Potential reforms to the leasehold system could lead to a sharp rise in the number of freeholders looking to sell their interests in blocks of flats, presenting a prime opportunity for leaseholders to collectively acquire their freeholds.
Following the publication of the Law Commission’s recommendations for reforming leasehold enfranchisement last week, the Leasehold Group has said it expects many freeholders will now seek to dispose of their freehold interests before the government makes any legislative changes.
Anna Bailey, CEO of the Leasehold Group, commented: "As the momentum behind leasehold reform continues to gather, we've seen that freeholders are very anxious about how the government intends to change the leasehold system.
“Despite the fact that we expect legislation to take a long time to enact, we are already noticing that many freeholders are disposing of their freehold interests via Section 5 Notices, and we expect many more to start the process over the coming months.
“When leaseholders receive a Section 5 Notice from their freeholder, it presents a rare opportunity to purchase the freehold of their building without any resistance in order to gain full autonomy over what is usually their largest asset.
“However, time is very much of the essence, as there are tight legal deadlines surrounding a Section 5 Notice and the clock starts ticking from the moment the freeholder issues the Notice, not from the time the leaseholder receives it through the post.”
Under the Landlord and Tenant Act 1987, a freeholder who wishes to sell the freehold interest in a block of flats must first serve a Section 5 Notice on the leaseholders, giving them the opportunity to buy the freehold of their building. This is known as ‘the Right of First Refusal.’
If a majority - more than 50% - of the leaseholders wish to acquire the freehold on those terms, then they must notify the freeholder within the time limits set out in the Notice (typically two months).
Leaseholders that fail to respond within the timeframe – even if they are one day late – will lose their legal right to buy the freehold in this way, and the freeholder will then be free to sell it to whomever they wish.
Bailey continued: “Our experience shows that freeholders will use every trick in the book to delay the process, in order to thwart leaseholders' chances of purchasing the freehold, so the freeholder can sell to their preferred buyer or at auction. For example, freeholders often issue Section 5 Notices during the summer months, when many people are on holiday – or at Christmas time – when it can be very difficult for leaseholders to organise themselves into a group within the strict timeframes.
“Experienced project management support can be invaluable in uniting all leaseholders, including those who rent out their properties, to achieve the common goal of collectively acquiring the freehold. Project managers will also coordinate the work of the numerous professional parties involved, and arrange other important aspects including the financing of any non-participants’ shares (which must be covered).”
There are numerous benefits to owning the freehold, such as getting rid of ground rent and fees for licenses or permissions to make home improvements, reduced service charges, and that there will be no future fees for participants in the freehold transaction to extend their leases (except minimal legal costs), according to Bailey.
She added: “It is essential that any leaseholder seeks advice as soon as they receive a Section 5 Notice, in order to take advantage of an excellent opportunity to purchase the freehold of their building within a prescribed time frame, especially as freehold purchases can otherwise become very protracted.
“Failing to act in time could enable the freeholder to sell the freehold interest at auction or to another investor, and remove this golden opportunity for the leaseholders to take full control of the value of their leasehold property.”