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WORKING TOGETHER TO PROTECT OUR INVESTMENT
Welcome to the Valentines House Ground Rent Working Group (GRWG) website. We are a committee of leaseholder volunteers who are working together to explore legal options to protect our investments and resolve our ground rent issue which is causing difficulty with sales. This site is to provide information on our options, provide access to relevant and useful information, and share answers to common questions that you might have.
The Problem
Valentines House leaseholders are struggling to sell their flats because lenders are not willing to lend to potential buyers for our flats.
One of the primary reasons cited is the ground rent clause.
All of our leases contain a ground rent clause which sees the ground rent increase every five years in line with inflation. Over time, lenders have updated their lending criteria and have taken a negative view of this clause, deeming the five year review period unusually high. As a result, our potential buyers struggle to find mortgage providers and many sales have collapsed.
While there are still some specialist lenders that are willing to lend, they will do so at high interest rates and require large deposits, narrowing our pool of potential buyers. We are also increasingly finding it difficult to find willing lenders. As a result, some estate agents are looking for cash buyers but are significantly dropping the asking price to achieve a sale, especially when there are multiple flats on sale at once. Flats are selling for less than what we paid for them.
While the ground rent issue is a primary barrier to sale, we've explored our other barriers to sale here.
Taking Collective Action
The GRWG is looking at all of our legal options to take collective action against the issues we face to make our properties sellable. If we act together, we stand a far greater chance of success and at a reduced cost.
We need to take action before it becomes impossible to ever sell.
The Solution
The good news is that we can try to do something about it!
We are currently waiting to see if the Government's proposed Leasehold Bill solves the ground rent issue for us, but, if it doesn't, we have two legal options available to us.
OPTION 1
Collective Enfranchisement - buying the freehold
If leaseholders collectively purchase the freehold (known as 'collective enfranchisement') for Valentines House, then we will no longer have a freeholder and will no longer need to pay ground rent. Those of us who do so will be the 'enfranchised members'.
This will resolve a key issue with lenders and will put us in the strong and unique position of each owning a share of the freehold with Right to Manager (RTM) in place.
This will make us a more attractive proposition for buyers and lenders alike as there are not many buildings of our size that own the freehold.
We need 50% of leaseholders to agree to do this and fund the purchase. If the other 50% choose not to, their ground rent payments will go to the enfranchised members.
The freeholder cannot refuse to sell the freehold to us.
The Solution
OPTION 2
Lease Extension
Extending our leases reduces the ground rent to a peppercorn amount. We still have a freeholder but the ground rent becomes a minimal amount, making lenders more willing to lend.
There is no 50% threshold for this - any individual leaseholder can do this themselves, but if we decide to do it collectively, at the same time, we can negotiate on legal fees. Some individual leaseholders have floated the idea of extending the lease to the freeholder previously when their sales have fallen. The freeholder has responded to say that they will fight this aggressively.
Seeing a number of leaseholders take action collectively puts us in a much stronger position to fight the freeholder and force them to negotiate with us.
It is important to note that the freeholder cannot refuse to grant a lease extension
Timeline & Leasehold Bill
Parliament is currently reviewing a proposed Leasehold and Freehold Bill which should go to a vote this year. The Bill is currently in amendment stages in the House of Lords.
There have been rumours that this could include a ground rent cap, potentially capping our ground rent at £250, which could solve our issue. There is a lot of uncertainty if this cap will go through.
In addition, the Leasehold Bill, in its current form, would remove our liability for the Freeholder's costs. Under current legislation, we would be liable for the Freeholder's "reasonable legal costs" and their cost for obtaining a valuation (this is explained below), in either a lease extension or collective enfranchisement scenario. We would not be liable for their tribunal costs, if it gets to that stage.
Given this moving situation, solicitors have suggested that we wait until this Bill is voted on in parliament (due 2024), as we could be in a more favourable position. However there is uncertainty as to which of the Bill's proposals could be amended as it progresses through the Lords, and how long it would take for the Bill to be implemented once it passes. We recommend that all leaseholders sign up to email updates so that we can keep you updated as the Bill progresses and share what any changes mean for us.
The GRWG's view is that the government is highly unlikely to scrap ground rents and it has been widely reported that the plans to limit ground rents have been scrapped after freeholder lobbying.
