Landlords of the world unite

Investors can land a fortune if they get together and buy flats outright

Buy-to-let investors with leasehold flats are waking up to the big capital gains to be made by banding together with the other leaseholders and buying the freehold.

Flats in blocks that have been freed from the control of bad landlords have seen values hiked by as much as 40 per cent. No wonder that the process of leasehold enfranchisement is spreading like wildfire through the two million leasehold properties in England and Wales.

But investors are finding that the process of kicking out a freeholder who does not want to go is a nightmare of nitpicking form-filling, rigid deadlines and legal mantraps.

One of those legal mantraps may have been removed by a court judgement last week. Leaseholders are entitled to first refusal if the freehold of the block comes up for sale, but the situation is often confused by the presence of a "superior landlord" who owns a head lease for the whole block and sub-leases to the actual residents.

When residents in Kensington Heights, a block of flats in west London, discovered the freeholder had given a new lease to their head leaseholder, Campden Hill Developments, as part of a land swap, they successfully took them to court and now have the chance of buying their block.

Michael Donnellan, a partner at the leaseholders' solicitors, Trowers and Hamlins explains: "Until now, it has not been clear exactly what the position is where there is a superior landlord who owns the head lease, in between the flat owners and the freeholder - even though this is a very common situation. This decision means that landlords who surrender their head lease should give flat owners the right of first refusal on buying it, even if they are only surrendering it in return for a new lease."

As a New Yorker, former Reuters executive Kat Callo was amazed to find that when she bought a flat in west London it did not entirely belong to her, as it would in her home city. Furthermore, the landlord was not maintaining the building to her satisfaction. Being a New Yorker, however, she did not take this lying down but started getting the residents together to enfranchise the block.

Many freeholders are willing to negotiate a reasonable deal, but Callo's landlord dug its heels in and used every legal device possible to frustrate the move. It took four years of struggle before enfranchisement became complete, in June. The process has made Callo into an expert on the subject - she now acts as a consultant to leaseholders, and has just published a practical guide to the process, The Survivor's Guide to Buying a Freehold (Lawpack, £12).

One of the unexpected hazards facing leaseholders who want to enfranchise is, surprisingly, other leaseholders, Callo discovered. "A small minority of the leaseholders decided not to participate and were very opposed to the project," she says. "It was a troubled building which was not well maintained and many tenants had been overcharged. The only action they could take was to withhold the service charge. Some would brag that they owed £30,000." These refuseniks realised that if the enfranchisement went ahead, they would have to pay up - and some of them stood to lose their homes if that happened.

Once the required majority of leaseholders had been signed up, keeping them together required the diplomacy and persistence of UN peace negotiators. "The residents' association is small and has little or no authority over the members," Callo points out. "It is deeply frustrating."

Success eventually brought rich rewards, however. "It had become virtually impossible to sell flats in the block, but since we bought the freehold people have been receiving offers and the value of flats has shot up by about 40 per cent," Callo says.

But the work is not over. Decades of mismanagement has to be put right. Callo estimates that, despite the difficulties, hundreds of leaseholds are being enfranchised every year. "It is the biggest transfer of wealth from one group to another in living memory," she says.