A leasehold property is a property leased for a term of years by the person who owns the freehold (the freeholder). The freeholder and the leaseholder of a leasehold property may choose to negotiate an agreement to extend the lease beyond the original term, particularly if there are fewer than, say, 60 years left on the lease.
However, the leaseholder might be able to buy the freehold from the freeholder. This is known as ‘enfranchisement’ of the lease. An acceptable price and conditions of the sale of the freehold will, of course, need to be agreed between the parties.
What’s the law?
The law is highly complex, and is set out in the Leasehold Reform Act 1967, the Landlord and Tenant Act 1987 and the Leasehold Reform, Housing and Urban Development Act 1993. These Acts were later amended by the Housing 1996 and the Commonhold and Leasehold Reform Act 2002.
Most leases would, in theory, expire on the end date specified in the lease, but the law now requires freeholders to extend existing leases (for a price) to a term of 90 years longer than the remaining term of the lease once the leaseholder has held the lease for two years. Alternatively, the tenant can buy the freehold of the property after two years. This is called ‘enfranchisement’.
Because of this, the freeholder may decide that selling the freehold is more cost-effective and more practical than extending the lease, whether or not the tenant has been leasing the property for two years. Enfranchisement of a lease of a property can be ‘individual’ or ‘collective’ enfranchisement.
What is ‘individual’ enfranchisement?
Individual enfranchisement is where the leaseholder has the right to acquire the freehold of the property – but individual enfranchisement is not possible for an individual flat owner acting as an individual because it is part of a larger block of which the freeholder owns the freehold. The only option available for a tenant on their own is to have an extension of the lease.
However, a group of leaseholders within the block of flats can collectively enfranchise.
What is ‘collective’ enfranchisement?
A number of flat owners can group together and collectively enfranchise if at least half of the flats with qualifying tenants participate.
The leaseholders must decide how they will acquire and own the freehold but this is typically done via a company (the nominee purchaser) of which all those leaseholders will be members. The flat owners then continue to hold the leases of their individual flats. In effect, the freehold simply changes ownership.
Flat owners who do not or cannot join in the collective enfranchisement have the right to extend their existing lease by 90 years.
What are the qualifying conditions for buying the freehold?
Both the tenants and the block of flats itself must qualify under the Leasehold Reform, Housing and Urban Development Act 1993. A minimum number of the qualifying tenants must join in with the purchase of the freehold. Two thirds of the flats must be let on long leases and the minimum number of participating tenants must equal half the total number of flats in the building. In addition, at least half of the participating, qualifying tenants must satisfy a ‘residential test’.
A tenant qualifies if they are a tenant of a flat under a long lease at a low rent (the rent is not relevant if the lease was granted for a ‘particularly long term’ ie. over 35 years). Most flat owners will be classed as tenants even if they are sub-leasing (unless the property is used for business or as a charitable housing trust).
A flat is classed as a flat if at least part of the property is above or below another part of the building, including both one storey and two storey flats above shops.
A long lease is an original lease granted for a term longer than 21 years, regardless of whether the flat owner was the original tenant or how long is left under the lease. The rules for deciding what constitutes ‘low rent’ are complex, but in most cases, the lease will be for a ‘particularly long term’ anyway.
What is the residential test?
A minimum percentage of the floor area must be used for residential purposes. There is a 25% rule where, if more than 25% of the internal floor area of the building (not including common parts), is used for purposes other than residential, then the building will not qualify.
Garages and individual parking spaces designated for a particular flat are classed as residential for these purposes. If more than four flat owners want to buy collectively buy the freehold, they must set up a corporate body to do so, to satisfy the Law of Property Act 1925 which states that no more than four individuals co-own the freehold.
How will the leaseholders buy the freehold?
The purchase price of the freehold will need to be agreed with the freeholder or decided by a leasehold valuation tribunal. The price is based on the open market value which reflects the income the freeholder would have received from rent and the prospect of regaining possession of the parts of the building that are currently let.
Added to the open market value agreed is the so-called ‘marriage value’, which recognises the individual leaseholder’s special interest in the purchase.
Does notice need to be served?
Notice should be served on the freeholder, who must then provide information and documents including title deeds, surveyor’s reports and planning restrictions. The leaseholders can then make an informed decision about how they wish to proceed.
The leaseholders can ask the freeholder to consider a voluntary sale, avoiding the usual complex procedures where they are asserting their right to buy. The freeholder may agree to this, given that they may be forced to sell anyway.
What’s the procedure?
In practice, the procedure is sometimes complex, but in simple terms – a surveyor carries out a valuation, commissioned by the leaseholders. The leaseholders then give the freeholder an initial ‘section 13’ notice of two months to respond to a proposed price, and will give details of the leaseholders involved, and the nominated purchaser; proof that they qualify (as detailed above); and which parts are to be enfranchised (and leased back). The freeholder may not now sell to a third party.
If the freeholder requires evidence of the leaseholders’ qualification, the nominated purchaser has 21 days to provide details. Then, the freeholder must serve a counter notice accepting the proposal with proposed terms, such as leaseback provisions – or giving their reasons for rejecting it (in which case, further negotiations will become necessary).
Once the sale terms have been agreed, there are two months to exchange contracts. If this has not happened within two months, the purchaser/participating tenants can ask the court to transfer the freehold to them.