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  • The government has unveiled plans to allow building owners to add additional floors without going through the usual planning process
  • When the reforms come into effect this will add to the ‘hope value’ of a building, increasing the cost of purchasing the freehold
  • Leaseholders may have to pay to determine if building is structurally sound enough to support an extra two storeys, warns leading property expert

Changes to the planning system announced this week mean leaseholders looking to buy the freehold of their building must act now to avoid paying significantly more, the boss of one of the UK’s leading residential property consultancies has warned.

The government has promised to expand what are known as ‘permitted development rights’ to allow freeholders of purpose-built residential blocks constructed between 1st July 1948 and 5th March 2018 – as well as homeowners – to extend their buildings by an additional two storeys without needing full planning permission.

The move, part of a wider package of planning deregulation to increase the supply of new homes and repurpose disused commercial property into housing, will make it more difficult and expensive for leaseholders to ‘enfranchise’, or buy the freehold of their building, says Mary-Anne Bowring, founder of Ringley Group.

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Mary-Anne Bowring, managing director of Ringley Group, explains: “Under current legislation, the valuation method used when flats owners who want to ‘enfranchise’ and buy the freehold of their block of flats includes ‘hope value’ in its calculation. ‘Hope value’ can include the market value of land or roof or airspace development rights based on the expectation of getting planning permission for development.

“By allowing freeholders to bypass the usual planning process, the ‘hope value’ of the extra flats that could be built on top of a building becomes a positive presumption, which will impact on the valuers’ quantification of the ‘hope value’, which helps determine the ‘enfranchisement premium’ – the cost of buying your freehold.  In theory, the premium for leaseholders would increase.”

Example

A block of flats where all the leases are long leases, with more than 80 years unexpired and therefore there is no ‘marriage value’.

The enfranchisement premium would be approximately 20-25 times the ground rent plus the present value of the freehold deferred by the number of years the leases had unexpired.

To buy the freehold, each leaseholder would pay a percentage of this total in relation to their flat as well as a share of what is left for the flats who are not participating including hope value.

But under the proposed changes, in theory the premium for leaseholders would increase because of the certainty in the hope value for buildings purpose-built and constructed between 1st July 1948 and 5th March 2018.

Mary-Anne also warns leaseholders to expect to pay costs towards determining if the building could even support an extra two floors on top, as that will impact the ‘hope value’. It could also mean freeholders of purpose-built blocks constructed between 1st July 1948 and 5th March 2018 are reluctant to create roof space leases.

Mary-Anne Bowring, managing director of Ringley, explains: “Another issue that looks unfairly weighted against leaseholders – and may end up being left for the courts to determine – is whether it is physically possible to build additional storeys in the first place. Some blocks may not have sufficient structural bearing capacity in the original design to do so but it would take flat owners a lot of money to prove that this may be the case and doubtless some leaseholders will suffer.

“It also means that freeholders of purpose-built blocks constructed within the timeframe set out by the government will be in less of a rush to create roof space leases to increase the enfranchisement price by creating a degree of certainty of further development.  Needless to say, for blocks built in the right time period, the weighting of the hope value for enfranchisement purposes will shift significantly.”

To avoid facing additional costs, Ringley, a full-service residential property consultancy with legal, engineering and surveying expertise, is urging leaseholders wanting to buy the freehold of their building to act immediately.

Mary-Anne Bowring, group managing director at Ringley, says: “There’s only a short amount of time before these planning reforms come into place so leaseholders wanting to buy the freehold of their building need to act now to minimise additional expense because of these changes.’

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Mary-Anne Bowring
Mary-Anne Bowring, Managing Director of Ringley Group

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