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Tenants may negotiate the acquisition of the freehold of their block of flats by agreement or alternatively claim a statutory right under the Leasehold Reform, Housing and Urban Development Act 1993 (‘the 1993 Act’). The tenant, premises and flat must qualify.
There are exceptions but broadly speaking, a tenant is a qualifying tenant if they hold their flat on a lease which was originally granted for a term of over 21 years (but a qualifying tenant of 3 or more flats is excluded).
The premises qualify if:
- they consist of a self-contained building or part of a building;
- they contain two or more flats held by qualifying tenants; and
- the total number of flats held by those tenants is not less than two-thirds of the total number of flats contained in the premises.
A flat is defined as a separate set of premises which:
- forms part of the building; and
- is constructed or adapted for use for the purposes of a dwelling; and
- of which either the whole or a material part lies above or below some other part of the building.
It is important to note that if the internal floor area of the non-residential parts exceeds 25% of the whole premises (excluding the common parts) then the premises will be excluded from enfranchisement.
The tenant of a missing or unidentifiable landlord may still acquire the freehold subject to permission of the court. Lastly, it will require the participation of at least half of the number of flats held by qualifying tenants in the premises.
Valuations
It is strongly advised to obtain a professional valuation of the freehold from a surveyor with specific experience of the 1993 Act. We have close relationships with a number of specialist surveyors and can assist you in recommending a surveyor to calculate the likely cost should you require such a recommendation.
The surveyor’s valuation will normally provide a range of values:
- A best case scenario value; and
- A middle value representing what the surveyor thinks is the actual value of the lease extension; and
- A worst case scenario value.
The Acquisition Process
A nominee purchaser (normally one of the participating tenants) is chosen to act on behalf of all the participating tenants to serve the initial notice and run proceedings thereafter. The initial notice (known as a section 13 notice) has to be carefully drafted as the legislation has strict requirements that must be complied with to avoid the notice being considered invalid. The notice will contain various provisions and proposals about the terms of the transaction. The most important proposal is, unsurprisingly, the amount that the tenants wants to pay. The notice is, in effect, an opening offer to begin negotiations as it represents the absolute minimum the tenants will pay.
Once the notice is served, the nominee purchaser becomes liable for the landlord’s reasonable valuation and legal costs (but not those incurred in connection with an application to the First-tier Tribunal). The notice will give a minimum of two months for service of the landlord’s counter-notice (known as a section 21 notice). This is a strict deadline. If the landlord does not serve the counter-notice within this period, the tenant will be entitled to apply to court to have the lease extension granted at the price proposed in the initial notice.
The counter-notice will either admit or deny that the tenants are entitled to exercise the right to collective enfranchisement, and if admitted, which of the tenants’ proposals are accepted. If the landlord does not accept any of the tenants’ proposals, the counter-notice must give a counter-proposal. Most often, this will take the form of a counter-offer on the price. This effectively sets the most that the tenants could possibly pay and forms the upper boundary of the negotiation.
Following service of the counter-notice, a six month statutory negotiation period begins. During this time, the parties attempt to negotiate and agree all of the terms of the transaction. In all but a few low value cases, the parties’ surveyors will conduct the price negotiation as the surveyors are best placed to deal with valuation matters.
If an agreement is not reached within the six month deadline, the initial notice will be deemed withdrawn. This will end the process, the nominee purchaser will be liable for the landlord’s costs up to that point and will not be able to serve notice again for 12 months (at which point freehold may be more expensive). This is also the case if the tenant chooses to withdraw the claim. If agreement is looking unlikely and the deadline looming, tenants usually make an application to the First-tier Tribunal to ask them to make a determination on the points in dispute.
The application to the Tribunal stops the clock and the deadline can safely pass without the initial notice being withdrawn. Once the points in dispute have been agreed or determined by the Tribunal, the parties enter into a separate set of deadlines for preparation of the necessary documents and completion of the conveyance.
The process can be lengthy and can often take up to a period of one year or longer. How complicated the process is often depends on a landlord’s willingness to give up the freehold but otherwise profit is usually the landlord’s main or only objective. Tenants will have a number of issues to consider when deciding whether or not to launch a claim under the 1993 Act, such as:
- How much will it cost? Even though this is not the only concern, it is fundamental to know whether or not the tenants can afford the process at the outset;
- Will this make service charges cheaper? Whilst tenants often approach us looking to enfranchise because of unreasonable charges made by their landlord, it is important to realise that maintenance and insurance costs will still be incurred and the tenants will still have to pay their individual shares. It is worth looking at the costs that the landlord is currently charging and comparing these with quotes from the wider market to establish whether or not the current charges really are too high;
- Will the tenants be able to manage the building as they see fit? In a sense, yes they will. However, they will also be taking on the obligations on the part of the landlord that are contained in the leases. This will restrict what the tenants can and cannot do and sometimes the obligations are quite onerous and/or time consuming. Also, once the tenants become the freeholder, they will have to deal with questions and comments from the tenants (especially those who have not participated in the acquisition) about the management of the building;
- Will the tenants be able to extend or vary their leases once they become the freeholder? Yes, this is often one of the most attractive aspects of acquiring the freehold. If the leases are running short the tenants will be able to grant new extended leases at a peppercorn (nil) ground rent without paying a freeholder a further premium. Also, if the leases are defective or simply dated by modern standards, the tenants can have new leases drafted to deal with any issues.
