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A GUIDE FOR TENANTS OF FLATS ON PURCHASING THE FREEHOLD
Under the Leasehold Reform Housing and Urban Development Act 1993, if you are the owner of a residential lease of a flat, you and the other tenants may be entitled to purchase the freehold.
Broadly speaking, you will meet the criteria if:
- No more than 25% of the floor area in the building is used for non-residential purposes; and
- There are at least two flats in the building; and
- At least two thirds of the flats in the building are let to qualifying tenants (i.e. tenants on long leases of more than 21 years, but note it does not matter how much of the term is left to run).
- It is the qualifying tenants who can band together to make a claim to purchase the freehold. At least half of the qualifying tenants have to participate in the enfranchisement, except where there are only two qualifying tenants in which case they must both participate.
Leasehold enfranchisement can be a useful tool in allowing the tenants to acquire the freehold as a valuable asset. It also allows the tenants to take control of the management of the premises, which can be attractive where the tenants are frustrated with the current management. Having taken over the freehold of the property, it is then possible for the tenants to grant themselves lease extensions at peppercorn rent for no premium, therefore not only do they acquire the freehold asset, but also increase the value of their lease, which can be useful if the tenant wants to sell or re-mortgage.
There are two ways that you can purchase the freehold: either by negotiation with your Landlord, or by using the Statutory Procedure.
1. By Negotiation
Often, the most straightforward and cost effective way to purchase the freehold is by negotiation with the Landlord. Sometimes the Landlord will not be prepared to negotiate and will require the tenants to enter into the statutory procedure.
2. Statutory Procedure
It is always important that you know from the outset that you will be able to afford the premium payable for the enfranchisement. Therefore, the first step is to obtain a valuation report from a surveyor as to how much should be paid for the freehold. We have good relations with surveyors in the area, who are experienced in producing valuations and who are also willing to argue your case at the Leasehold Valuation Tribunal, if necessary. In addition to the premium you must budget for the fees of your surveyor and legal advisor. Other costs which you will be liable for include the Landlord’s reasonable legal and surveyor’s costs.
Once your valuer has produced a report, you should employ a qualified solicitor to assist you through the statutory procedure. The Notice of Claim must be properly prepared and served on your landlord and any other interested parties. The Notice will specify the premium recommended by your surveyor.
Before serving the Notice on your landlord, you and your fellow tenants should think carefully about how the freehold is to be held between you: will it go into your individual names or will you set up a company and allocate on share per flat? There are advantages and disadvantages to each course and these should be discussed with a professional.
If there are any more than four tenants participating in the purchase, it is a good idea to draw up a participation agreement between you. This agreement records the agreement of the participating tenants to cooperate in various stages of the process and also records agreement to contribute towards costs.
Upon receiving your notice, the Landlord can require payment of a deposit of 10% of the premium that you are proposing. The Landlord then has a period of two months to serve the Counternotice. In this the Landlord will insert the figure he wants to be paid for the freehold. It is usual that his figure will be significantly higher than the figure set out in your Notice; this is to allow for negotiation.
After both Notices have been served, the surveyors for each party have a further period of two months to try to negotiate an agreement on the premium. For this reason, it is even more important that you choose a reliable surveyor in order to speed negotiations along.
If the surveyors cannot reach an agreement within 6 months from the date of the counter notice then it will be necessary to make an application to the Leasehold Valuation Tribunal who will then decide what figure is payable. It is sometimes necessary for your valuer to attend in order to make representations about the premium.
If your lease has fallen below 80 years’ unexpired, then something called marriage value is payable, which can significantly increase premium payable. Therefore, if you are just on the cusp of falling below 80 years, it is worth starting the statutory procedure as soon as possible.