A landmark series of cases in the new year will decide whether owners of flats across the UK end up having to pay thousands of pounds extra to extend their leases or to buy their freehold. The judgments will be the first since a crucial ruling in September allowed the Cadogan estate in central London to charge owners between £22,000 and £460,000 to extend leases on flats in Cadogan and Chelsea Squares — up to 20% more than had been levied previously.

That ruling was made by a Leasehold Valuation Tribunal (LVT) that had been asked to revise the historic method of calculating extension and freehold costs by the estate, which is owned by Earl Cadogan, whose wealth is estimated at £1.5 billion by The Sunday Times Rich List.

“Legally speaking, the Cadogan decision does not set a precedent, but other large central London estates have written to owners of their properties saying they will adopt a similar approach,” says Robert Orr-Ewing of Knight Frank estate agency.

These are believed to include the Wellcome Trust and the Grosvenor estate. The Phillimore estate and the Church Commissioners, two other large freeholders in central London, are also believed to be considering their options.

“The real worry is the ripple effect. If this September judgment is repeated in the 11 judgments that are being considered in one sitting by the tribunal in the new year, it may ultimately affect every leaseholder, and not just those in the historic London estates,” warns Orr-Ewing.

The leasehold system at the centre of the row is unique to the UK. It means individuals can buy flats within a block while others can own the freehold; the latter are entitled to levy charges for maintenance and, occasionally, for extensions of leases. Aristocratic family estates own many central London freeholds, and professional landlords and property firms own thousands of others around the country. Most flats typically have leases of 99 or 125 years. In large cities, however, many properties now have 20 years or less remaining on their leases.

When these homes go on sale they have low asking prices, because buyers must also later pay to have the lease extended. This has led to a surge of speculative buyers who, under laws introduced in 2002, can buy short-lease flats, live in them for short periods, and then negotiate to buy lease extensions or the full freeholds.

The cost depends on the freeholder’s willingness to sell or extend the lease, on how much a longer lease could add to a future sale price, plus a sum of compensation to the freeholder that is worked out by complicated formulas involving actuarial tables and a “discount rate” based on the prevailing interest rate.

The LVT’s September ruling changed the discount rate, meaning freeholders could demand much higher payments for an extension or for the freehold itself.

A typical example would be on an apartment with a 25-year lease that may be on sale now for £400,000 but would be worth £900,000 if the lease was extended to 90 years. Under the “old” discount rate an extension may have cost £355,000, but the new methodology could take this to nearer £435,000.

Because the September tribunal did not have the power of a court, other tribunals are not obliged to follow suit. But there is growing evidence that the balance of power between freeholder and leaseholder appears to have shifted permanently.

Some owner-occupiers in leasehold properties are already having to pay more to extend their leases, although the sums involved are much smaller outside London. “At Coleshill, just east of Birmingham, I’ve had an example where an extension of a 54-year lease has risen from £6,562 to £8,451, so there’s clear evidence of the effect of the Cadogan decision already,” says Nick Plotnek, a leasehold property manager.

One of the first buyers to be hit by the September judgment was Zoe Dare Hall, who was buying a two-bedroom flat in a block owned by the Cadogan estate in Chelsea. It had only a 13-year lease, and Hall’s offer of £210,000 had been accepted by agents acting for the estate.

She had calculated that it would cost £120,000 to extend the lease, after which the flat would be worth £450,000, giving Hall and her co-buyer a £120,000 profit, or £60,000 each.

“We planned to begin negotiating the extension while buying the property, rent it out for six months, and then sell,” says Hall. “We were on the point of signing when our lawyer told us of the September decision. We were told Cadogan always took extension claims to tribunal, so we calculated our request would go the same way. Any profit we anticipated would be lost in the extra we’d have to pay the estate, so our scheme just fell apart.”

There is one other effect of the Cadogan decision. The asking prices of short-lease homes now on sale may have to drop to reflect the additional cost of lease extensions. Some central London estate agents say short-lease flats have already had prices slashed by 10% to attract buyers. Douglas & Gordon, a London estate agency, says it has already had one buyer pull out citing Cadogan as justification.

But Robert Levene of the Federation of Private Residents’ Associations, which is opposed to the higher extension charges, says the real victims are simply owner-occupiers who want to extend to continue living in their own homes. He says: “Most extensions are done through negotiation. Until now, these have usually been amicable and affordable for owners. We just hope it will continue, because we’re talking about people’s homes here.”

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