A Practical Guide to Leasehold Reform

An introduction to leasehold reform

The legal provisions relating to the area of leasehold reform are complex. This guide aims to provide both leaseholders and landlords with a summary of the main issues.

The rights for lessees to “enfranchise” began in England and Wales with the passing of the 1967 Leasehold Reform Act (‘the 1967 Act’). This Act gives the tenant of a leasehold house the right to acquire the freehold and any intermediate leases.

Since 1967 there has been further legislation in the area of leasehold reform, increasing the rights of leaseholders generally. Today, there are rights for tenants to purchase the freehold to a building, either individually in relation to a house, as provided by the 1967 Act or together with other lessees for a block of flats.

As an alternative to buying the freehold, individuals or groups can now extend their leases in a procedure protected by statute. There are also rights allowing tenants to assume the management of their building.

The Leasehold Reform Housing and Urban Development Act 1993 (‘the 1993 Act’) introduced the rights for flat owners to buy their freehold or extend their leases. These rights were extended by the Commonhold and Leasehold Reform Act 2002.

This guide provides an overview of the area of leasehold reform.

Freehold acquisition
Advantages of Buying the Freehold
The 1993 Act gives qualifying tenants the right to act together and purchase the freehold of their building, on terms and at a price which is fair. There are a number of reasons why doing so is considered worthwhile:
  1. The financial investment to acquire a share in the freehold to a building is generally considered to add to the marketability and value of flats;
     
  2. Once the freehold has been bought, flat owners no longer have to worry about their lease being a diminishing asset. Flats are difficult to sell if a lease has less than 60 years left to run, particularly because most mortgage lenders are unprepared to lend. Acquiring the freehold allows flat owners to grant themselves new leases with 999 year terms;
     
  3. The terms of the existing leases may be unsatisfactory, perhaps being old fashioned or containing onerous covenants. The freehold acquisition process gives leaseholders the right to modernise and vary the terms of their leases;
     
  4. The ground rent payments may be high, or the lease may contain a worrying rent review as some date in the future;
     
  5. Flat owners may not like the way in which the landlord enforces the covenants in the building. Once lessees have acquired the freehold they can enforce such covenants as leniently or as strictly as they wish;
     
  6. The landlord may not be managing the building well, or in some cases at all. Perhaps the landlord has not undertaken proper maintenance of the building for many years. Or perhaps leaseholders consider the service charges being imposed to be unreasonable. Acquiring the freehold means that the participating lessees will control the management of their building;
     
  7. By acquiring the freehold, flat owners take control of their own property and it’s destiny (there is no longer a risk of the freehold being sold to a 3rd party, perhaps a property investment company which has little interest in the welfare of the building or estate.
The acquisition of the freehold is generally undertaken by a group of lessees collectively. Normally a company is formed to own the freehold and the participating lessees will each have a share in the freehold company. Any flat owners who do not participate in the process will continue to pay ground rent to the new freehold company.
Methods of Acquisition

There are generally three ways of acquiring the freehold interest in a block of flats:

  1. By direct negotiation with the landlord. A price is agreed. The funds are collected from the participating flat owners and completion can take place relatively quickly. This process saves on the costs and time inherent in following the procedure set out in the legislation but it presupposes that the landlord is willing to sell at a price and on terms that are acceptable to the flat owners.
     
  2. If the landlord of a building wishes to sell his freehold interest, he must first serve a notice on all the flat owners giving them the right of first refusal. It is an offence not to do so. If at least 50 % of the flat owners wish to accept the landlord’s offer the landlord should sell the freehold to them at the price that he has offered. There is very little scope for negotiation of the price at which the landlord is prepared to and, again, this presupposes that the landlord wishes to sell
     
  3. If the landlord does not wish to sell, or suitable terms cannot be agreed, the flat owners, subject to meeting the eligibility criteria, can force him to transfer the freehold to them at a fair price which, in default of agreement between the parties, is determined by the Leasehold Valuation Tribunal. This is the process set out in the 1993 Act.
Qualifying Criteria

Before deciding to proceed with a freehold acquisition under the 1993 Act, it is necessary to consider the eligibility criteria.

  1. Does the building qualify?
    To qualify, a building must be self contained or part of a building which could be redeveloped independently of other premises. It must contain at least 2 flats held by qualifying tenants. Not more than 25 % of the internal floor area of the building may be occupied otherwise than by residential purposes
     
  2. What is a qualifying tenant ?
    A qualifying tenant of a flat must have a lease for a term of at least 21 years (when originally granted). If a tenant owns more than 3 flats in the building, then he does not qualify. Briefly, at least 50 % of flat owners need to take part in the freehold acquisition
     
  3. Check that the landlord qualifies
    Some landlords, such as the Crown, the National Trust and certain other bodies are exempt from the provisions of the 1993 Act
     
