Collective enfranchisement- three flats, 78yrs. unexpired

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    Collective enfranchisement- three flats, 78yrs. unexpired

    Hi

    I have a flat in a block of 3. I have thought about trying to buy the freehold, but require participation with at least one of my neighbours, one of whom is trying to move and the other isn't interested. Maybe in the future I will have a neighbour who wishes to participate, however time is ticking by and I am now thinking of just extending the lease. I have 4 questions.

    1) I reckon my flat is worth about £125,000. It is situated in Bexhill in East Sussex and has 78 years left on its lease. The ground rent is just £25 a year. I have read up on how these extensions are calculated but I can't work it out. I'm not sure how the yield percentages are factored into the equation. Rather at this stage than employ a surveyor to work it out I wonder if someone could tell me roughly how much it would cost to extend the lease.

    2) I am on fairly good terms with the freeholder although she was missing until recently for a few years she has now reappeared. Can I make her an offer directly without too much involvement with notices/surveyors/solicitors and see what she says?

    3) Given that she was missing for a about 4 years the lease is now below 80 years and hence the marriage value is now payable. I have had to spend money on a solicitor to deal with other problems related to the property that have occurred in her abscence including the costs of trying to locate her. Should I factor all this in to my offer for the lease extension?

    4) If I extend the lease and in the future I buy a share of the freehold, will the amount I pay for the share be less given that my lease will be longer than those of the other leaseholders in the building?

    Thanks

    Rob

    #2
    1. Don't know.
    2. Yes, as regards leasehold extension. You could even offer to buy the whole f/r. However, she cannot proceed with an f/r sale to you unless she first offers whole building's f/r to all lessees collectively. They will probably have a right of first refusal, but - as you state that they're not interested- she'll be free (after two-month wait) to sell to you.
    3. Yes.
    4. You cannot just buy a share of the freehold. As I repeatedly say, NEVER EVER SEVER the building's f/r; it must stay intact. Once you have extended your own lease, this will of course reduce the f/r value- even more so if the others extend too.
    JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
    1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
    2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
    3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
    4. *- Contact info: click on my name (blue-highlight link).

    Comment


      #3
      Thanks Jeffrey.

      Originally posted by jeffrey View Post
      1. Don't know.
      4. You cannot just buy a share of the freehold. As I repeatedly say, NEVER EVER SEVER the building's f/r; it must stay intact. Once you have extended your own lease, this will of course reduce the f/r value- even more so if the others extend too.
      I was referring to buying the freehold by way of collective enfranchisement although I need another leaseholder to be involved, I believe you need half or more of those in the building to be involved. Are you saying that you consider this a bad idea?

      Comment


        #4
        As far as the cost of extending the lease I would calculate it as follows:-

        Step 1 The capilisation of the ground rent of £25 per annum. It may well rise every 33 years so you are 12 years away from an increase. Unless it is significant its unlikely to have much effect on this part of the calculation. At 7.5% simply times the rent by 15.

        Step 2 the value of the reversion. Take the value of the flat if it had a long lease and divide it by 45.

        Step 3. Take the value of the flat in Step 2 and instead of dividing by 45 take 2% of its value and then deduct the result in Step 1 and Step 2. The result may well be negative in which case use 0 otherwise take 50% of that figure.

        The cost of a lease extentsion where the rent fall to a peppercor and the term extended by 90 years will be the sum of those 3 steps probably about £3,150.

        I would be 95% confident that the result will be within that figure plus or minus £250 either way.

        If your freeholder is approachable do try very hard to reach a negotiated settlement. The costs of a contested case could well amount to £2000 as you would have to bear the cost of her valuation fee and her solicitors reasonable costs of drafting the deed fo surrender and re-grant along with your own.

        Comment


          #5
          Thanks Sgclacy!

          Am I right in saying that step 3 in your calculation is the "marriage value"?

          Rob

          Comment


            #6
            Yes it is.....

            Comment


              #7
              OK thanks,

              I am tempted to offer the freeholder £3150 less the amount I have had to spend thus far on the other problems. Is this a wise move at this stage? If she doesn't find this acceptable then maybe I can negotiate or employ a surveyor to work it all out in detail.

              cheers

              Rob

              Comment


                #8
                Originally posted by Robble76 View Post
                OK thanks,

                I am tempted to offer the freeholder £3150 less the amount I have had to spend thus far on the other problems. Is this a wise move at this stage? If she doesn't find this acceptable then maybe I can negotiate or employ a surveyor to work it all out in detail.

                cheers

                Rob
                Sounds OK to me.
                JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
                1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
                2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
                3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
                4. *- Contact info: click on my name (blue-highlight link).

                Comment


                  #9
                  As Jeffrey says try it but be prepared to write off those costs you have incurred to date .As I said a contested valuation could easily cost £2,ooo in surveyors and legal costs and there is all the time and agro involved and there is no legal redress as far as I am aware to enable you to recover those costs as Jeffrey said in a previous answer.

                  Regards

                  Comment


                    #10
                    Sgclacy

                    I just realised my flat has 79 years left on the lease, not 78 as previously stated. Does this make much difference to the steps of your calculation?

                    Also, where do the numbers of 15 and 45 come from in the calculation? Are these looked up in tables or are they actually calculated? The LEASE website describes the calculations based on yield rates and says there are numbers that must be looked up in tables, but does not say where the tables can be found or how the numbers are calculated. I appreciate your help in calculating the cost of the lease extension. If I am to go to the freeholder with a figure as I was suggesting then I would like to be able to justify it.

                    Thanks
                    Rob

                    Comment


                      #11
                      You can refer to tables for the figures for capitalisation rates.

                      To capitalise 7.5% for very long period indeed you simply divide the figure by 100 and then divide it into 1. Therefore 1 divided by 0.075 = 13.33. I suggested 15 as I assumed the rent would rise

                      The deferment of the reversion using 5%. If you divide this figure by 100 and then add 1 you arrive at 1.05. If you take this to the 78 power you get 45. For 79 years you get 47.2.

                      If you have Microsoft excel the formulas would be as follows:-

                      For the capitalisation of the income use =PV(discount rate, no of years, rent)
                      So in your case = PV(7.5%,79, 25)

                      For the deferment I would use the formula = round(1.05^79,2). Divide the result into the value of the property and it will give you the discounted value of the reversion

                      I can produce a “nice” four page spreadsheet which will also enable you to alter the variables. I will do it for £10 if I receive a cheque made payable to “children in need”. If you want to see what an example of what you would get please send me an email to stephen@clacy.com.

                      To do the calculation I need the following:-

                      The values of the flats in the block assuming they had very long leases and where in a condition similar to that when the leases were granted.

                      The start date of the term of each lease

                      The ground rent and a note of when it rises

                      And finally the address

                      Comment


                        #12
                        Thanks, I've sent you an email

                        Comment

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