Article idea: Should leaseholders acquire their freehold?

, I do hope you will find space for the following interesting article, which is a must-read about the pros and cons for leaseholders who wish to acquire their freehold. We hope you find the below take on the above interesting and can find space for this article. I look foward to hearing from you soon. With residential property values in the doldrums, now may be a great time for leaseholders to consider acquiring their freehold – but is there a downside? Property tax specialist Paul Windsor has just completed his latest enfranchisement project in a residential block of 40 flats and in this article he examines some of the pitfalls and lesson learned. It will comes as no surprise that the majority of first time buyers buy their property without giving any real thought to the tenure of their investment. It is the bricks and mortar, the location and the standard of finish that influence their purchase and yet the nature of their interest is of such fundamental financial and legal importance that it should be the first question on the lips of any buyer. So what can be done about a slowly expiring lease? There are 3 basic options: let it run its term and expire; extend it; or buy out the freehold interest. It is the last of these options that is addressed by this article. Leaseholders have a legal right to act together to buy the freehold of their building if they meet certain qualifying criteria. This is known as collective enfranchisement. This legal right was given under the Leasehold Reform, Housing & Urban Development Act 1993 and the rights were supposedly improved and simplified under the Commonhold and Leasehold Reform Act 2002. Sounds good - but does it really work in practice? Well, after checking that the building qualifies, that the leaseholders qualify and that there are sufficient willing participants in the building, the only real way to find out is to take action and dip your toe into the water. Value of the Freehold Before anyone starts spending any real money it is a good idea to get a rough estimate of what the project might cost. For even the most modest block an experienced valuer will be required. In very simple terms the value will be based on the open market value of the freeholders interest (calculated on the uplift in the value of the flats with the benefit of the freehold interest over their value under the existing lease terms), the percentage yield for the capitalisation of ground rents and the deferment of freehold values, the freeholders interest in any marriage value (only applicable where leases falls below 80 years unexpired term) and any development or other special values. Some recent judgements, notably the now infamous ‘Sportelli’ case, have had a significant impact on the percentage yield (now 5%) which has had the impact of significantly increasing the capital values in recent years. Working in unison If it’s still looking good, then a team will be required to drive things forward and in my experience good communication is vital. The team need to consider who to select as professional advisers (and to establish the level of their fees) as well as setting out the basic understanding of the process to their fellow lessees. A detailed understanding will form the basis of the legally binding participation agreement which will tie all the participating lessees together and ensure that their verbal commitment is ultimately translated into cash. There is often a significant drop out rate at this point when participants really sit down and work out how they are going to meet their share of the purchase. Persuasive chairmanship is undoubtedly a characteristic of successful enfranchisements. If at least one half of the tenants remain engaged then the project can move forward. The reluctant seller So often enfranchisement projects are derailed by reluctant landlords who, at each legal stage create what appear to be insurmountable barriers. Great tenacity is required by the team. Costs appear to rise disproportionately, the sellers lawyers obfuscate and the lessees become disillusioned and want to drop out and secure a lease extension as an easier alternative. The key in my view is to give lessees very low expectations at the start of the project. Exaggerate the costs at the outset and add a year to the initial time expectations. Certainly don’t believe the lawyers when they say that the timetable is set out in the legislation with 90 day response and filing time lines at each stage – in reality it just doesn’t work like this. Uncertainties and SDLT One of the biggest frustrations to overcome is to be constantly battling with uncertainties over timings, costs, participants and the ultimate sufficiency of the cash collected from lessees. An example of this is on Stamp Duty Land Tax. Legislation was drafted to exclude enfranchisement purchases from SDLT however the sections containing the relevant clauses have never been enacted – indeed the current HMRC guidance notes provide a ‘relief code’ to make a claim for relief under the enfranchisement provisions but put in brackets ‘relief not yet available’. So is it all worthwhile? Land, particularly in areas of high demand, is a finite resource. Large quantities of residential blocks were erected in the post war 50’s and 60’s and were sold on 99 year leases and thus many of them dropped below the critical 80 year threshold some years ago, indeed many are beginning to drop below the 50 year level. More recent residential developments in the 80’s and 90’s are also dropping below the 80 year level at which marriage value comes into play. These factors mean that freehold reversions and freehold rights in general have become increasingly valuable. So my advice is to stick with it and keep an eye on the big picture in those moments of doubt – it will be well worth it in the long run. Oh, and don’t forget to choose your advisers carefully! Paul is a partner at specialist UK real estate tax advisor WSM Property (www.wsmproperty.com) Paul Windsor is a partner at specialist UK real estate tax advisor WSM Property (www.wsmproperty.com) Contacts: Paul Windsor, WSM Property 020 8545 7606 paul.windsor@wsm.co.uk www.wsmproperty.com Lauren Alexander, Maltin PR 020 7887 1357 lauren@maltinpr.com www.maltinpr.com Picture of Paul is available at www.maltinpr.com/paul-windsor Notes to Editors: Paul is a regular commentator on property and finance trends, including taxation. Paul J Windsor BSc FCA - Background Information Paul is 51, married with 3 children and lives in Haslemere, Surrey. Paul has been a partner at WSM Partners LLP since 1985. WSM is a firm based in London, SW19 with a team of 30 professionals. The firm has two divisions,one specialising in the tax for individuals and small businesses and WSM Property specialising in UK real estate tax. Having started his professional career with KPMG Paul now believes passionately that clients of all sizes are best served by smaller specialist firms and to prove the point the firm currently works for international clients such as Citigroup, UBS and Deutsche Bank. The firm is at the leading edge of UK property tax work and deals with complex limited partnership vehicles, SDLT restructuring cases and offshore property unit trust structures. In 2006 the firm was a finalist in the Accountancy Age small firm of the year award and has also been accredited with the Investor in People award for many years. Paul is also Chairman of Polka Children's Theatre Limited, a leading national theatre company dedicated to bringing the performing arts to children and young people. Polka's productions are always highly acclaimed and set a gold standard for children's theatre around the world.