Until the ground rent issue is resolved, we need to help leaseholders who have to sell before the Bill comes into place. If you want to sell your property, please read this guide, where we have suggested a strategy to achieve sales while we have the ground rent issue.
Once we start a lease extension or collective enfranchisement process, we estimate it to take a year.
Benefits of Collective Enfranchisement
No More Ground Rent
As freeholders we will no longer be required to pay ground rent, resulting in long-term cost savings. We are particularly vulnerable due to our ground rent potentially increasing every five years.
Ability to Remortgage and Sell
Removing leasehold status and ground rent will make it easier to get mortgages and sell individual flats in the future. Currently, we could face the situation of never being able to sell if lenders won't lend.
Ownership Rights
Enfranchised members will collectively have full ownership rights over both the property and the land it sits on.
No Lease Restrictions
We will no longer be bound by lease restrictions meaning we can collectively make alterations or renovations to the property without seeking permission.
Peace of Mind
Freehold ownership will provide a sense of security and peace of mind, knowing that we have complete control over our properties without concerns about lease terms, ground rent increases or lease extensions.
Potential for Higher Property Value
Having the right to manage (RTM) already in place plus ownership of the freehold will make Valentines House a more attractive proposition for sales and will put owners in a more unique position.
The Process of Buying a Freehold
As Leaseholders we have a legal right to purchase the Freehold or extend our leases - the Freeholder cannot refuse.
The Freeholder can only dispute the value of the freehold, (i.e. the cost to buy it) known as the 'Premium'.
Step 1: The Valuation
Both processes must begin with a valuation of the Premium. We'll collectively instruct a Valuation Agent to provide an independent and professional valuation to determine what the freehold is worth, for either a leasehold extension or collective enfranchisement. This is a necessary first step.
Based on quotes we have sourced, we estimate the cost to be around £80-100 per leaseholder if only 50% of leaseholders agree to obtain the valuation. The more who agree to fund this valuation the lower the cost for everyone.
The valuation will be based on a few factors, but is primarily an assessment of the cost to "compensate" the freeholder for taking away their revenue stream - the value of the ground rent for the term of the lease. This is an assessment of the market value of our freehold as a financial asset, not the condition of the building, individual flats, amenities within the building etc.
The valuation typically "stands" for 3 months.
Step 2: Determine Costs & Financing
Once the independent valuation has been confirmed we can then estimate the total and final costs taking into account the Premium and legal fees.
We can also then discuss and look at financing options. We think that your existing lender may be willing to increase your existing mortgage amount to accommodate the purchase of a Freehold.
Step 3: Agree Our Course of Action
At this stage, we can hold a vote to ask leaseholders if they wish to collectively enfranchise or extend their lease. It is important to remember that both carry similar costs and involve a very similar legal process, but collective enfranchisement, in the GRWG's view, presents far better value for money, makes our flats a better sell and gives us the opportunity to benefit from the ground rent of any leaseholders who do not enfranchise.
If we fail to meet the 50% threshold, those of us who do wish to take action on the ground rent clause should look at extending our leases at the same time, using the same solicitor. This way, we can negotiate and share legal costs.
Step 4: Instruct a Solicitor
We will instruct a solicitor who has significant experience and expertise in purchasing Freeholds or lease extensions, but also represents good value for money to keep costs to a minimum. By acting collectively, we can negotiate and share legal costs, reducing it for everyone.
Step 5: Notify the Freeholder
The solicitor will issue a “tenants’ notice” on the Freehold, effectively requesting the purchase of the Freehold. The notice must be signed by all leaseholders involved in the purchase. The Freehold will then be required to serve a “notice in reply” within two months.
Step 6: Negotiate
Upon receipt of our Notice, the Freeholder will then have to undertake their own independent valuation (they must use an independent Valuation Agent) and will negotiate the Premium with our Valuation Agent and solicitors.
If no agreement on the Premium can be reached for either a collective enfranchisement or lease extension, then this will have to go to a tribunal.
Each party at a tribunal is responsible for their own legal costs - the Freeholder would have to pay their own costs for a tribunal. They would have to demonstrate to an independent tribunal why our valuation and negotiations aren't sound.
While the Freeholder has told leaseholders in the past that they would vigorously defend any lease extension (and, we can presume, collective enfranchisement), they cannot legally stop us from doing so, and can only defend this within legal parameters, i.e. by providing reasonable arguments as to why the Premium proposed is unreasonable.