a mathematical task except in regard to the yield. The Valuer has to decide what yield an investor would apply to a particular building. The lower the yield the higher the price for the freehold.

When the Valuer has reached an estimate of the purchase price it will be divided between the value of the freehold interest in the block and a separate payment for additional land over which there may be rights. In making the valuation all improvements by Lessees have to be disregarded. Hopefully, the Valuer for the Lessees and the Valuer for the Freeholder can reach agreement without the need to invoke the legislation but if a friendly agreement is not possible then the matter is taken to the Leasehold Valuation Tribunal and certainly at that stage, if not before, lawyers will be involved.

It is likely that the legislation will become more used as time goes on and when the benefits of controlling the block are seen to be very worthwhile.