The Leasehold Enfranchisement process , brief description
The Leasehold Reform
Housing and Urban Development Act 1993 (as amended) gives the right for tenants of flats
to purchase the freehold and any head leases of their building from their Freeholder (landlord). In order for the building to qualify under the Act, it must:
1, be an independent building or the building must be a self-contained building, or part of a building. If part of a building it must constitute a vertical division of the building, with services either independent to that part, or could be so provided without significant interruption to the remaining part; and
2, contain two or more flats held by qualifying tenants; and
3, have at least two thirds of the flats held by qualifying tenants.
4, In order to be a qualifying tenant you must have a long lease which
means a lease which, when originally granted, was for a term of more
than 21 years. However, you must not own three or more flats in the
You cannot be a qualifying tenant if you hold a business lease.
If the qualifying criteria are met then it is then advisable
to ascertain whether you have a sufficient number of tenants who
want to participate, both for the purpose of qualifying for enfranchisement and for the purpose of being able to finance the acquisition. In order to qualify for enfranchisement, you need to establish that the number of participating tenants comprises
not less than one half of all the flats in the building.
The Property included in the Claim includes the freehold of the premises in which the qualifying leaseholders’ flats are contained, i.e. the block or building.
Together with the
freehold of the premises purchased will also be included any “appurtenant
property” which means: premises belonging to or usually enjoyed with the flat,
such as garages, outhouses garden or yard or gardens and premises. Also
property which a qualifying leaseholder is entitled to use under the terms of
his lease in common with occupiers of other premises.
This would include such things as communal gardens, driveways, sports facilities such as a gymnasium (note that the freeholder
has the option of granting equivalent rights over such common areas rather than transferring the freehold).
Initially you will need to establish what it is going to cost by obtaining a valuation.
Valuation: The Valuation will analyse the price to be paid
by the participating tenants to purchase the freehold of the building
is the aggregate of:
A; the building’s investment value to the freeholder – the capitalised value
of his ground rents and the value of his reversion (being the present
freehold vacant possession value deferred for the unexpired term of
B; one half of the marriage value – the increased value attributable to
the freehold by virtue of the participating tenants being able to grant
themselves extended leases at nil premium and a peppercorn rent;
the marriage value attributable to a lease held by a participating tenant
will be deemed to be nil if that lease has an unexpired term of more
than 80 years at the date that the initial notice is given;
C; compensation for loss in value of other property owned by
the freeholder, including development value consequent to
the severance of the building from that other property.
D; The valuation date is the date that the claim notice is given. Value added to the flat of a participating tenant by tenant’s improvements is disregarded in the valuation.
Finance; The participators will need to establish how to
finance the cost of acquisition. It may, for example, be necessary for a number
of participating tenants to seek a further advance from a Building Society or
Bank. In particular, the participators
will want to decide who is to finance the purchase of the non-participators’ flats and on what basis.
How to Acquire the Property; It will also be necessary to
establish what vehicle the participating tenants should use in order
to buy the freehold and how they will establish and regulate the relationship between themselves. In most cases, this is likely
to be through a company structure, although in some circumstances a trust might be more appropriate. It should be noted
that the participating tenants do not all have to have equal shares, so that the proportion of the shareholdings will be a matter
for negotiation between them. The 2002 Act provides for collective claims to be made through the mechanism of a Right to
Enfranchise (RTE) company. Those provisions have never been brought into force and it is unlikely that they will now be enacted.
Tax; the participating tenants should seek advice to
establish whether there are tax implications to the transaction, both in
relation to their individual positions and in relation to the vehicle chosen to buy the freehold.
Participation Agreement; the collective enfranchisement
legislation provides no guidance or controls on the way in which the
participating tenants should work together in order to acquire the freehold.
Since the purchase may well involve substantial
sums of money and is likely to take time to complete and, during this time, the participating tenants will be heavily reliant on
each other for the performance of tasks within strict limits, it is strongly advised that, before embarking on a claim,
the participating tenants should enter into a formal agreement (called a participation agreement) in order to regulate the relationship between them during the course of the claim.
The Likely Timetable is as follows:
freeholder has two months to come back and serve a counter-notice stating
whether they accept that leaseholders have
the right to buy the freehold, and if so, whether they agree the terms proposed, including the price. If the freeholder disputes
the leaseholder’s right to buy the freehold the leaseholders will have to apply to the County Court for a declaration as to their entitlement.
2. If the
freeholder’s counter-notice accepts that leaseholders have the right to buy the
freehold but disputes the terms, usually the premium, the parties have a
further two months to negotiate. If agreement cannot be reached within this
there is then a “window” of four months within which either party can apply to the First Tier Tribunal (Property Chamber)
to rule on the terms.
parties can continue to negotiate during the four month “window”, even if one
of them has applied to the Tribunal.
If agreement cannot be reached a Tribunal hearing will go ahead.
4. The Tribunal will make a ruling after hearing evidence from both parties. This will normally be the valuation evidence form their surveyors, as most disagreements are on the premium.
terms have been agreed, or the Tribunal has made a ruling, the parties are
required to enter into a contract within
specified time limits. A party can apply to the County Court to force the other party to enter into the contract if these time limits are not met.