Case Study – How Using a Professional can save you Money
Wednesday, 26th October 2011
Case Studies | Leasehold Valuations | Surveying
We’ve written quite a few posts over the last few months on how the Leasehold Reform, Housing and Urban Development Act 1993 works in principle, so we thought it was probably about time to look at a ‘Real World’ example and show how you can benefit from taking professional advice at an early stage.
As they always say in these cases, we’ve changed the names and addresses to protect the innocent. In fact we’ve gone even further and left them out altogether. We acted on behalf of the lessee of a flat who wished to exercise his right under the Leasehold Reform, Housing and Urban Development Act 1993 to obtain a new lease on his flat. Throughout we will refer to our client as the lessee and his landlord as the freeholder.
Initially he contacted his freeholder’s managing agents and, not unexpectedly, they told him the process of obtaining a new lease under the Leasehold Reform, Housing and Urban Development Act 1993 was extremely complicated and time consuming and it would take ‘months’ if he wanted to go ahead under the Act. However, the freeholder would be very happy to give him a new lease outside of the Act (on payment of a suitable premium) and this would be very easy and could be completed in no time at all.
Fortunately, our prospective client took professional advice at this stage and we were able to talk him through the process of applying for a new lease under the Act. I won’t repeat the process here as you can always go back and read my earlier blogs on how the Act works. To be fair the majority of professional landlords (i.e. property companies, developers etc.) will try to persuade their lessees to accept a new lease outside the Act. For them it’s purely a commercial proposition and it is always financially beneficial for the freeholder to grant a new lease that is outside the Act. Generally they will offer a new 99 year or 125 year lease at a ‘modern’ ground rent. Usually this will be about £250 a year with a provision for the ground rent to increase at set intervals. If the freeholder can encourage their lessees to take out new leases on this basis, they (the freeholder) maintain their income stream from ground rents.
From the lessees point of view it is always going to be financially better for them to apply for a new lease under the terms of the Leasehold Reform, Housing and Urban Development Act 1993. A new lease under the terms of the Act, you will recall, has to be for a term 90 years longer than the existing lease and at a zero ground rent.
Most lessees will start to think about extending their leases when they have about 80 years left to run. We will leave it to you to do the maths, but would you sooner have a new 99 year lease at a ground rent of £250 a year, or a new 170 year lease with no ground rent?
So back to the case in question. After advising our client of his rights under the Act we carried out an inspection of the flat to arrive at our opinion of the premium that he would have to pay for a new lease. The flat in question was a fairly typical, two-bedroom, purpose-built flat with a floor area of about 65m2. The flat was in an established residential area and was worth about £145,000 – £150,000 on the open market. When we looked at the flat the unexpired term of the lease was just under 72 years and the ground rent was £40 per annum for the duration of the lease.
When calculating the premium for the new lease we had to take into account the diminution in value of the freeholder’s interest that would result from the grant of a new lease. We had to consider that the freeholder would no longer receive the ground rent of £40 a year and that the freehold would now revert to the landlord after 162 years rather than 72 years. Using the formula set out in the Act we calculated that the premium would be £7,612.00.
After receiving instructions from our client we served the freeholder with a Notice under Section 42 of the Leasehold Reform, Housing and Urban Development Act 1993 advising that our client wished to obtain a new lease. In the notice the premium offered was £7,500. (Our calculation rounded down to the nearest £500). Our notice was served towards the end of January 2011 and the freeholder had to respond by issuing a Counter Notice under Section 45 of the Act no later than the end of March 2011.
The freeholder responded almost immediately through their solicitors advising that they:
- Required access for their own surveyor to carry out a valuation
- Required the lessee to produce evidence of entitlement to a new lease
- Required the lessee to deposit 10% of the proposed premium as security
The freeholder is entitled under the Act to do all of these things. Many freeholders will not insist on a deposit or put the lessee to the trouble of producing evidence of title, as a simple, on-line Land Registry check can confirm details of the lease. We would stress that the freeholder could not be criticised for adhering strictly to the letter of the Act, but it was an indication that they did not intend to give the lessee an easy ride. Many lessees could be put off or discouraged by such an apparently bullish approach, but we were able to reassure our client that the freeholder was acting within his rights and that this approach would not prevent our client from seeing the deal through.
