How to buy your freehold

New properties for sale © iStockphotos
They wouldn’t be smiling if she mentioned the ground rent

Nationwide Building Society announced last week that it would stop lending against any new-build leasehold flat or house where the ground rent is more than 0.1% of the value of the property. This is in response to a high-profile series of stories about onerous leasehold contracts that impose spiralling ground-rent charges on buyers – a liability that could eventually render these properties unsellable.

Buyers of leasehold properties had complained that clauses doubling the ground rent every ten years were buried in leases and overlooked by solicitors. In such a situation, a £250 annual ground rent charge could reach £2,000 after 30 years. Many contracts also stated that the owner had to pay the freeholder “consent fees” for alterations to the property, such as laying carpets and switching mortgage lenders.

Bad publicity about these arrangements has already led housebuilder Taylor Wimpey to announce it will pay out up to £130m in compensation to owners of some of its leasehold properties. Nationwide’s decision is likely to put more pressure on builders to stop selling new properties on these terms in future. But for those who have already bought one of these properties, the only way to avoid ground-rent hikes and consent charges will be to buy the freehold.

Unfortunately, many owners have found that developers have sold their freeholds onto investment companies that either set sky-high prices for the contracts or refused to sell at all. So what are your rights in this position?

The Leasehold Reform Act 1967 gives leasehold tenants of houses the right to buy the freehold via a process called “enfranchisement” once they have owned the property for two years. To do this, you’ll need to hire a solicitor who is a member of the Association of Leasehold Enfranchisement Practitioners (ALEP). Enfranchisement involves following a legal process with a statutory valuation method set down by law. The first step is to serve a “notice of claim” on the freeholder. The freeholder then may require a deposit (of up to three times the annual ground rent) to be paid within 14 days, and ask for evidence of your title to the lease within 21 days. Once notice has been given and the claim accepted as valid, the freeholder is bound to sell the freehold. If they refuse to negotiate a price fairly, you have a legal right to force them to do so, as well as benefiting from legal protection on the terms of the freehold purchase.

Unfortunately, enfranchisement can be expensive and time-consuming, with the homeowner having to pay the premium for the lease, plus both theirs and the freeholder’s solicitors’ fees and valuation fees. Hence some leaseholders will be tempted to negotiate informally with freeholders in an attempt to either purchase their freehold before they have owned their property for two years or cut costs. But if you do this, you will have less legal protection, and the freeholder may seek to exploit their position.

Leasehold flat owners looking to buy their freehold need to club together with at least half the other owners in the same block via a process called “collective enfranchisement”. Again, specialist legal advice is needed for this process, and a specialist surveyor will negotiate with the freeholder’s surveyor to agree a price. Once a sum has been agreed, flat owners set up a new freehold company which will own and manage the building. Each flat owner will own a share of the company – hence the term “share of freehold”. This entity will have control over service charges, repairs and maintenance. Leases can then be easily and cheaply extended, and the ground rent reduced to a negligible sum.