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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, and is a separate initiative from the Right to Manager (RTM). 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 our flats because mortgage lenders are not willing to lend to potential buyers for our flats.
One of the primary reasons that lenders refuse to lend is due to the ground rent clause in our lease.
It is suspected that all, if not the majority of leases contain a ground rent clause which sees the ground rent increase every five years in line with inflation (RPI is the index used).
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 obtain mortgages 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 at all and some leaseholders have even struggled with remortgaging their existing mortgages.
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 and the most recent flat which sold to a cash buyer went at a 100k loss.
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 has examined the legal options available to us for us to take action against the issues we face to make our properties more sellable. If we act together, we hope to share costs, making it cheaper if we act jointly.
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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!
Some of you have asked why we don't just ask our Freeholder nicely to vary our ground rent clause.
Some leaseholders have asked the Freeholder to agree to what's known as a Deed of Variation, where we all voluntarily agree to amend a term in our lease. The Freeholder has refused to do this and they don't have to agree - a Deed of Variation is entirely voluntary.
There is no incentive for the Freeholder to be nice to us, amend the ground rent term and give up their income stream by doing so. We are their cash cows, locked into a contract to pay them, and they don't care if our flats are unmortgageable. It's not their problem.
So, we do have two legal options available to us, which the Freeholder can't refuse.
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OPTION 1
A Statutory Lease Extension
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While our leases have over 200 years remaining on them, we could help resolve our ground rent issue by conducting a statutory lease extension. This extends our leases by 90 years and automatically extinguishes the ground rent, reducing it to what is known as a 'peppercorn amount'. A peppercorn amount is a nominal fee, usually something like £1.
We will still have a freeholder but the ground rent becomes a minimal amount, making lenders more willing to lend.
IMPORTANT: There is no 50% threshold for this - any individual leaseholder can do this themselves at any point. A single leaseholder could do this alone, without needing other leaseholders to agree.
However if we decide to do this collectively, at the same time and using the same solicitor, we can share costs and negotiate legal fees down.
It is important to note that the freeholder cannot refuse to grant a statutory lease extension. The process is governed by a strict timeline which all parties must adhere to.
The Solution
OPTION 2
Collective Enfranchisement - buying the freehold
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Purchasing the Freehold is known as 'collective enfranchisement'. By purchasing this, we become our own freeholder and can then enact a voluntary Deed of Variation to amend the ground rent clause in our lease and scrap it altogether.
To do this, we will need to create a limited company, appoint Directors, and file accounts with Companies House. The limited company would acquire the Freehold, and everyone who participates in collective enfranchisement would become a shareholder of this company.
They would be known as the 'enfranchised members' and their flats would become share of freehold flats, where their flat would still have a lease, but they'd also have a share of the freehold of the building.
IMPORTANT: In order to collectively enfranchise, we need 50% of leaseholders to agree to do this and fund the purchase. Our building has 122 flats, so we need 61 leaseholders to agree and fund the total cost.
The flats that do not enfranchise would be known as the 'unenfranchised members'. For them, nothing much would change - they would continue to pay ground rent, but to our limited company. We would then distribute this amongst the enfranchised members. Now, it's important to remember that if tomorrow the government does finally take action and a ground rent cap does come in, this could impact on these payments.
ALSO IMPORTANT: In a collective enfranchisement scenario, an enfranchisement could be more expensive as you have to pay the full cost of the freehold. The cost of acquiring the freehold is known as the Premium, and we'd need a Valuation to determine this.
If the Valuation determines the Premium to be, let's say, £1.2m, and we only have 51 participants, we'll each have to pay around 23.5k, covering the cost of payments for even the unenfranchised members. We haven't managed to get 100% of flats to sign up to this project, so we know that we will have to pay more to cover the unenfranchised members' portion.
In a lease extension, you're just compensating the freeholder for your own ground rent payments that you're taking from them (remember, this is because a lease extension is an individual thing and the freeholder doesn't change). In collective enfranchisement, you're taking the entire building's freehold away from them, which is a huge income stream for the freeholder.
This option can also be more expensive as the freeholder could negotiate the Premium more than they can in a lease extension (explained below), and we'd also have to pay the costs of setting up the limited company.
Government Reform
The outgoing Conservative government passed a Leasehold and Freehold Bill. This Bill means that we are no longer liable for the Freeholder's costs if we undertake a lease extension or collectively enfranchise, which will save us all a considerable sum. However we are potentially going to have to wait months or years to see this come into force and we do not have a timetable for this.
Although there was talk of a ground rent cap at £250 (which would solve our issue), this ultimately didn't materialise.
The new Labour government has announced a new draft Leasehold Reform Bill. Draft legislation takes at least a year to get through parliament and won't necessarily immediately come into force. It is not currently clear if Labour will introduce a ground rent cap but this seems highly unlikely as freeholders are taking legal action against the government to stop this from happening.
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.
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.
The Process of Extending a Lease
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.
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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.
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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. Based on advise we have received it is likely that your lender will be willing to increase your existing mortgage amount to accommodate the extension of the lease or purchase of the Freehold.
Step 3: Agree Our Course of Action
At this stage, we can decide what our best course of action is. We should take into account the full pros and cons. Please read the email that Maahwish has sent you directly which shares additional detail on each option and the costs involved - it is worth noting that enfranchisement will be more expensive.
Step 4: Instruct a Solicitor
We will instruct a solicitor who has significant experience and expertise in purchasing freeholds or lease extensions. We have already spoken to two experts in leasehold and both have agreed to reduce their fee for a lease extension if we all do it at the same time with them - these are the cost savings that we want to achieve by acting collectively. In an enfranchisement, we all have to use the same solicitor anyway, so there's less room to negotiate their fee down.
Step 5: Notify the Freeholder
The solicitor will write to the freeholder to notify them of a lease extension / collective enfranchisement request.
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.
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A lease extension under the statutory process follows a fixed timeline and is likely to take up to 12 months