Although the freeholder had responded almost immediately, their response did not constitute a Counter Notice. The freeholder’s surveyor attended the property on 7th February 2011, but we heard nothing from the freeholder or their agent until 3rd March. If we are going to be precise we didn’t hear from the freeholder at all! The freeholder’s managing agent actually by-passed us entirely and wrote directly to our client! The gist of the managing agent’s letter was that their surveyor had calculated the premium to be £11,476.00, but that they would not be issuing the formal Counter Notice until the end of March 2011 (the maximum period allowed by the Act). They went on to say that it would take 6 to 12 months to achieve completion if the lessee wanted to follow the legislative route. There was, however, no need to despair; the freeholder would be willing grant a new lease for 99 years at a ground rent of £250 per annum. Not only would they grant a discount of 10% from the price of £11,476 (provided the lessee accepted the offer within 14 days) but they would also give the transaction immediate priority attention. (Yes, the immediate priority attention was actually underlined and in bold on the offer letter.) Fortunately, our client was able to overcome the temptation to immediately accept this ‘once-in-a-lifetime’ offer and forwarded the letter to us.
As discussed above, this was an ill-concealed attempt to dissuade the lessee from pursuing his statutory right to a new lease under the Act. The implication was that the freeholder would make it as difficult and protracted as possible for the lessee to obtain a new lease by the statutory route and that it would be much easier for him to accept a new lease outside the Act on terms dictated by the freeholder. Had the lessee given in to this pressure he would, in fact have paid about £10,000 for a lease that was only 27 years longer than his existing lease at six times the current ground rent!
After taking our client’s instructions we responded to the managing agent advising that our client would be declining the offer of a new lease outside the Act and would be pursuing his statutory claim.
The freeholder’s managing agents were true to their word and the formal Counter Notice under Section 45 was duly received shortly before the end of March 2011 (The legal deadline for service). It should be borne in mind that the freeholder’s surveyor had inspected the property on 7th February and it would have been possible for the freeholder to have served a Counter Notice by about the middle of February if they had complied with the spirit of the Act rather than the letter of it!
Once the Counter Notice was served we were able to commence negotiations on behalf of our client. At this stage it is normal practice for the two surveyors to exchange valuations. The valuations were exchanged at this stage, but the freeholder chose to use his managing agent to conduct the negotiations rather the surveyor who had produced the report. At the end of the day, although this is slightly unusual, there is nothing in the Act to say who should carry out the negotiations and it didn’t really make any difference to the outcome.
When we saw the other side’s valuation we were able to see how the freeholder’s proposed premium of £11,476.00 was calculated and were able to successfully challenge it. Put simply the freeholder’s surveyor had used a much higher market value for the flat than we had and this obviously favoured the freeholder. On negotiation we were able to reduce this figure to a level much closer to our own valuation. The other main area were we were adrift was on the concept of ‘relativity’. This basically means how much the flat with the existing ‘short’ lease is worth when compared to a similar flat with a share of freehold.
This flat had a lease of just under 72 years and we calculated relativity at 92%. This means that the flat with a 72 year lease would be worth 92% of what it would be worth with a share of freehold. The freeholder’s surveyor set relativity at 89% in his calculation. This is quite significant and again was very much in favour of the freeholder. We were able to demonstrate by reference to published graphs of relativity and previous decisions of the Leasehold Valuation Tribunal that a relativity of 89% cold not be substantiated.
Following an exchange of e-mails with the freeholder’s managing agents over the course of a few weeks we were eventually able to negotiate a settlement at £8,000. You will recall that our original valuation estimated the premium at £7,612.00, so at the end of the day we went up by £388.00 and the freeholder came down by £3,476.00. The settlement was agreed on 17th May 2011, less than two months after the Counter Notice was served. Not quite the 6 to 12 month period suggested by the managing agent!
A successful outcome for our client who now has a flat with a lease of almost 162 years at zero ground rent and has paid a premium of £8,000. If he had accepted the managing agents original offer he would have paid over £10,000 for a 99 year lease and would also be paying a ground rent of £250 a year! It just goes to show that taking professional advice at an early stage can save you time and money.