  4. Valuation
    The 1993 Act provides a formula for calculating the price to be paid by the participating tenants for the freehold. The formula is complex. It is intended to provide the landlord with a fair market price for his interest in the building, including a share of the marriage value (where it applies). In simple terms, the price is calculated as the aggregate of:
  • the investment value of the building to the landlord;
  • one half of the marriage value. The marriage value is the value attributed to the freehold as a result of the participating tenants being able to grant themselves extended leases at nil premiums and peppercorn rents. The marriage value only applies with leases of less than 80 years to run;
  • compensation for the landlord’s other losses resulting from enfranchisement, for example, the loss of development value of other property
Procedure under the 1993 Act

Once satisfied that the participating tenants satisfy the qualifying criteria, the following steps should be considered:

  1. One of the first considerations for flat owners who are interested in acquiring the freehold to their building is to understand what the whole process is likely to cost. To do that, it is recommended to obtain a valuation from a valuer who specialises in leasehold enfranchisement.

    We work closely with a number of specialist valuers and can help you with this process. We can also let you have a breakdown of the likely legal costs and other professional expenses that you will have to pay.
     
  2. Draw up a participation agreement. This is a binding contract between the flat owners wishing to participate in the claim. It regulates the manner in which participators are to share the costs of the premium (which might vary between participating lessees if, for example, the size and value of flats within the building differ) and the expenses of the process. It will also deal with what might occur if a participating tenant dies or sells his flat, or wishes to drop out of the process
     
  3. Normally, flat owners will form a company to acquire the freehold interest. We can deal with the company formation, appointment of officers and advise you about all company filing and book-keeping requirements. We can act as first officers, if required, and as Company Secretary in the long term
     
  4. The claim is initiated by the participating tenants serving on the landlord an Initial Notice. The notice must contain precise information. It must specify the premises claimed and the proposed price which the tenants are offering to pay. It must give details of all the tenants in the building and the names of those who intend to participate.
     
  5. The freeholder will then investigate the claim. He is entitled to raise enquiries to satisfy the information given in the Initial Claim. His valuer will inspect the building and carry out a valuation for him. The freeholder must serve a Counter Notice within the period specified in the Initial Claim. This will state whether or not the claim is admitted. The freeholder may only reject the claim on the grounds of invalidity or if he intends to redevelop the building. Normally the claim will be admitted but the freeholder will put forward his counter proposal for the terms of acquisition. Typically this will mean that he proposes a higher price.
     
  6. The parties will then negotiate the price and any other terms to be agreed. If the terms are then settled, the purchase can complete. If au price cannot be agreed between the parties, either party can apply to the Leasehold Valuation Tribunal to decide the matters in issue.
The participating tenants are responsible for their own costs and those of the landlord investigating the claim and his valuer valuing the premium. The participating tenants are not responsible for the landlord’s negotiating costs, nor any of his costs if the matter were to proceed to the Tribunal.
Lease Extension
General

Extending a Lease can be an alternative to the rights flats owners have to acquire the Freehold from the Landlord (for example, if there are not enough people willing to take part in obtaining the Freehold from the Landlord or if the building does not qualify).

Once the term of your Lease gets shorter, it will become more difficult to sell. The majority of Banks and Building Societies will not lend where a Lease has approximately 55-65 years left to run and once this period has been reached it can difficult to a flat to any purchaser who requires a mortgage.

In 2002 new legislation was introduced to amend the 1993 to make it easier for flat owners to extend their Leases. The legislation gives flat owners a right to extend their Leases for a period of 90 years (in addition to the term remaining under the existing lease). This can either be at price agreed between flat owner and Landlord or, where an agreement cannot be reached, at a price be determined by the Leasehold Valuation Tribunal.

Qualifying

In order to qualify for a Lease extension certain conditions have to be met:

  • Flat owners must own a long Lease (i.e. a Lease which was originally granted for more than 21 years)
  • A flat owner must have owned the Lease for a period of at least two years before being able to exercise the right. It is no longer necessary to have occupied the flat for any specific period
  • Where a deceased flat owner would have qualified under the above criteria before their death, their personal representatives can qualify for the right to extend the Lease. However, the personal representatives must exercise their right within two years from the date of the Grant of Probate or Letters of Administration.

There are some exclusions from the Act as follows:

  • It does not apply to business tenancies.
  • Certain Landlords such as the National Trust, the Crown and certain other bodies are exempt from the provisions of the Act.
Methods of Acquiring an Extended Lease

There are two methods to acquire an extended Lease:

  1. You can negotiate directly with the Landlord. Once a price has been agreed, the Lease extension can be completed fairly quickly once the Deed for the Lease extension is agreed and the Landlords Title has been checked.

    This is, of course, on the basis that the Landlord is willing to grant an extended Lease and the price that has been negotiated is acceptable to both parties. This is usually the cheapest, easiest and quickest method of extending the Lease but does not always provide for the best new lease terms.
     
