Leasehold Reform Act 1967
Leasehold Reform, Housing and Urban Development Act 1993
The Leasehold Reform Act 1967 has now been with us for over 50 years.
The Act was originally intended to allow leaseholders of lower rateable value houses to acquire the freehold (this is known as "enfranchisement"). It has been amended significantly over the years to allow for more valuable houses to be enfranchised and by the removal of qualifying conditions.
The Leasehold Reform, Housing and Urban Development Act 1993 introduced for flat owners with qualifying leases, the collective right to enfranchise their block of flats and the individual right to a lease extension. It was also amended significantly by subsequent legislation.
The principal purpose behind the amending legislation was to make the enfranchisement process easier by reducing the qualification rules and simplifying the valuation process.
The Commonhold and Leasehold Reform Act 2002 attempted to make a collective claim fairer by giving all the tenants the opportunity to participate in a claim through the mechanism of a Right to Enfranchise (RTE) company. However, that particular set of amendments has never been brought into effect and, owing to the inadequacy of the drafting, is never likely to be.
The collective right to enfranchise
Leasehold Reform, Housing and Urban Development Act 1993
What is it?
This gives the right for tenants of flats acting together to purchase the freehold and any headleases of their building. In order for the building to qualify under the Act, it must:
- be an independent building or be a part of a building which is capable of independent development; and
- contain two or more flats held by qualifying tenants; and
- have at least two thirds of the flats held by qualifying tenants.
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 building. You cannot be a qualifying tenant if you hold a business lease.
Notwithstanding the above, the building will not qualify if any of the following apply:
- it comprises four or less units and has a "resident freeholder";
- more than 25% of the internal floor space (excluding common parts) is used for non-residential purposes;
- the building is part of an operational railway.
How do you prepare for a claim?
Any qualifying tenant can give a notice to his landlord or the managing agent requiring details of the various legal interests in the block. This notice places no commitment on the tenant but the response to the notice should provide the tenant with the information necessary for him to ascertain whether the building contains a sufficient number of qualifying tenants for it to qualify.
Having established that the building qualifies, 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. However, if there are only two flats in the building then both must participate.
When you have established that the building qualifies and that there is a sufficient number of qualifying tenants who wish to participate, there are five further practical steps which should be taken before embarking on the enfranchisement process.
First, you should establish what it is going to cost by obtaining a valuation. In simple terms, the price to be paid by the participating tenants to purchase the freehold of the building is the aggregate of:
- the building's investment value to the freeholder; being the capitalised value of his ground rents and the value of his reversion (being the present freehold vacant possession value deferred for the unexpired terms of the leases);
- one half of the marriage value; being the increased value attributable to the freehold by virtue of the participating tenants being able to grant themselves extended leases at nil premium and at 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;
- compensation for loss in value of other property owned by the freeholder, including development value consequent on the severance of the building from that other property.
The valuation date is the date of service of the claim notice. Value added to the flat of a participating tenant by tenant's improvements is disregarded in the valuation.
For the purpose of calculating the price, the tenants should take the advice of a properly qualified surveyor or valuer with experience in the field of enfranchisement and knowledge of the local market.
In addition to the price and the participating tenants' own legal costs and valuation fees, the tenants will be required to reimburse the freeholder his legal costs and valuation fees.
Secondly, the participators will need to establish how to finance the cost of the acquisition. It may, for example, be necessary for a number of participating tenants to seek mortgage funding. In particular, the participators will want to decide who is to finance the purchase of the nonparticipators' flats and on what basis.
Thirdly, it will 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 company. However, those provisions have never been brought into force and it is unlikely that they will be.
Fourthly, 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.
Finally, 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, it 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 enter into a formal agreement (called a "participation agreement") in order to regulate the relationship between them during the course of the claim and to document how the purchase price and costs are to be shared between them.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.