Kat Callo's blog - Transforming UK apartment ownership

Overcoming the Old Slumlord Phenomenon in the UK with "Right to Manage"

I was invited earlier this month by a consumer-rights TV programme, BBC Watchdog, to meet with leaseholders of flats, to  advise them about ways to take greater control over their residential blocks of flats. These owners of flats had all suffered at the hands of landlords and managing agents that had failed to take proper care of these apartment buildings.

Some of the stories were shocking and involved a glimpse inside buildings run by owners or managing agents apparently stuck in an outdated slumlord mindset. 

In one case, a resident showed the BBC camera team huge patches of mould growing inside the front door of her block of flats. In another building, residents donned rubber gloves to clear away piles of smelly months-old rubbish, even though it was the managing agent's responsibility to do this and residents had paid for this service.

I was one of three experts invited by BBC Watchdog to meet with these leaseholders, who had travelled from across the UK to attend the day-long session.

By the way, thank you to the many people that sent me emails about the two BBC Watchdog programmes that were made from the leaseholders' meeting, one for BBC1 television and the other for the BBC website. I would love to get your feedback. To see these video clips, Google (1) Kat Callo Watchdog Consumer Advice Property Management and also (2) Kat Callo Watchdog Property Management Fees.

In the many years that I have lived in the UK, I have always been struck by the degree to which apartment owners here represent an undervalued, unappreciated group of homeowners. While people with condos in the States, for example, are homeowners with powerful rights, just like people that own houses -- the British apartment owner is seen as something of a second class citizen. Maybe this is because land has so long been associated with power in the UK. Maybe it's because, in this crowded island nation, many people are desperate to have their own front door, even if the house behind the door is tiny and cramped.

One of the most unsettling revelations from the day in Ilford was that a very large number of leaseholders of flats in England and Wales remain unaware of three powerful legal rights that they have to secure greater control over their homes.

The most far-reaching of these rights is that of "Collective Enfranchisement", which is the legal right for leaseholders to join forces and compel the landlord (or freeholder) to sell to them the freehold of their building.

Another important right is that of the individual leaseholder to force the landlord to sell to him/her a 90-year lease extension, which means that 90 years gets added on to the number of years presently on the lease. Since shorter leases fetch lower prices than longer leases, extending one's lease is an important way to protect the value of one's home.

The third right is for leaseholders to acquire the "Right to Manage" their building. This involves forming a special "Right to Manage" or "RTM" company, serving a notice on the landlord and, if successful, taking away from the landlord the right to run the building. Once the process has been completed, it's the RTM company that has the authority to run the building, including to hire and fire a manging agent company.

Every week I get phone calls from leaseholders living in various parts of the country. Again and again I hear the same message -- that many leaseholders in London are familiar with these rights, but that people living in the north of England and many other parts of the country have never heard of any of this. As one caller from Yorkshire told me this week, "No one is my area knows anything about these rights. Not the leaseholders. Not the solicitors. Not the surveyors."

In central London, leaseholders that have bought freeholds are transforming these buildings, by carrying out overdue repairs and investing in improvements. The trend is similar to what we saw in Manhattan in the 1970s, when apartment renters transformed down-at-heel tenement buildings into prime real estate after taking their buildings "co-op", that is, jointly buying them.

Leaseholders represent Britain's fast-growing sector of homeowners. But they need to be empowered with knowledge about their rights, so they can overcome antiquated residential property laws and regulations. They need to develop a stronger consumer voice.

If you have any suggestions about how best to spread the word about leaseholders' rights in England and Wales, please let me know. And do send me your feedback about the two BBC Watchdog video clips. Many thanks.

Extending Your Lease Before Selling Your Flat

With some signs of life returning to the London property market, many owners of flats that postponed earlier plans to sell are considering whether now might be a good time. If you are going to sell your flat, a key issue is whether your lease is long enough to ensure that you will get a good price.

Most leaseholders of flats in England and Wales have a legal right to force the landlord (freeholder) to sell to them a 90-year lease extension and to do so at a fair-market price within deadlines laid down by law. So, if you acquire a lease extension and your flat now has, say, 70 years left on the lease, you will end up with a 160-year lease.

