Share of Freehold VS Lease Extension

Once you have established you are entitled to extend your lease, the next question will be, “how much will it cost?” 

Generally, as the lease length gets shorter, the premium payable to extend the lease increases. 

To determine the premium payable for a lease extension, valuation surveyors will use a formula set out by statute, and determined at the date the lease extension is claimed. Property valuations are highly significant when it comes to lease extensions, and leaseholders may take advantage of the current market conditions. 

Another way of obtaining a long lease is to collaborate with other flat owners in the building to buy the freehold. Once acquired, an extended lease (usually 999 years) will generally be granted to the participants.

A long lease will invariably make your property more saleable; the longer the lease term left, the more marketable your property will be. Also, generally, mortgage lenders tend to shy away from lending against leases that have less than 80 years.

A lease extension will generally tend to be cheaper if there are more than 80 years left to run on the lease. The reason for this is that “marriage value” (a valuation concept) will not be payable. In simple terms, the shorter the lease term, the more expensive it will be to extend.

FREEHOLD:

By law, long leaseholders have a right to collectively purchase the freehold to their building (subject to a few exceptions). A flat marketed with a “share of freehold” generally refers to a leasehold flat plus a share in the company which owns the freehold.

Often, not all tenants in a block will own a share of freehold, but it is sometimes possible to buy into the freehold later. A price will be payable for this but the freehold company is under no obligation to sell a share.

The main advantages in owning a share of freehold are:

leases can be extended at little or no cost to 999 years at a peppercorn rental (i.e. nil). 

leases can be varied so long as the majority of shareholders in the freehold company agree;

the tenants have more control over the day-to-day management of their building;

the tenants have the ability to govern the level of service charges and insurance premiums levied; and

the saleability of a flat with a share of freehold is generally increased. 

In larger blocks, always engage a professional Managing Agent. Relying on a group of tenants can be problematic unless there is professional management in place. Tenants can have differing priorities and may be uncooperative.

Specialist legal and valuation advice is a must - the process may sound simple however there are main pitfalls to avoid!

Yashmin Mistry and Katie Cohen are Partners at JPC Law