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What is an informal purchase of a freehold?
It may be possible that flats owners who wish to acquire the freehold interest in their building can come to an informal agreement to acquire the freehold from the freeholder. This would avoid the need to proceed through the formal collective enfranchisement route.
Why should I buy my freehold now?
Once the freehold interest has been acquired by the participating flat owners, they will collectively have control over the management of the building (typically including the buildings insurance, maintenance and repair of the building, service charges and day to day management of the building).
Each participating flat owner can also extend their individual leases to 999 years and reduce the ground rent to nil for no premium. The new lease can be tailored to suit the circumstances of your particular building and ensure that your individual flats are as marketable as possible which will help you realise the maximum value of your flat.
Your share of the costs are also likely to be lower as a flat owner jointly acquiring the freehold interest in the building, in comparison to extending the lease over your individual flat.
Why should I buy the freehold informally?
If you are confident that you can promptly agree a fair premium for acquiring the freehold with your freeholder then it may be cheaper and quicker to acquire the freehold informally rather than through the formal collective enfranchisement route. This may particularly be the case if you want to complete the acquisition of the freehold interest quickly, for example to prevent disproportionately expensive major works being carried out. It is usually only beneficial to proceed informally if you have a reasonable freeholder who will negotiate fairly or the premium is relatively small as you may be able to agree a premium without paying certain valuation and/or negotiation fees.
However, it is important to note there is no obligation on the landlord to complete the sale of the freehold interest (unlike under the formal route), so there is a risk that they may withdraw from the agreement before completion.
It is also worth noting that if not all the flat owners in the building wish to participate and purchase a share in the freehold interest, the freeholder will be required to serve section 5 notices on all the flat owners offering the right of first refusal to buy the freehold to all the flat owners. The flat owners must be given at least two months to decide whether they collectively wish to accept the offer of first refusal. More than 50% of the flats must join together to validly accept the offer.
For more information on the section 5 procedure please click here.
What is the cost to me of purchasing the freehold interest informally?
The total cost of acquiring your freehold will normally be comprised of the following:-
- Your share of the premium – this is the payment that will be made to the freeholder as consideration for the transfer of the freehold interest. We recommend that you instruct a specialist enfranchisement valuer at the outset of the matter to advise you of the fair value of buying the freehold.
- Your share of the flat owners’ costs – this will include the cost of your solicitor and your valuer, plus any applicable disbursements, for example, Land Registry fees, bank charges, stamp duty, etc.
- Your share of the freeholder’s costs – this will depend on what has been agreed with the freeholder but generally it will be agreed that the flat owners will be responsible for the freeholder’s reasonable costs in connection with the transaction.
- Lease extension costs – you will not have to pay an additional premium for extending your lease, but you will have to pay your own legal costs for drafting and finalising the lease extension. In addition, if you have a mortgage over your individual flat, then your lender may charge a small fee for providing their consent to the lease extension.
How long will it take to purchase the freehold?
As the terms of the purchase are already agreed once we are instructed, if all the flats are participating, it should only take a number of weeks to complete the transfer (depending on how responsive the freeholder/their solicitors are).
If there are any flats that do not participate, the ‘Section 5’ procedure will need to be followed and then the expected timeframe is expected to be 4-6 months.
For more information on the section 5 procedure please click here.
Should we hold the freehold in a company name or in our individual names?
If you were to hold the freehold in the name of the company each participating flat would be entitled to membership in the freehold company, and each flat owner would be responsible as the members and directors for the administration of the company, for example, registering new members, submitting annual returns, etc. The freehold company will then be responsible for the freeholder’s obligations under the leases, which typically includes arranging the buildings insurance, maintenance and repair of the building and common parts and dealing with the service charges and the day to day management of the building.
It must also be noted that legal title in England and Wales can only be held by a maximum of four individuals, and therefore if there are more than four individual freeholders then it is highly recommended that a company is set up to hold the freehold interest, otherwise you will have to enter into a Deed of Trust with all the beneficial owners of the freehold if there are more than four to record and protect the unnamed freeholders beneficial ownership.
The benefit of holding the freehold interest in the name of the company is that if any of the flat owners sell their flat you and your co-freeholders would not be required to sign a Transfer Deed as the company would still hold the freehold interest, but you would just need to transfer your membership in the freehold company to your buyer. By comparison, if you hold the freehold interest in your individual names, all the individuals on the freehold title will have to sign a Transfer Deed to transfer the share of freehold to the buyer and be identified for Land Registry purposes. If there is a Deed of Trust in place, then a new Deed of Trust will have to be signed every time the freehold is transferred. This could result in delay to your sale if, for example, the co-freeholders were not resident in the building, abroad, unwell or simply being uncooperative.
In addition, holding the freehold interest under the name of a company would protect each flat owner as an individual against personal liability from any claims against the freehold company, for example, for breach of covenant.
The drawback of setting up a company to hold the freehold interest is the cost and time of carrying out the administration for the company, for example, filing annual returns, etc. However, with Companies House web-filing, filing requirements are simplified making it easier for you to do yourself or if you do appoint a managing agent, they will deal with this for you and recoup the cost through the service charge.
If you would like to instruct a managing agent to deal with the management of the building on behalf of the freeholder then you can instruct a managing agent either in the name of the company or in your individual names.
What is the procedure for buying the freehold?
As part of the preliminary legal work, we will prepare a participation agreement between all the flat owners to confirm their contractual obligations to each other. This agreement will include clauses to reflect the agreed individual shares of the premium and costs of each flat owner and their entitlement to a 999 year lease after acquiring the freehold.
As the terms of the acquisition of the freehold have already been agreed once your solicitor is instructed, we will investigate the title to the property, request a draft Transfer Deed from the freeholder’s solicitor and negotiate the terms of the draft Transfer Deed until it is agreed form. In respect of more complex purchases there is also often a separate Contract prepared.
Once the Transfer Deed and Contract (if applicable) is in agreed form, it will need to be signed on behalf of the participating flat owners and the freeholder. Once these formalities have been carried out, the premium and costs will be paid to the freeholder’s solicitors and the transfer of the freehold will be completed.
We will then deal with the post-completion formalities on behalf of the participating flat owners, including paying any stamp duty and registering the Transfer Deed at HM Land Registry.
After the acquisition of the freehold is completed, we will then deal with your 999 year individual lease extensions.
How can LEASE Law help me purchase the freehold?
LEASE Law are specialist solicitors who can act on behalf of the flat owners in respect of the legal requirements for acquiring the freehold interest in their building informally. In the vast majority of cases, we are able to offer a fixed fee for acting on behalf of the participating flat owners.
The work that we will carry out for the participating flat owners includes investigating title to the subject property, preparing the Participation Agreement, negotiating and agreeing the terms of the Transfer Deed and the Contract (if required), completing the Transfer Deed and registering the same at HM Land Registry.
Please contact Jade Thomas (jade@leaselaw.co.uk or 0204 511 9100) or Joanna Botley (joanna@leaselaw.co.uk or 0204 511 9101) for a no obligation discussion about your potential informal purchase of the freehold.
