Leasehold enfranchisement

The term 'leasehold enfranchisement' includes rights to:

The purpose of those rights is to enable tenants to continue occupation of their residential property at a fair price and on fair terms. It also allows leaseholders to maintain capital value and the ability to mortgage.

Mortgage lenders look unfavourably on leases with less than 70 years left to run.

Houses

Leasehold Reform Act 1967, Part I (LRA 1967) gives an individual tenant of a house the right to:

A lease can be extended only once under LRA 1967 and can be terminated (with compensation) for redevelopment under LRA 1967, s 17. Moreover, the rent payable under the extended lease is to be a 'modern' ground rent – representing the letting value of the site – and the landlord can insist on a review midway through the new term (at year 25). In each case, the tenant must pay the valuation cost.

The prospective abolition of the low rent test by Housing and Regeneration Act 2008 will remove a potential obstacle to subsequent acquisition of the freehold interest under LRA 1967, but buying the freehold in the first place must be the sensible option if the funds can be raised.

The statutory definition of house includes terraced and semi-detached houses, but excludes blocks of flats. Special attention needs to be given to the definition if any flats are included within the house or there is an element of flying freehold.

There is no requirement for the tenant to have resided in the house; and the lease can be held in the name of a company. The requirement for two years' ownership applies.

Flats - individual extension

Under Leasehold Reform, Housing and Urban Development Act 1993, the tenant of a long lease of a flat has a right to an extended lease of 90 years in addition to the unexpired term of the existing lease at a peppercorn rent. This right is the most commonly used in practice, due to the relatively high proportion of leasehold flats and also because this right is exercised by one individual. However, if a notice of claim by other tenants in the building or block is made for collective acquisition of the freehold, the tenants individual claim for a lease extension is suspended.

Flats - collective enfranchisement

Tenants who meet the criteria set out in Leasehold Reform, Housing and Urban Development Act 1993 can require the landlord to sell the freehold of the building to the 'nominee purchaser' of a group of leaseholders of the flats (representing at least half of the flats in the building). Where there is any intervening interest, like a headlease, this must generally be acquired as part of the purchase by the leaseholders.

Where this right is to be exercised, participating leaseholders should enter into a formal participation agreement amongst themselves to govern joint actions prior to and during the collective enfranchisement procedures - rights of voting, the negotiation and agreement of terms and, most important, the individual leaseholder's financial contributions.

Collective right to manage

The Commonhold and Leasehold Reform Act 2002 gave a new right to tenants of blocks of flats to take over the management of their building without having to acquire the freehold. For this purpose, the building must be a self-contained block of flats (which includes a converted building as well as a purpose built one). It must have no more than 25% non-residential use, and two thirds of the flats must be let to qualifying tenants.

Procedures and valuation

Exercise of any of these rights involves detailed procedures. They are initiated by serving notice on the landlord. Strict deadlines then apply for the service of counter-notices and subsequent steps in the process. Even if a right is admitted, a claim may lapse if time limits are overlooked. Although often referred to generically as 'leasehold enfranchisement', the qualifying criteria, forms of notice and time limits for each right are different, and it is essential before initiating any of the procedures to ensure that each successive step is mapped out and understood.

The valuation process for freehold acquisitions and lease extensions is also extremely complex. For houses, the premium to be paid depends on the category into which the house falls. This is governed by the size of the property as reflected by its 'rateable value' when these were in force or by its 'rental value' if the house was constructed after the abolition of rateable values for residential properties.

For both houses and flats the formulae are primarily based on ground rents and yields and the length of the unexpired term. Where a lease has less than 80 years left when the process is triggered, the tenant must pay a 'marriage value' which can considerably increase the price. Again, though, the detailed rules for each right are different and specialist advice should be obtained before launching into any of the procedures.