Category: Flat Guides

What is a Lease

What is a Lease?

We are able to offer insurance for buildings that have been divided in to self-contained flats. These flats can either be purpose built with concrete floors or houses which have been converted in to flats.

What is a lease

Whatever type of flat you own, in all but rare occasions, you will own it on a lease. A lease gives you the right to occupy your portion of the building and use the common parts for a certain period of time. A typical lease would be for either 125 years or 99 years. At the end of the lease period the “ownership” of the flats reverts back to the freeholder.
Leases have been developed to give property owners a legal entitlement to land and buildings where it is not possible for them to own the freehold. Leases vary greatly and contain both basic elements and also special terms relating to the specific building. They are made in duplicate and the counterpart is held by the landlord. All the counterparts together form the management company or freeholders association title to the property. Most leases within the building will be the same. Its sometimes difficult to grasp that even though you have purchased a flat, if it is on a lease, you will in fact be a tenant, albeit it one with the right to occupy your property for a considerable amount of time. A lease is a contract between a landlord and a tenant. Each party’s rights and duties are formally written out. The duties are called covenants. Each flat owner ought to have had the lease explained to him/her when buying the property and should be aware of its terms. The owner or landlord will be paid ground rent and a service charge by each individual flat within the block and there will also be rules relating to behavior within each flat and repairs of the property.

The tenant’s covenants

Rules within the lease cover a variety of things. Most of them will be easy to understand and will not need any intervention from the management company or tenants association or group of tenants if things are run on a more ad-hoc basis. The covenants that interest leaseholders usually relate to the collection of money for the ground rent and the service charge.

Ground rent is normally a small sum (a peppercorn amount) and it may give the landlord a small income. If the tenants all group together and buy the freehold then this yearly amount is paid to themselves and it can be used to subsidise the cost of maintenance and insurance.

The service charge is a necessity whoever owns the freehold as it is used towards building insurance premiums and general maintenance. It is usually a good idea to keep money in a fund as the collection of charges can sometimes be a long drawn out affair especially if any of the leaseholders do not live on the premises

Types of Leasehold Clauses

‘Quiet possession’ is a clause that is to be found in every lease. It means that as long as the flat owner carries out his/her duties and obligations, then the lessor has no right at all to interfere.

The freeholder or his delegated managing agent must ensure that the building is covered by insurance (building, not contents) with a block policy. The insurance cover will need to be studied to make sure it is suitable for the leaseholders to be able to secure a mortgage. Often a leaseholder’s mortgage provider will want their interest noted on the policy schedule and in the event of a serious event such as a large fire, they will expect to be notified.

The cost of this insurance is recoverable from the flat owners by working out what proportion each is to be liable for. Building Insurance is paid in this way as it would not be possible to make sure that the entire building was correctly covered by insurance if each individual were to only be responsible for their own part of the building. Many leaseholders still try to obtain building insurance for a single flat but this is not to be recommended.

The Freeholder has a duty to maintain the building. This is an ongoing obligation. The cost of the maintenance and repairs are recovered under the service charge. The flat owners will expect the service charge to be used in an efficient way and, for this reason; another duty of the freeholder company is to produce comprehensive annual accounts for the flat owners. In practice, these are sometimes difficult to obtain.

If you have any question with regard to your ability to purchase insurance for a building that has been divided in to a flat, please do not hesitate to contact us, we will be pleased to assist.

May 18, 2015

Flat Guides

Valuing Freehold Interest

Freehold Interest on Valuations

At Highhouse Insurance we are often asked to quote for Buildings Insurance in respect of property that has been divided in to self-contained flats, either purpose built or converted property. One of biggest areas of confusion relating to this type of cover surrounds who is who is actually responsible for the insurance; is it the freeholder or is it the leaseholder. Generally speaking in most cases, the freeholder is responsible for the buildings insurance and will charge the leaseholders accordingly. In some cases it may be possible for us to provide cover for leaseholders and we are always willing to listen to situations where for whatever reason, the freeholder has not arranged insurance cover.

Many leaseholders chose to buy the freehold of their property to give them control over the building they own, this will then give them the right to make decisions and to manage the property as they feel fit.

If you are contemplating purchasing the freehold of the block of flats that you live in, it will be necessary to get a valuation from a local qualified surveyor before you enter into any negotiations. A surveyor will be able to complete a valuation according to the current legislation; will advise on purchase price and the offer that ought to be made to the freeholder in the Initial Notice and the freeholders response in the Counter Notice. He/She will also carry out negotiations on your behalf with the freeholder, give advice and provide evidence at a leasehold valuation tribunal as well as giving advice regarding repairs and maintenance of the property once the enfranchisement has been completed.

At the first meeting with the surveyor the valuation process should be discussed. According to Schedule 6 Part II of the Leasehold Reform, Housing and Urban Development Act 1993 the price of the freehold should include the income received from the ground rents within the building, the increase in the sale value of the flats due to the freehold being obtained (this is called the reversion value), the marriage value (this is the increase in flat values minus ground rents and the reversion value), the value of other interests e.g. garages and commercial properties, and compensation for losses to the freeholder for the reduction in value of another property resulting from a forced sale (injurious affection).

Freehold property with a long lease is valued on an investment basis, meaning that the property has no other value except for the income from the rent and the reversionary value once the leases have run out. The freehold value is worked out according to the expected future income of the property.

The income received is easily worked out. The annual ground rent is multiplied by the number of flats in the block. This amount is then multiplied by the ‘years purchase’. The ‘years purchase’ may either be taken from a set of tables or the valuer may calculate this for himself/herself. It is done to ascertain what the investor would have to pay to get the same fixed income over the term of the lease. There are often discrepancies to be looked at as the leaseholder’s valuer and the landlord’s valuer will often come up with different amounts for the years purchase figure.

As the lease on a leasehold property gets shorter the value of that property decreases. If enfranchisement is achieved then the new owner will usually increase the time on the leases. The values of the flats within the building are, consequently, increased. The valuer will need to consider other properties in the vicinity to estimate how much the value will increase. Flat leases usually revert back to the landlord once the term of the lease has expired. However, it is most likely that the tenant will be able to remain in occupation as there is statutory protection to ensure the tenant still has somewhere to live.

The marriage value involves both parties and is worked out quite easily. The value of the property with renewed leases is the base figure and from this the current value of the properties are deducted. Then the ground rent and the reversionary value are also deducted leaving the ‘marriage value’. This amount is split equally between the two parties. Legislation states that if a participating leaseholder has an unexpired lease of in excess of 80 years then any marriage value will be irrelevant.

In cases where negotiations do not run smoothly it may be necessary to enter more formal arrangements to bring matters to a satisfactory conclusion. The Leaseholders Valuation Tribunal is of help when trying to decide on matters like the sort of interest to be applied and the price to be paid.

There is a myriad amount of information relating to the value of freeholds available on the internet we believe if you are contemplating the purchase of your freehold, you should always seek professional advise.

Highhouse Insurance will be pleased to quote for buildings insurance for all types of blocks of flats whether owner occupied or rented to tenants.

We look forward to receiving your enquiry.

May 14, 2015