Success for Tenants acquiring their head lease

Last November I was asked to advise a group of 22 lessees that make up the residential element in their building on the premium they should pay to acquire the 997 year reversion held by the head lessee who had served a s5 | 5b notice under the Landlord & Tenant Act 1987  giving them the right of first refusal. If they did not accept the offer, the landlord was going to auction his head lease in February. Their building was a very well designed new block of flats set in a high up position enjoying panoramic views over SW London. Each flat had the benefit of an outside terrace as well as a private communal garden for their own enjoyment. 6 flats also had underground parking.

Aware a) that the building had no hope of collectively enfranchising as the commercial element over the ground and lower ground floors most certainly exceeded the 25% net of common parts area threshold and b) the commercial element was already held by a long term building society pension fund investor who would be the most likely bidder.

The successful bidder be able to look forward to an annual ground rent income of nearly £12,000 subject to 15 year RPI increases producing an annualised return of approx. 3.6% as well as future premiums on any of the flats extending their leases under the LRHUDA 93.

Although an investor would not be interested in paying an element of additional premium towards an expectant early release of marriage value as the leases were approx. 120 years unexpired; from the tenants’ perspective, they would then be able to grant themselves long 997 year leases without having to pay within the premium the element of landlord’s reversion that the landlord would receive piecemeal on each lease extension. This element alone was worth around £36,000 equivalent to approx. 15% of the premium.

Aware too of the FtT’s ‘All Saints‘ decision much favouring the landlord accepting the adoption of a low 3.35% yield would add to  his expectation of obtaining a very satisfactory premium if he put the head lease to auction, a majority of the lessees collectively bid to acquire the head lease at the lowest range of offer premium following my advice which their landlord accepted equivalent to a yield of 6.82%.

The participating tenants have now completed the purchase and are enjoying 997 year leases with nil ground rent and can look forward to a rising income from those lessees who didn’t participate together with any added premiums receivable should any of the remaining lessees ever extend their leases by a further 90 years.