Lease Extensions and Collective Enfranchisement: how much will I have to pay towards the freeholder's costs?
Exercising your right as a flat owner to either extend your lease or collectively buy your freehold will normally be a sound financial investment. Your shortening lease will be extended, or together with the other flat owners in your block you will own the freehold and be able to grant yourself lease extensions at no cost.
At the beginning of the process you will normally take specialist valuation advice, so you will have a good idea of the range of prices you will have to pay for your new lease or freehold. You will probably have factored in your legal costs and valuer’s costs, as well as any Stamp Duty Land Tax you may have to pay at this point.
You may be aware – and if not, your solicitors and valuer will soon inform you – that you will also be responsible for paying some of your freeholder’s reasonable costs of the process. The difficulty is predicting with any accuracy what those costs may be.
The costs of your freeholder that you will have to pay are strictly limited, whether you are extending your lease or buying your freehold. They are broadly costs associated with the:
- Investigation of your right to extend the lease / buy the freehold;
- Carrying out a valuation of your flat / building; and
- Drafting and negotiating the terms of your new lease / the transfer of the freehold.
The limited categories above are further restricted by the requirement that the freeholder’s costs must be reasonable, and would have been incurred by the freeholder had they been paying those costs themselves.
You would not be responsible for the freeholder’s valuer’s costs of negotiating the premium with your valuer and similarly you would not be responsible for your freeholder’s legal costs relating to any tribunal applications that may be made. This means that any properly advised freeholder will know they are going to be liable for some costs, but most will seek to recover as large a proportion as possible from the leaseholder.
Towards the end of the lease extension or freehold purchase, the solicitors for the freeholder will normally put forward a proposal for the costs they wish to recover from you. There is no need to accept their proposal, and there are some useful tactics for negotiating on those costs. The first is to request a full and detailed breakdown of the freeholder’s costs with justification as to how those costs fit into the allowable categories. The freeholder will have to pay their solicitors to produce this breakdown, and so will be running up irrecoverable costs in doing so.
Once a breakdown has been provided the hourly rates of the freeholder’s solicitors and valuer may be challengeable under the “reasonableness” test above, and certain items of expenditure may be disputed.
If the parties cannot agree, then the matter can be referred to the First-tier Tribunal, and the Tribunal will review the freeholder’s costs. There will of course be further irrecoverable costs for the freeholder in doing this, so a well timed reasonable offer from the leaseholder may encourage the freeholder to accept.
During this negotiating process you will also be incurring costs, so it is always vital to keep the negotiations proportionate to the sums involved. The freeholder’s solicitors are aware of this and so this can often lead to their costs being agreed solely to save time and further costs. This is an unfortunate consequence of the rules and some freeholder’s solicitors are refusing to provide breakdowns until a Tribunal application has been made, thereby forcing leaseholders to incur that cost so that they cannot begin to negotiate from an informed position.
There is therefore no easy answer to how much you will have to pay for your freeholder’s costs, as every transaction is different and it is often impossible to know in advance the stance a freeholder will take. You can rest assured, however, that there are avenues open to leaseholders to ensure that you only pay what is allowable and reasonable towards the freeholder’s costs.
If you are considering extending your lease or buying your freehold and would like to talk to CBG Law please call Chi Collins or Rob Boucher on 020 7436 5151 or email cyc@cbglaw.co.uk or rb@cbglaw.co.uk.