Money: A new lease of life for flat owners

Condemned as a waste of time when it first came into force, the Leasehold Reform Act has now been in operation for four years. Nic Cicutti examines new evidence that the Act has had beneficial effects on the prices people pay to purchase their freehold or extend their lease.
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The aim of the Leasehold Reform, Housing and Urban Development Act (1993) was to ease the process whereby tenants coming to the end of long leases could either renew them for a further 90 years or even purchase their freehold outright.

It came after bitter complaints from leaseholders that their landlords were demanding impossible prices to extend leases on properties which many regarded as "theirs" by virtue of having lived there for 30, 50, even 80 years or longer.

At the time, the Act was slated. It was described by many experts in housing law as cumbersome, expensive and potentially ineffective, with the odds stacked in favour of landlords and large freehold owners.

Cumbersome and expensive it may still be. But four years later, the first comprehensive study of the effects of the Act shows that rulings over purchase prices for freehold properties and lease extensions are far closer to leaseholder's valuations than they are to those of their landlords.

A survey by Leasehold Enfranchisement, a firm set up to assist leaseholders, was carried out among the 166 claims entered under the Act, involving 600 flats where the price was in dispute.

The firm's research reveals that in cases before Leasehold Valuation Tribunals (LVTs), the bodies which adjudicate on conflicting claims between tenants and landlords, the average cost of buying the freehold of a flat in London, where a lease had more than 80 years to run, was pounds 1,470. Outside London the average per flat was pounds 1,322.

Tim Curran, a director of Leasehold Enfranchisement, says: "This shows that if people are prepared to fight their case through the tribunal system they may be pleasantly surprised."

Collective enfranchisement is the right of flat owners to collectively buy their freeholds. Lease extensions for 90 years are another option, available to those who have lived in their properties for three consecutive years or three out of the past 10 years.

Although most claims are settled without recourse to LVTs, the increasing body of case history makes it easier for individuals to negotiate a better deal.

Mr Curran says: "LVT decisions on the price of the freehold are benchmarks both for claims under the Act or settlements outside it. The publication of the results sets new guidelines for reaching agreement on price."

LVTs reach decisions regarding collective enfranchisement primarily on the basis of "marriage values", the 50:50 split in terms of a property's value between lessees and freehold owner. For example, if the property, once owned by the lessee, is worth pounds 10,000 more than it was before, the payment to the freeholder would be pounds 5,000.

Part of the calculation of the "marriage value" increasingly includes the capital value of any ground rent and reversions of flats to the landlord which do not take part in the decision.

Another factor that determines the cost of enfranchisement is "yield", the interest rate used to capitalise the value of ground rents, or discount the value of the landlord's reversion, the taking back of flats that revert to him. This is expressed in terms of the value today of the right to receive a sum in the future.

A low discount rate increases the value of a landlord's reversion, and therefore the purchase price.

Factors that can affect yield include the length of the lease, the amount of ground rent, how often payments are to be reviewed, plus location insurance and other management factors.

Similar reasoning lies behind leasehold extensions. These are mainly the ground rent and lease length remaining. High ground rents and medium to short leases increase the premium.

The lease length remaining affects the "marriage value", which is related to the increase from the existing lease to one extended for a further 90 years. However, in the case of very short leases, the key consideration is the value of the property when it reverts to the landlord.

The Act makes lessees responsible for meeting their own valuation and legal costs. They must also meet some, but not all, of a landlord's "reasonable" valuation and legal fees, although they are not responsible for the costs of appearing before a tribunal, or of negotiating the purchase of the freehold or lease extension. Mr Curran points out that LVTs have sometimes used their powers to cut claims for valuation and legal fees.

The evidence indicates that some leaseholders are getting benefits from the Act. Ultimately, the acid test comes when you approach your landlord and ask for your rights.

'The cost of Buying Your Freehold or Extending Your Lease', by Tim Curran, available (price pounds 25 incl p&p) from: 33 St George's Drive, Pimlico, London SW1V 4DG.