Is it worth sharing?

You live in a large block of flats (it could be a small block), and you are aware that other residents bought the freehold several years ago. Your neighbours say that they have a share of freehold and the freehold company is actively looking to sell lease extensions to raise funds.

You write to the directors. They reply giving you the option of a new 125-year lease for £95,000 or a new 999-year lease, with share of the freehold for £114,000.

You take valuation advice and your surveyor enters into negotiations with the freehold company’s surveyor. After three months, an agreement is reached: £67,600 for the 125-year lease or £75,000 for a 999-year lease. All seems well until you receive the letter which states: “the directors of the freehold company say that the share of freehold will cost an additional £15,000”.

Is this value for money?

A formal lease extension (post service of a section 42 notice, so 150.5 year lease) would cost £71,000.

For a further three months no information is forthcoming from the freehold company as to “what you get for £15,000 extra”. The company is reluctant or will not answer. The accounts provided are two years old and they show that this is a relatively new company; the previous company was dissolved. There is no information as to why.

The local estate agent states that share of freehold will not really add significant value of the flat, but it is a preferred option.

In Erkman in 2011 the Upper Tribunal (Lands Chamber) determined relative values of long leases. In this case study, the following would apply:

Freehold 100%: £695,000

130+ year lease 99% of freehold: £688,000

115+ year lease 98.5% of freehold: £684,500

100+ year lease 98% of freehold: £681,000

The difference between the cost of the agreed premium for the 125-year lease and 999-year lease is almost the same as the difference in value between a flat on the different lease lengths: so are you getting value for money?

A share of freehold in this case study should give a profit share (dividend) from income received from other sources or lease extensions. However, the accounts show that there is a bank loan (possibly from when the property was enfranchised). They also show no evidence of there ever being a profit share (dividend) paid out.

When acquiring a share of freehold, make sure your professional advisors consider carefully what you are acquiring.