Case Study 1

The purchase of a residential block of
flats for the residents.

Background
The company which owned the
freehold reversion in a residential
block where the residents owned their
flats had served notice on all of the
residents and the residents
association that they intended to sell
the block at public auction. Under the
current legislation, if a freeholder of a
block of flats wishes to sell, he has to
offer the residents first refusal. The
residents then have to decide whether
they exercise their right to purchase.

In this case, the residents had
decided to exercise their right. Once
the residents had made this decision,
what actually happens is that the
block of flats still gets offered for sale
at auction and the auctioneer declares
that the residents have exercised their
right of first refusal.

What then happens is that the
property goes into the auction sale
room and is sold to the highest bidder.
After the auction, the sale is
suspended and the residents have a
short period in which to exercise their
option to purchase at the price the
property was sold at auction.

Our Involvement
We were approached in April 2007
after the freeholders had served
notice on the residents and told them
that the block was to be placed into a
public auction being held by in July.

The valuation was complicated by the

fact that the freehold included a men’s
social club at the rear of the block,
which had been sold on a long lease,
and 44 garages. The block itself
comprises 47 self-contained flats. A
recent planning application to build
additional flats on the roof had been
refused and the freeholder had also
lost his appeal against the planning
refusal.

As the valuers appointed, we had to
consider two main aspects. The first
consideration was to assess what the
residents would have to pay if they
served a notice of compulsory
acquisition on the freeholder and the
freeholder chose to sell everything
and not take 999 year lease backs on
elements of the freehold in his
possession, such as garages. The
second aspect was to consider what a
willing purchaser would pay at public
auction, not knowing when residents
would apply for lease extensions. The
importance of lease extensions to any
prospective purchaser is because the
freeholder shares the marriage value
element with the flat owner on a
50/50 basis. This marriage value
considerably increases the value of a
block such as this to an investor.

In early May we began work by
inspecting the majority of the flats.
The block is a 1930s block and
comprised different flat types. It was
essential that we inspected each flat
type within the block, the men’s club
and a sample of garages. On behalf
of the residents we held preliminary
discussions with the men’s club to see
if they were willing to participate in
the purchase. Although the men’s club
initially indicated a willingness to

participate, nothing was forthcoming
and the residents decided not to
continue discussions with the men’s
club unless they were prepared to
enter into a binding Participation
Agreement.

The freeholder had begun selling
individual flats on long leases in the
1970s and all of the original leases
were for 100 years from December
1972. Similarly, the men’s club and
the garages had been sold on long
leases from 1972. The valuation was
complicated because a number of the
flats had extended their leases, some
by using their statutory right to a 90
year lease extension and others by
negotiation with the freeholder. Those
leases that had been extended by the
statutory route were therefore 190
years from December 1972 but there
were a number of other leases that
were only 125 years, 150 years and
999 years from December 1972. The
majority of the leases were however
100 years from December 1972 and
therefore had an unexpired term of
approximately 65 and a half years.

We explained to our clients that we
would advise them on the parameters
of the purchase price, together with
an estimate of what we thought the
property would sell at auction. In our
view, the highest price achievable
would be a price payable by the
residents if they served notice under
Section 13 of the legislation. It was
therefore of paramount importance to
assess what an outside investor would
pay and ensure that the residents
utilised the auction room to their
advantage and did not pay any more
than an outside investor.