Is an £11,026 Freehold Purchase Price Fair?

A leaseholder is seeking clarity on whether an £11,026 charge from their local council for purchasing the freehold of their flat is reasonable. The offer includes a 999-year lease extension for a property valued at £600,000, while the current lease has 82.49 years remaining.

Assessing the Freehold Valuation

Experts suggest that the £11,026 premium for a £600,000 property with over 80 years remaining on the lease is likely fair. Linz Darlington, director of leasehold extension specialists Homehold, explained that the payment compensates the council for the loss of their right to reclaim the flat at the end of the lease. He likened the sum to the potential compound interest on £11,000 invested over 82.5 years at a 5% interest rate, which would grow to approximately £600,000. This financial principle, he noted, makes the current offer a legally accepted equivalent to receiving the full property value in the future.

In contrast, the leaseholder's downstairs neighbours, who have a significantly longer lease of 172.49 years remaining after a previous extension, were quoted only £123 for their share of the freehold. This disparity is due to the much greater time that must pass before the freeholder would regain possession, rendering that right nearly worthless in present value terms.

Vanessa Griffiths, a leasehold reform and litigation consultant, concurred that based on the provided figures, the £11,026 appears reasonable, although she recommended seeking an independent valuation for a full assessment.

The Impact of Roof Repairs

The leaseholder also raised concerns about a poorly conditioned roof, which their structural survey flagged as requiring immediate and costly repairs. The council, as the current freeholder, is responsible for roof maintenance under the existing lease.

However, experts indicate that this condition may not significantly reduce the freehold purchase price. Griffiths noted that if roof repairs are funded through service charges, leaseholders already indirectly cover these costs. Darlington added that while a buyer of a physical house might deduct repair costs, the freehold purchase operates differently. The costs of repairs, even if necessitated by the freeholder's current obligation, would be passed back to the leaseholders through service charges. Consequently, even a reduction in the flat's immediate value due to the roof repairs would translate to a minimal decrease in the freehold premium due to the power of compound interest over the remaining lease term.

Strategic Leasehold Decisions

Regarding the question of whether to buy the freehold first and then extend the lease, or vice versa, experts advise that the core cost remains similar. Both actions compensate the freeholder for the loss of their reversionary interest. In this specific case, purchasing the freehold allows the leaseholders to extend their lease to 999 years at no additional premium, though legal costs would apply.

Darlington emphasized the importance of extending the lease to 999 years even after acquiring the freehold. This is crucial for future resale prospects and mortgage lender requirements, and to avoid potential future tax implications.

Griffiths reiterated that buying the freehold and simultaneously granting a long lease is the most sensible approach, stating that separating these actions would not yield financial savings.

Leasehold Reform Considerations

While the Leasehold and Freehold Reform Act (2024) promises to simplify and reduce the cost of lease extensions and freehold purchases, the general advice for leaseholders with over 80 years remaining on their lease is to proceed with their transaction rather than wait. The exact details of the new calculation methods and their implementation date remain uncertain, and there is no guarantee that future processes will be cheaper.