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The London Business News Magazine had the exclusive opportunity to speak to Mike Somekh, the founder of the Freehold Collective, a London based SME that helps leaseholders gain control of their property through the purchase of the freehold.
In this interview we discuss the current property market in London and the UK in light of the recent Leasehold and Freehold Reform Act 2024 to learn how leaseholders and freeholders can effectively navigate through the changes.
1. Can you explain what drives the Freehold Collective to help leaseholders acquire their freehold? What’s the main motivation behind what you offer?
I founded The Freehold Collective with a simple mission: To help ordinary people gain control over their homes and their lives by owning and managing their properties and investments. All our services are geared towards leaseholders exercising their right of collective enfranchisement and of their right to manage.
2. Mike, as the founder and CEO of the Freehold Collective you set up the organisation after you purchased your freehold. Why did that process lead to you starting this company?
Like most leaseholders, I was blissfully unaware of the problems and costs we were facing year on year, until one day, we discovered that our building was sold to a foreign investor, at which point we all had a wake-up call.
Our service charges went through the roof, whilst our services went down; an entire flat was built in our lobby; a fire escape path was repurposed for a private dwelling; there were plans to develop our roof, the name of our building was set to be changed from Barrie House, named after the famous author, J.M. Barrie who wrote Peter Pan, to the investor’s surname! And that was just the beginning.
Each of my neighbours felt helpless. Looking back, it was as if a new type of predator had arrived, and we all felt the fight or flight response. Those who attempted to flee by selling their flats found no buyer in the market (except one – the freeholder himself); but those of us that stayed to fight, joined together, eventually won and our lives changed immeasurably for the better.
Whilst my career in the Software industry at the time led me to travel worldwide, providing consultancy services and managing global teams in delivering critical customer projects, I found that I was helping friends, neighbours and others in their collective enfranchisement claims in the UK. Everything was by referral. One day, my brother, founder of a branding and marketing and business development firm, announced that he was disowning me as unlike any of his clients, I did not even have a website! At that point, getting the message, I founded The Freehold Collective and am proud to say that we have grown year on year.
One of our main skills is shepherding leaseholders, who often have history and competing interests, to work and live together for everyone’s benefit. One client suggested that I did such a good job that I should run the United Nations- my answer was that the United Nations and securing World Peace were easy – her building was much more of a challenge!
3. The British property market is very popular among investors despite its complexity. Do you think that it would be even more desirable if there was only a freehold option and no leasehold option in the UK?
The residential property market has always been attractive amongst investors, partly because of the leasehold structure.
Leasehold buildings either purchased or newly built, can provide a return for freeholders through annual ground rent income, short lease interests and development potential of additional land. However, leaseholders who have an interest in their homes and investment do not often see any benefits. Ground rent is seen as an outdated tax, a short lease (although allowing the leaseholder to save a lot on the purchase price) is a wasting asset and who wants to suffer developers building new flats on their roof or in their garden?!
Moving to Freehold will avoid this conflict of interests between investors and leaseholders, allowing everyone to get behind investments for mutual benefits.
4. Should property buyers avoid leasehold properties and only purchase freehold properties?
There is no reason why property purchasers should avoid leasehold properties. Whilst freehold properties offer clear advantages in terms of ownership, control, and long-term security, they attract a higher price. Leasehold properties are often far cheaper, and, as long as the purchaser pays the right price taking into consideration all the factors such as low lease length and the ground rent burden, they can make a good return when the lease is extended. It is important for people who purchase a flat, freeholders and investors to ensure that they work together for everyone’s mutual benefit.
5. Who will benefit the most from the Leasehold and Freehold Reform Act 2024?
The Leasehold and Freehold Reform Act (LAFRA) was aimed to primarily benefit leaseholders, in preference to all other stakeholders. There was an expectation that it would abolish ground rent, cut the cost of extending a lease, make the process significantly cheaper, provide leaseholders with greater control over maintenance and management decisions and make more leaseholders eligible to exercise these rights than now.
However, the Act was rushed through Parliament in a last minute “wash-up”, many key amendments were not allowed to be put forward and it is widely believed to be severely flawed, with many experts predicting that leaseholders could be worse off financially.
