COMMENT: A first-time investor came to us recently looking to sell an ex-local authority flat he had done up, only to be hit with a hefty bill from the freeholder for estate improvements, writes Philip Waterfield, a director at Strettons.
After 18 months of enjoying the fruits of his labour, a letter from the local authority freeholder landed on his doormat giving notice of its intention to upgrade the block and carry out estate improvements including replacement windows and doors – something he had already done as part of the refurbishment but without freeholder consent.
Not very clever as this was no doubt a breach of the lease terms but, more to the point, the money spent on windows and doors was going to be wasted.
The proposals were clearly a surprise, although a prudent, experienced buyer might have been aware of a potential future liability because councils (as do many other landlords) rarely make provision in their service charges for a sinking fund contribution towards future major works.
Pre-purchase enquiries
The pre-purchase enquiries two years previously were probably too far ahead for a cash-stretched and short-staffed council to have thought about any works, although a sensible survey prior to purchase might have predicted the likelihood of future works.
To allow for consultation, the works would not start for at least another six months but this was not a large enough window (pun intended) for the buy-to-let investor to save up for his share of the cost of the works, which were likely to be about the same as a year’s rent.
To add insult to injury, HMRC would be unlikely to allow the cost of works to be offset against income and treat them as capital expenditure only, which might be offset against the proceeds of sale.
Having already spent his cash on upgrading the flat, including money wasted on windows and doors, the landlord realised that the proposed works would have limited impact on the actual value of the flat, although they would add to the longevity of the building and the estate. The conundrum now faced by our novice investor is whether to keep the property and borrow more money for the works or just cut and run – perhaps not at a loss.
Borrowing the money against a flat whose value to the owner is almost maxed out might be difficult. Even worse, the lender would need to be told about the proposed works. This would be an unknown factor at this stage, as would the six-month consultation and then a further six to 12 months for the work to be carried out, during which time the noise and disturbance could cause the tenant to leave or seek a rent reduction and affect the landlord’s income.
This difficulty would also apply to prospective buyers and thus generally limit the market to people with cash and those hungry for a bargain, who would be likely to use the cost of the proposed works as a negotiating chip.
A sale by auction?
To cut out the haggling, a sale by auction might be the most obvious method of sale in a situation like this, but a wily auctioneer will take the view of a prudent buyer and make a discount for all the hassle and cost that is going to go along with the property in the next 18 months or more.
So, while auction might be the preferred route of sale here, the seller needs to decide whether he can afford to hold the property for a few more years to try and claw back the unexpected expenditure or, with something of a sinking feeling perhaps, abandon ship and face the consequences of a possible loss but avoid the headache of paying for works that will add little direct value to the property and dealing with a potentially aggravated tenant while works are in progress.
Oh, the joys of being a landlord, although it is easy to be wise after the event. Property is a long game and many investors, especially newbies with an eye to immediate income who throw caution to the wind, might find out to their cost at a later date that the freeholder, who has not set aside a sinking fund in his service charge collection, might legitimately demand hefty costs in one fell swoop for works that a savvy buyer might have anticipated at the outset.
