Investing in Freehold Reversions
All land in England and Wales, whether or not it is registered, has a freehold title. In addition the freehold of a particular property may be subject to a leasehold title. If this is the case then it is the leasehold title that has by far and away the greatest value since it is the owner of this title that has the right to occupy the property for the term of the lease, however the freehold does still have value.
Where a freehold title is subject to a lease it is known as the “freehold reversion”. It can be bought and sold just like the leasehold title and it can potentially be quite a shrewd investment. People tend to think that the only value is in the ground rent that can be collected, which is usually quite low, however in reality this is not the case. The freehold of a flat is more valuable than the freehold of a house however it will also be more expensive to buy.
How Can I Make Money From Freehold Reversions of Houses?
There are a surprising number of ways to make money from your freehold reversions and we’ll cover them below:
Collecting Ground Rents
As owner of the freehold you will be entitled to receive any ground rent which is payable by the leaseholder(s). The amount of the rent is set out in the lease and cannot be increased except in accordance with any mechanism set out in the lease (in line with inflation for example).
The rent is sometimes a peppercorn, which is just another way of saying no rent is payable. Whatever the rent, it is rarely in itself valuable enough to warrant purchasing the freehold.
Dealing With Pre-Sale Enquiries
Whenever a leasehold property is sold the purchaser will want to raise enquiries of you as the freeholder and it is generally accepted that a fee will be payable for this service. Generally the seller pays the fee but this is for the buyer and seller to resolve.
There is no fixed fee, however the average is probably around £100 for a house or £150 for a flat (there will be more information required in respect of a flat). On top of this VAT can be charged if you are VAT registered.
Some freeholders charge considerably more and often they get away with it because the seller doesn’t want to hold up the sale by arguing the fee but beware, a leaseholder does have the right to make an application to the Leasehold Valuation Tribunal to adjudicate on the fee.
Granting Consents to Alterations
Most leases (though you will need to check the terms) require the leaseholder to obtain the freeholder’s consent before carrying out any alterations, particularly structural alterations. Where work has been carried out without consent (which is often the case where there has previously been an inactive freeholder) you can insist that an application be made retrospectively, and can charge a fee.
Typically the fee will be around £400 plus VAT if applicable, plus costs. You may for example choose to instruct a surveyor to assess the work and make sure that the structural stability of the property has not been affected.
Failure by the leaseholder to obtain consent to alterations is a breach of the lease and may give you the right to terminate the lease (known as forfeiture).
Notices of Assignment and Charge
On every assignment of the lease (i.e. when the leasehold interest is sold) the purchaser must serve a notice on the freeholder of the change of ownership and the freeholder is usually entitled to charge a fee. This will sometimes be specified in the lease, in which case this is the fee that must be charged, but otherwise a reasonable fee is generally considered to be around £50 for notice of assignment and a further £50, where the purchaser buys with a mortgage, for notice of charge.
You will need to provide a receipt for the notice.
Licences to Assign
Sometimes the lease will require that before assigning the lease the leaseholder obtains consent from the freeholder in the form of a licence. The fee chargeable in this respect could be anywhere between £200 – £400.
Lease Extensions
The biggest financial advantage in owning the freehold of a property is being able to charge for lease extensions. The amount of the premium that can be charged depends on a number of factors including the length of time remaining on the lease and the amount of ground rent payable.
To get an indication of the amount you should be charging you can use the calculator on the Leasehold Advisory Service website, though this is only a guide and does not apply to leasehold houses. It is generally not worth extending a lease which has more than, say, 80 years remaining so if the lease is for a term of 800 or 999 years which many older house leases are then the leaseholder is unlikely to offer need to extend.
How Can I Make Money From Freehold Reversions of Flats?
All of the above apply to flats as well as houses however there are some additional options for flats that do not apply to houses.
Arranging Buildings Insurance
As the freeholder of a block of flats you will usually be responsible for arranging the buildings insurance for the block. If you are, it is generally accepted (though you will need to check the lease for any restrictions) that the freeholder will receive a commission from the insurer, of perhaps 15% of the premium.
Some older house leases also allow the freeholder to arrange the buildings insurance however these provisions are no longer enforceable.
Management Charges
As the freeholder of a block of flats you will usually be responsible for arranging repairs and maintenance to the common parts of the block, which will be paid for through maintenance charges which you will be responsible for collecting from the leaseholders.
As reward for this you can often charge a management charge of, say, 15% of the total maintenance charges.
Responsibilities of a Landlord
You should always check the terms of the lease and seek professional advice on it however generally the responsibilities in respect of a house are limited to collecting rent and acknowledging notices of assignment, whereas for a flat you will be much more involved as you will need to arrange maintenance, insurance and repairs.
You may need to carry our certain works even though not all of the tenants have paid their maintenance charges which can leave you out of pocket.
How Do I Purchase a Freehold Reversion?
Portfolios of freeholds often go on sale at auction. If you live in a block of flats you can enquire of the freeholder as to whether he is interested in selling the freehold. If you live in a leasehold house, it is likely that the other houses in the street will also be owned by the same freeholder.
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