A lot of people think that once they have purchased their freehold, “that is that” and there is no further action to take. But, they could be wrong.

Why?

Because as a lease is a wasting asset, notwithstanding the fact that you may own the freehold via a share in a company, once the freehold has been purchased, the lease term still continues to diminish.

If you do not take some sort of action to extend the lease to say, 999 years and make it effectively ‘infinite’ then as the lease decreases in value you may be slowly storing up trouble.

Ideally all of the leases for participating flats should be extended at the time of purchase. If this is done (or if it does not need to be done as the leases are already very long) then this problem will not arise. However, if the leases are of ‘modest’ or ‘normal’ length and there is a delay between buying the freehold and extending the leases then there is a risk that this problem will arise.

What is the problem?

Effectively, CGT (Capital Gains Tax) is the problem. If the company grants a lease extension back to the leaseholder and the value of what the leaseholder gets back differs significantly from what was paid to receive this benefit in the first place (i.e. if the value of the lease extension is higher than the ‘cost’ of buying into the freehold), then the company has made a disposal of something of value and may well face a CGT liability.

As the company may have no assets or cash to pay for this (and why would it want to pay this expense on someone else’s behalf?) it will need to have this liability covered off (i.e. paid for by the leaseholder) before the lease extension is granted.

The moral of the story is therefore, don’t delay in extending leases to 999 years after completion, or to ensure that it is a requirement of your participation agreement that this is done.

In certain circumstances, there may be some ‘ways’ around the issue, but these are very much circumstance dependent. It is also likely that the company will need valuation advice. These issues have become the focus of discussion, including a recent debate at the ALEP Conference. in practice, I see a number of tax and enfranchisement issues on a fairly regular basis and freehold company directors should always consider carefully their position in such situations.