The longer the lease, the more valuable the flat. A 999-year lease means, for all intents and purposes, that you own the flat forever. But a lease with just 50 years left is considered by the market so close to expiring -- that moment when the lease reaches zero and ownership of the flat reverts to the landlord -- that many mortgage lenders are reluctant to provide a mortgage.

Acquring a lease extension is an important way to protect the value of your flat -- whether you do this individually by forcing the landlord to sell to you a 90-year lease extension or whether you team up with your neighbours collectively to compel the landlord to sell to you the freehold of the building and then grant yourselves 999-year leases thereafter.

Buyers will generally pay more for longer-lease flats than shorter-lease flats, but the difference in price is not written in stone.

However, the formula for calculating the value of a 90-year lease extension is a statutory one, which gives the whole process some degree of certainty.

Five elements will determine the value of a lease extension when you use the statutory formula. These are: the estimated value of the flat today, the number of years left on the lease, the amount of ground rent payable per year, the expected increase in the value of the flat once you add on 90 years and the compound interest rate (called the yield or deferment rate) used to calculate the value.

Before you start the process, you must make sure that you qualify to force the freeholder to sell to you a lease extension. In order to qualify, you must have owned the flat for a minimum of two years. Also, when the lease was first granted, it had to have more than 21 years, which is called a "long lease".

Because many buyers prefer to buy a longer rather than shorter lease and given the fact that one must own a flat for at least two years before having the right to start the lease extension process, many vendors wisely begin the process before selling.

Once the lease extension process has been started, by serving what is called a "Section 42 Notice" on the freeholder, the right to acquire the lease extension can be transferred by the seller to the buyer upon completion of the purchase of the flat.

In some cases, the vendor pays the advisory fees to get the lease extension process started. In other cases, it's the buyer that pays the fees. This is a question for negotiation between seller and buyer. When the landlord grants the new longer lease, it is the buyer (ie- the new owner of the flat) that pays the landlord for this.

If you plan to sell your flat and the flat's short lease is depressing the value of the property, be sure to give yourself enough time to become familiar with the lease extension process and to get the initiative underway.

A final point to remember -- although the formula for calculating the value of a 90-year lease extension has several parts to it and a degree of complexity, it was created in order to help ensure that the landlord gets a fair price and that the leaseholder pays a fair price. To achieve this balance, the formula is devised so as to ensure that the leaseholder pays less for the lease extension then is expected to be the subsequent increase in the value of the flat once 90 years have been added on.

That's why buying a lease extension should be seen as an investment in one's property, a way to protect and enhance the value of the property.

Happy selling.

When a Landlord Offers You a "Right of First Refusal" to Buy Your Freehold

I am often contacted by leaseholders of flats that are in a panic because they have received in the post a scarey-looking legal document from their landlord, called a "Section 5 Notice", and they don't know what to do.

My advice is -- don't panic.

A Section 5 Notice is a notice that a landlord (freeholder) of a residential building of flats must serve on people in the building if the landlord wishes to sell the freehold to a third party. The law says that the landlord must first offer a "right of first refusal" to leaseholders in the building.

If the landlord sells the freehold of a residential block of flats without first offering a right of first refusal to people in the buidling, he/she has just committed a criminal act. Sadly, there are many instances across England in which landlords have sold freeholds of residential blocks of flats and the leaseholders in the building have been unaware of the freehold sale and/or unaware of their right to be able to buy the freehold themselves.

So, at the end of a busy day, you arrive home, you open the post and there is the Section 5 Notice. It will contain a price at which the landlord is willing to sell the freehold by Right of First Refusal to people in the building and it must provide a two-month deadline date by which leaseholders wishing to buy the freehold must confirm this to the landlord.

In order for people in the building to be able to buy the freehold through the Right of First Refusal process, more than 50% of the flats in the building that qualify must take part.

In a building where leaseholders, in principle, want collectively to buy their freehold, the biggest question is whether the selling price stated in the Section 5 Notice is reasonable. I have been contacted by many leaseholders' groups that have spent months or years planning to buy their freehold, only to be served a Section 5 Notice -- which, happily, enables them to speed up the whole process.

If the landlord has presented a reasonable selling price within the Right of First Refusal process and if leaseholders in the building wish to buy their freehold, then the leaseholders should go ahead and buy the freehold through the Right of First Refusal process. To do this, they need to send to the landlord a notice of acceptance, which is called a Section 6 Notice. They then have a further two months by which they must advise the landlord of the identity of the entity that will buy the freehold. This entity is called the "Nominee Purchaser".