Many of the provisions as drafted are highly controversial, in particular in respect of the confiscatory nature of some of the provisions. For example, the capping of ground rent and the “abolition” of marriage value (implemented by gifting 100% of marriage value to the tenant instead of 50% to the tenant and freeholder) would seem to benefit leaseholders who have short leases. However, for freeholders, especially leaseholders who became freeholders, this would mean wiping off billions of pounds of their investment. Similarly, the abolition of ground rent seems sensible but without compensation, pensioners (not pension firms), flat owners who enfranchised, investors and freeholders will all lose out.
The Act requires the government to fix market rates (deferment and risk-free rates) reviewed every 10 years. The problem is that to set them at a fair market rate today may actually increase the cost to leaseholders and benefit freeholders, the exact opposite of the Act’s purpose. However, if the rates are set the other way for political reasons, freeholders will lose out, many of them leaseholders themselves. It is quite a dilemma for the Government.
The Act in its current form is likely to be challenged by leaseholders and freeholders alike for potential breaches of The Right to Property (Article 1, Protocol 1 of the European Convention on Human Rights). At its heart, the Act changes the value of a property so at least one party to the contract (the lease) will be short-changed through no fault of their own. The government has ruled-out any compensation which makes sense as otherwise the UK taxpayer would need to foot the bill. It’s difficult to predict who will win or lose, but there are likely to be several legal challenges in the pipeline.
6. After the Grenfell tragedy and the cladding scandal many leaseholders are trapped and unable to sell their properties. What are your recommendations?
I live not far from Grenfell and pass it virtually every week. A real tragedy on the day and more of a tragedy for years after. In its haste to address the tragedy and scandal, the government enacted legislation and rules that were so badly thought out that they impacted the lives of hundreds of thousands of ordinary leaseholders who are now trapped between their requirement to fix the cladding, often at their cost, and their life plans, for example moving home. The situation is incredibly distressing for them and a modern-day scandal. The advice I would give is to club together, seek legal advice to check the obligations of the freeholder and/or original developer and try to engage with your managing agent or freeholder. If you cannot resolve issues through dialog then you may want to seek legal advice over the Building Safety Act or serve notice on your freeholder under section 13 of the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA 1993). What we found is that this last act forces the issue, and you will not complete the purchase until satisfied that all defects are resolved by the freeholder.
7. What are the chances that a freehold owner would sell their freehold to the leaseholders and what’s the price leaseholders must pay?
Freehold owners sometimes sell their interest to leaseholders by mutual agreement, but this is relatively rare as both sides often find it hard to agree the price and even the terms of the sale. More common is for leaseholders to sell their freehold to a third-party investor sometimes via an auction. In most cases they must first offer it to leaseholders in a take-it-or-leave-it manner at a set price. This is called the Right of First Refusal. Only if leaseholders do not accept the offer within 2 months, can the freeholder sell it on to someone else. The third option and the most common is for leaseholders to enact their right of Collective Enfranchisement. In this way, they make an offer to the Freeholder, negotiate a price and, if none can be agreed, defer to a Tribunal to make a determination. It is a criminal offence for the Freeholder to refuse to sell though of course they can demand a fair market price. This route is little short of a compulsory purchase order and is often the one we advise leaseholders to take.
8. What are the responsibilities that come with acquiring the freehold and how can a group of leaseholders manage these collectively?
I am often asked about the responsibilities that come with acquiring the freehold and explain that, whilst they are numerous, managing and organising yourselves properly makes all the difference. I always ensure that we form a limited company with directors that have some time on their hands. We appoint a managing agent to deal with everything from, building maintenance and health & safety compliance to budgeting and service charge collections. I instruct a lawyer to handle important but standard work, like licences to assign and licences to alter. Ultimately when well organised there is little for leaseholders to do but they all need to work together!
9. What are your predictions on how the UK housing market will evolve over the next 5 years?
Overall, I would expect moderate price growth in line with lower interest rates. Demand will still outstrip supply, but this will be tempered by the Government’s stated aim of building more affordable housing.
10. Do you have any expert advice for property investors in London?
Recent years and events including the pandemic, financial crisis, increasing interest rates and law reform have injected uncertainty into many parts of the London property market, and in the King’s Speech 2024, the new Labour Government promises ever more sweeping reforms to the residential, leasehold property market. However, for those investors who are able to work with rather than exploit tenants and purchasers, now is the time to invest in the right way.
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We thank The Freehold Collective and its founder Mike for sharing their insightful UK property market expertise with our London Business Community!
Author Profile
- Online Media & PR Strategist
- Senior Online Media & PR Strategist at ClickDo Ltd. | Editor in Chief at LBN | Summer Course Student at the London School of Journalism and passionate Digitalist.
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