  2. If the Landlord does not wish to grant the extended Lease the flat owner can apply for a Lease extension under the 1993 Act.
Procedure
  1. In order to be able to apply for a Lease extension under the 1993 Act you need to ascertain:
     
    • whether, as a flat owner, you qualify;
    • whether the premises qualifies; and
    • whether the Landlord qualifies.
       
  2. The next step is to arrange for the initial notice to be prepared on behalf of the flat owner. This is a detailed notice which sets out the grounds of the claim, details of the flat owner and the existing Lease and a note of the price the flat owner is prepared to pay which is calculated in accordance with the 1993 Act.
     
  3. The initial notice is then served on the Landlord.
     
  4.  Any enquiries which are raised by the Landlord as a result of the initial notice are dealt with.
     
  5. Details of the notice are registered at H M Land Registry against the Landlord’s Title to prevent the Freehold interest being sold without the flat owner or the purchaser of the Freehold interest being notified. There is a small fee payable to the H M Land Registry for the registration.
     
  6. The Landlords counter notice is made which will either accept or reject the claim. The Landlord must serve the counter notice within two months of the initial notice being served by the flat owner.
     
  7. The parties will then negotiate the terms and particularly the price that is to be paid for the new lease.
     
  8. Any issues with any arrears of ground rent and service charge are dealt with.
     
  9. The terms of the Lease extension are agreed.
     
  10. The new Lease is then completed and registered with the Land Registry against the flat owner’s and the Landlord’s Title.

The time limits which are imposed by the Act are extremely strict once the initial notice has served by the flat owner on the Landlord. If the flat owner fails to comply with the prescribed timetable the application can fail. However, if the Landlord does not meet the timetable it is for the flat owner, again within specified time limits set down by the Act, to make the an application to the Court or tribunal to protect their rights to extend the Lease.

The legislation provides that on the grant of a Lease extension under the terms of the Act, only a peppercorn rent will be payable. Unlike the rent which was previously paid to the Landlord under the terms of the Lease, a peppercorn rent has no monetary value.

Under the 1993 Act, the term of the existing Lease is extended by 90 years. This means that if, for example, the flat owners existing Lease has 60 years left to run, after the lease extension is granted, the lease will have 150 years left to run.

Before the Landlord is contacted about extending the terms of a Lease, it is strongly advised that a flat owner obtains a professional valuation from a surveyor which will indicate the likely premium payable for an extension of the Lease term. The majority of surveyors will give an indication of the premium rather than a detailed valuation at this early stage. This will then give the flat owner an idea of the likely premium payable before any legal costs are incurred. If you would like details of surveyors please do not hesitate to contact us.

Enfranchisement of houses
General

The Leasehold Reform Act 1967 (‘the 1967 Act’) gives the tenant of a house the right to acquire the freehold and any intermediate leases.

Qualification

The first issue to consider is whether the building qualifies. It must be a “house”. This can, in fact, include a shop with a flat above or a building converted into flats. The building must, however, not over-hang or under-hang adjoining buildings.

The lease of the “house” must comprise the whole building, and it must be for a term of at least 21 years (from the date of the original grant). Business leases can qualify, but here the lease term must be a minimum of 35 years.

To qualify under the act, the tenant must have owned the lease of the house for at least 2 years prior to the date of the claim.

Valuation

The formula for ascertaining the price for the freehold is set out in the 1967 Act. In fact, three different valuation methods are laid down. It is strongly recommended that a formal valuation from a valuer specialising in leasehold reform work is obtained.

Procedure

The process for making a claim under the 1967 Act is reasonably straightforward. Once a valuation has been obtained, a notice of claim is served upon the freeholder (and any intermediate landlords). The notice must state:

  1. a description of the house;
  2. evidence showing that the claim passes the qualification criteria; and
  3. what the tenant thinks is the basis of valuation

The landlord will serve a counter notice. Generally, he will accept the claim but dispute the price being offered and the parties will try to negotiate a settlement of the price and any other issues not yet agreed. If the parties have not agreed terms within 2 months from the date of the counter notice, either party can put he matter before the Leasehold Valuation Tribunal for the terms to be decided.

Extended Lease Option

The 1967 Act does also provide for the tenant of a house to apply for a 50 year extension to the remaining lease term, at a commercial ground rent.

Right to manage

Before the Commonhold and Leasehold Reform Act 2002, flat owners did have the power to ask the court to appoint a manager of their building if they could prove that the freeholder was acting unreasonably and in default of his service charge and other obligations regarding the management of the building.

The 2002 Act introduced a new right to manage which gives tenants the absolute right to take over the management of their building without first having to show fault on the part of the landlord, and without having to pay compensation to them.

The law and practice referred to in this article or webinar has been paraphrased or summarised. It might not be up-to-date with changes in the law and we do not guarantee the accuracy of any information provided at the time of reading. It should not be construed or relied upon as legal advice in relation to a specific set of circumstances.

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