If the landlord's selling price is considered to be too high and unreasonable, then the leaseholders should not buy the freehold. It is important to remember that leaseholders of most blocks of flats in England and Wales have the right to force the landlord to sell to them the freehold, through the process of "Collective Enfranchisement". Leaseholders have this one-off right, whether they are dealing with a long-standing freeholder or a new landlord that has just bought their building.

If the leaseholders in the building are offered the Right of First Refusal and do not take up this right, then the landlord is allowed to sell the freehold over the subsequent 12-month period at the selling price. If the landlord wants to sell to a third party at a lower price than the one originally stated in the Section 5 Notice, then the landlord has to start the process again by serving a new Section 5 Notice on people in the building.

So how does one find out quickly and cost-effectively whether the landlord is asking a reasonable price for the freehold?

The most thorough, but also most expensive and time-consuming route, is to instruct a chartered surveyor to come carry out an on-site valuation of the freehold by visiting the building. This includes visiting each of the flats that plan to participate in the freehold purchase.

A faster and more cost-effective route is to get an informal estimate of the value of a 90-year lease extension for an average flat in the building and multiply this figure by the number of flats that are interested in buying their freehold. While this will provide only a rough idea of the fair-market value of the freehold, one can obtain this estimate quickly and cheaply.

Why am I mentioning the value of a 90-year lease extension? Because the main cost elements within the statutory formula for calculating the value of a lease extension are the same those contained within the formula for calculating the value of the share of one's building freehold.

At the Rosetta Consulting Ltd website -- at www.rosettaconsulting.com/valuer.php -- one can type in the basic information about an average flat in the building, ie- the estimated market value of the flat, the amount of ground rent payable each year and the number of years left on the lease -- and for £20 online one gets a detailed PDF document that provides an informal estimate of the market value of a 90-year lease extension.

In some lucky buildings, leaseholders have already had their freehold valued when they receive the Section 5 Notice from the landlord. In this case, they know immediately whether the selling price is reasonable or not.

If you get a Section 5 Notice, don't hestitate to contact us at Rosetta Consulting Ltd. Also, remember that you can download a Section 6 Notice (the reply to the landlord) at www.rosettaconsulting.com/publications.php.

So don't panic -- and good luck.

Taking advantage of London's flat property prices

Many apartment owners in London have contacted me in recent months to ask me whether the stagnant property market means this is a good time to extend one's lease or, with neighbours, collectively to buy the building freehold. The answer is yes, if leaseholders of flats want to buy a lease extension or a building freehold for the lowest possible price.

The reason is that the formula for calculating the value of a lease extension or of a building freehold -- and remember this is a formula laid down in law -- is directly linked to the value of the relevant flat(s). So, when the market value of a typical flat in London was shooting up at a dizzying pace a couple of years ago, so was the value of a lease extension for that flat and also the value of the freehold of that building.

The formula for calculating the value of a lease extension is meant to help ensure that the leaseholder gets to buy the new lease at a fair price and that the landlord (the freeholder) gets to be paid a fair price. For this reason, the formula is devised to help ensure that the leaseholder will pay less for his/her lease extension than is expected to be the subsequent increase in the value of the flat once the 90-year lease extension has been added on to the number of years still left.

But extending your lease or, with your neighbours, buying the building freehold should never be considered a get-rich-quick scheme.

It normally takes about one year to complete a lease extension process, according to the stages that are laid out in the legislation. Buying your building freehold also often takes about one year from the time that the official notice is served on the landlord -- but I have seen many buildings across England in which leaseholders have spent more than a decade trying to get themselves organised in order to reach this crucial starting line.

Extending one's lease by 90 years or buying the building freehold and then granting participants new 999-year leases do represent important ways in which to enhance the value of one's home. In the same way that one would try to keep in good repair the roof of one's house, knowing this will prevent leaks and will protect the value of the home if and when the owner decides to sell -- extending a lease or buying the building freehold is, amongst other things, about creating additional value in one's residential property.

So, yes, the present stagnant property market in London does represent a good time to get a cost-effective lease extension or building freehold. But, because these processes take time, it's often a good idea just to get on with it anyway.