Acquiring the Freehold of a House
As with flats, the tenant may negotiate the acquisition of the freehold of their house and premises by agreement or alternatively claim a statutory right under the Leasehold Reform Act 1967 (‘the 1967 Act’). The tenant, premises and flat must qualify.
Fundamental to the right to extend a lease is the definition of ‘house’. In basic terms, the building should qualify if it:
- is designed or adapted for living in;
- can reasonably be called a house;
- maybe divided horizontally into flats or maisonettes and is not divided vertically.
The building does not have to be detached.
However, please note that the definition is far wider than one might imagine and there is ongoing case law on the subject.
As regards the tenant, the legislation is complex and exceptions apply, but broadly speaking tenants qualify for the right if:
- they are the tenant of the whole of the premises (unless they are already the freeholder of those parts of the house of which they are not a tenant) but the tenant need not be the tenant of the premises; and
- they hold a lease which was originally granted for a term of over 21 years. Unlike flats, certain commercial tenants will be considered qualifying tenants; and
- the lease has been granted at a low rent and the property falls within certain rateable value limits; and • they have been registered as proprietor of the house and premises for a minimum of two years (trustees, trust beneficiaries and personal representatives or family members succeeding to a tenancy on death might also qualify).
If the tenant has the right to acquire the freehold, the correct basis of valuation for calculating the premium payable for the house and premises needs to be ascertained. This is determined by which financial limits they fall within and which section of the 1967 Act applies. This is a very complicated process and it is strongly advised to obtain a professional valuation of the premium payable from a surveyor with specific experience of the 1967 Act. We can assist you in recommending a surveyor to calculate the likely cost should you require such a recommendation.
The surveyor’s valuation will normally provide a range:
- A best case scenario value;
- A middle value representing what the surveyor thinks is the actual value of the lease extension; and
- A worst case scenario value.
The notice of tenant’s claim should be in a prescribed form and carefully drafted to avoid the notice being considered invalid. The notice will contain various particulars of the claim including the extent of the claim, that the tenant has a right to acquire the freehold, the section of the 1967 Act under which the right arises and the section under which the house and premises are to be valued. It must be served on not only the freeholder but any persons holding a legal interest in the house and premises superior to the tenant but it should be noted that certain bars apply to serving an effective notice.
The service of a notice has various effects. Principally, that it creates a binding contract between tenant and landlord for the grant of a lease extension and an obligation on the tenant to pay for the reasonable valuation and legal costs of the landlord (but not those incurred in connection with an application to the First-tier Tribunal). The parties may agree to withdraw from the contract at any time. The landlord may also require in writing a deposit of three times the annual rent or £25 whichever is greater. The notice will also trigger other obligations. It will give a two month deadline for service of the landlord’s notice in reply. If the landlord fails to serve an effective notice in within this period, the tenant will be entitled to apply to court to acquire the freehold but the landlord still retains the right to challenge the tenant’s notice.
Please note that the tenant of a missing or unidentifiable landlord is unable to extend their lease but may still acquire the freehold subject to permission of the court.
The notice of tenant’s claim is capable of being assigned to an incoming tenant without that tenant having to wait two years.
The landlord’s notice in reply (which should also be in a prescribed form) will either admit or deny upon specific grounds the right of the tenant to acquire the freehold. If admitted, it will also state in the landlord’s opinion the basis for the valuation or whether the house and premises are exempt.
It is important to note that a landlord may apply to court for possession of the property on the grounds that he or an adult family member reasonably require occupation of the house as their main residence if it was purchased or built prior to 18th February 1966 (redevelopment rights do not apply to freehold acquisitions) so as to avoid the effect of the tenant’s notice. If the parties are unable to agree the terms of the lease, an application must be made to either the First-tier Tribunal or County Court to make a determination depending upon the nature of the dispute.
Once the points in dispute have been agreed or determined, the parties enter into a separate set of deadlines for preparation of the necessary documents and completion of the freehold conveyance.
Informal Agreement
This is often the most straight forward means of acquiring the freehold. There are no particular qualifying criteria or unusual procedures, as the tenants are not exercising their statutory rights. All that is necessary is for the tenant(s) to approach the freeholder (or vice versa) to negotiate. Please note that some landlords will require you serve a statutory notice.
Depending on the circumstances, the landlord might need to follow the section 5 right of first refusal formalities before selling the freehold by agreement (please see Right of First Refusal).
The key point here is that the extension or acquisition proceeds by agreement. You must always bear in mind that neither party is under an obligation to proceed. All the terms are up for negotiation and it will come as no surprise that often the main topic on the table is the price.
Once the parties agree to proceed, you are best advised to obtain a professional valuation from a surveyor with specific experience of the legislation.
Once you have the valuation, the parties can begin negotiations over the price and any other terms of the transaction.
Chris Sarsfield
Head of Property Law
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