What is becoming ever more apparent in the world of residential developments is the squeeze on developers’ profit margins due to high demand for sites and increased competition this brings. Getting the right property at the right price is key for any developer wishing to turn a healthy profit from a development.
It has often been said money is made when a site is purchased rather than sold. Whilst this still rings true, developers across the country are failing to cash in on an often overlooked part of a flat scheme, the freehold.
More often than not developers fail to realise the potential value in the freehold reversion to their schemes and instead transfer this to a Tenants’ Freehold Company. This is normally under the belief that by giving the tenants the management of the freehold it will increase the unit sale price. It can certainly be said that flat units will be more attractive for a potential purchaser if the tenants can manage and run the property, however, this doesn’t have to be to the detriment of a developer’s profit derived from a site.
With freehold reversions often being sold for between thirteen and sixteen times the total reserved ground rent, getting the right advice at the early stages of a development can mean thousands of pounds to a developer. For example, a block of 9 flats with ground rent of £150.00pa could quite easily be sold for between £17,500 and £22,000 with minimal hassle if done correctly.
The catch, however, is the Qualifying Tenants’ right of first refusal imposed by the Landlord and Tenant Act 1987. If the provisions of the Act apply a developer will have to serve formal notices on each flat owner and offer to sell the freehold to the flat owners. A period of time then is afforded for the flat owner’s to consider the offer before either agreeing to purchase, turning down the offer or deciding to purchase but challenge the offer price and take the matter to the Lands Tribunal. If this were the only way to sell a freehold reversion for a residential flat development it is no wonder developers do not want to consider selling freeholds.
But this is not the case.
If advice is taken at an early stage (before the 2nd flat is sold) it is possible to implement a legal structure that simplifies the process considerably. A developer can enter into a contract to grant a lease to a Management Company. The Management Company lease will sit between the freehold and the flat leases which can then be given to the tenants free of charge once all units have been sold. This gives overall control of the development to the tenants, relieves the developer from their obligations under the flat lease and will leave the developer free to sell the freehold of the property to a third party without being caught by the provisions of the Landlord and Tenant Act 1987.
Taking advice at the right time gives everyone concerned the best of both. Purchasers will have control of the day to day running and management of the block of flats (good for purchasers). Developers are freed from their duties under the leases and free to sell the freehold without having to consult the flat owners, thus tapping into the full potential of a site (good for developers).
If you are in the process of building a flat scheme or are about to commence the marketing and sales of newly built flats and want to find out how you can benefit from such a scheme, please contact William Warnock, Bar Graduate Lawyer in our Poole office (01202 052042).
NB This article does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Dutton Gregory LLP.