To buy or not to buy: is the freehold worth aquiring?
MANAGING DIRECTOR, KAY & CO
Q I own an apartment in central London with a 125 year lease, which I am thinking of selling in the next couple of years. The other flat owners and I have been offered the opportunity to buy our freehold. Is this something I should do before I sell?
A There is no question that, generally speaking, purchasers prefer to buy in buildings where they own the freehold. The difference in value between the long leasehold which you currently have and a 999 year lease with a share of the freehold is probably only one per cent. While it may not enhance the value significantly, what it will do is make your apartment more attractive and essentially more saleable to a potential purchaser. The most significant advantage of owning the freehold is having control of the service charge levels and when and how the building is maintained and to what degree. Naturally the condition of a building makes a substantial difference to the price at which a flat can be sold: a good flat in a smart building is always worth significantly more than the equivalent flat in a scruffy building. However, all too often, maintenance of buildings by a third party freehold are done to a poor standard, in an untimely manner and at a cost which does not offer true value for money.
Ownership of the freehold makes you master of your own destiny and you and the other residents can ensure that the building’s running costs are relatively constant. You can also avoid large unexpected service charge bills through careful planning of future maintenance and through the provision of an adequate sinking or reserve fund which is built up over time to pay for major repairs such as a new roof or replacement lift. Be warned, however: a good managing agent is going to be an essential part of this process going forward as you are likely to struggle to run the building on your own. I have personally taken over numerous buildings that have been poorly managed in the past by absentee freeholders and have found that, on average, running costs can be driven down by about 15 per cent through prudent efficiency savings, which will a big attraction for any incoming purchaser. In conclusion, I would say that the acquisition of the freehold is something that will benefit you when you come to sell and given the length of your current lease it is unlikely to be particularly expensive either, relative to the benefits that you will derive. The only issue we find is that when residents do actually own their freehold collectively, the key is to ensure that there is a fair voting system in place so that the majority can dictate what happens to the building, otherwise nothing tends to actually get done as parties argue about what they want done and what they do not want to have done. In this situation having someone else actually own the freehold and controlling the building can be the lesser of two evils.