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Enfranchisment |
These pages tell you about two rights for leaseholders of flats. These rights are in Part I of the Leasehold Reform, Housing and Urban Development Act 1993 as amended by the Housing Act 1996.
The first is a group right for leaseholders of flats to buy the freehold of the building they live in. The second is an individual right for a leaseholder to buy a new, longer lease to replace their existing one. These pages explain the new rights and whether they apply to you. It tells you how to go ahead if you want to buy the freehold of your building or a new lease.
In England and Wales, most people who live in flats either rent them on a short lease or have bought a long lease. A long lease is usually granted for a fixed number of years, and when there are not many years left to run, the leaseholder often finds it difficult to sell. The rights and duties of the landlord and leaseholder are set out in the lease itself. But people often have disagreements about maintenance of the building and paying for repairs.
Buying the freehold
Long-leaseholders of flats have the right to buy the freehold of their building as a group if they and their building qualify. This is known as the right to ‘enfranchise’. Leaseholders have this right even if the freeholder or landlord does not wish to sell. Once they have bought the freehold, leaseholders can decide for themselves how to manage the building.
Buying a new lease
Now, a leaseholder of a flat has the same right to renew their lease. They can buy a new lease which adds another 90 years to the time left to run on their existing lease. The new lease will be at a peppercorn rent, but the other terms of the new lease will be the same as before.
You have to qualify as a tenant
To have these new rights you must be a ‘qualifying tenant’. This means you must have a long lease of a flat at low rent. A long lease is one that was first granted for more than 21 years. It does not matter if your lease has less than 21 years left to run and you do not have to be the person who was first granted the lease. If you own the lease with someone else, you are together the ‘qualifying tenant’ of your flat.
If there is more than one long lease of a flat at a low rent, the qualifying tenant will be the tenant with a long lease at a low rent who has not sub-let to another tenant on a long lease at a low rent. So if, for example, you have a long lease at a low rent from a landlord who also has a long lease at a low rent and you have not sub-let, you will be the qualifying tenant, not the person who granted you the lease.
The low rent test has been abolished for most leases over 35 years. The low rent test will therefore only generally apply to leases originally granted between 21 and 35 years.
To find out whether your lease is at a low rent use one of the following tests:
if your lease was granted before 1 April 1963, the rent due in the first year of the lease must not have been more than two-thirds of the letting value of your flat at the start of that year. A chartered surveyor or incorporated valuer can tell you the letting value of a lease; or
if your lease was granted on or between 1 April 1963 and 31 March 1990, the rent due in the first year of the lease must not have been more than two-thirds of the rateable value of your flat at the start of that year (your local authority will have the lists of rateable values); or
if your lease was granted on or between 1 April 1963 and 31 March 1990 but your flat did not have a rateable value at the start of the lease or at any time before 1 April 1990, the rent due in the first year of the lease must not have been more than £1,000 in Greater London or £250 if elsewhere; or
if your lease was granted on or after 1 April 1990, the rent due in the first year of the lease must not have been more than £1,000 in Greater London or £250 if elsewhere; or
if your flat had a nil rateable value on the first day it appeared in the valuation list or on the first day your lease started, then the test should be applied using the first positive rateable value it was given on any subsequent day.
If your lease was granted after 1 April 1990 as a result of a contract entered into before that date, and the flat had a rateable value on the first day of the lease or any other time, your lease will be treated as granted before 1 April 1990.
But there are some exceptions
You cannot be a qualifying tenant if:
your landlord is a charitable housing trust and the flat is provided
by the charity as part of its charitable work;
or
you own qualifying leases of more than two flats in the building;[1]
or
you have a business lease.
The residence test
You may also have to prove that you have occupied your flat for a certain length of time.
For enfranchisement
When a group of qualifying tenants give notice to buy the freehold at least half of them must have lived in their flats, as their only or main home, for:
the last 12 months;
or
periods that add up to three years in the last 10.
For lease renewal
When you give your notice to buy a new lease, you must have occupied your flat, as your only or main home, for:
the last three years;
or
periods that add up to three years in the last 10.
If you own your lease with someone else, only one of you need pass this test. A company cannot ‘live’ in a flat, so it cannot pass the test. This means that a company cannot have the right to buy a new lease, but can take part in collective enfranchisement if at least half of the group pass the residence test.
Your building has to qualify
If you are a qualifying tenant and you satisfy the residence test for a lease renewal, you have the right to renew your lease. But you can only buy the freehold with a group of other tenants if:
there are two or more flats in your building; and
not more than 10% of the internal floor area (apart from common parts
such as stairs) is in non-residential use – for example, as a shop or
an office;
and
at least two-thirds of all the flats in your building are let to qualifying tenants.
‘Flat’ includes a maisonette and properties which do not satisfy certain rules in the Leasehold Reform Act 1967.
You and your neighbours can buy the whole building or just the part containing your flat. For example, your building may be divided into two or more parts or wings for which there are separate entrances and facilities such as lifts and stairs. If you only buy the part containing your flats, it must be independent from the rest of the building, or easily made independent.
But there are some exceptions
You cannot buy the freehold or renew your lease if your building is:
within the precinct boundary of a cathedral; or
built on certain land held by the National Trust; or
owned by the Crown. (But you may find that the Crown authorities will agree to let you buy the freehold or renew your lease.)
You cannot buy the freehold, but can renew your lease, if your building is:
a converted property of four or fewer flats and the freeholder (or an adult member of their family) has lived in one of the flats as their only or main home for the last 12 months; or
a property that has been given a conditional exemption from Inheritance Tax by the Board of the Inland Revenue. (Your landlord will tell you where this applies.)
Ask your professional adviser if you are not sure whether any of the exceptions apply to you.
What do we buy?
The right to enfranchise is the right to buy, as a group, the freehold of the building and any leases superior to those of qualifying tenants, for example head leases.
You also have the right to buy the freehold of any property and areas your leases allow you to use at the time you buy your building. This includes facilities such as gardens, garages and parking spaces. You may also buy leasehold interests in this type of property, and in common parts of the building, if you need to do this to manage or maintain these areas properly.
Who owns the freehold after enfranchisement?
When you first give your notice to buy the freehold, you have to name someone to act for you throughout the process. This person is your nominee purchaser and will own the freehold for you after enfranchisement. Decide early on how you want your building to be owned and run in the future. Your decision will help you to choose a nominee purchaser. For example, in a small building, you might want to buy the freehold in your own names. But no more than four people can be joint owners of one freehold. In a larger building, it may be better to set up a company to own the freehold. Or, you could choose a third party with no interest in the building.
If you are not sure what would be best for you and your building, talk to your professional adviser.
What about parts of the building not let to qualifying
tenants?
You cannot buy a lease of a flat or other unit not let to a qualifying tenant. This includes shops, offices and flats let on short leases. The freeholder must take a leaseback of certain flats and can choose to do so in other cases. There are certain terms which must be included in a leaseback and you will need professional help to prepare the lease.
The freeholder must leaseback certain flats
If your freeholder is a public sector landlord, such as a local authority, they must take a leaseback of the flats they let directly to secure tenants. If your freeholder is a registered social landlord and has let a flat to someone other than a secure or qualifying tenant, they must take a leaseback of that flat.
Where the freeholder takes such a leaseback, the price you pay for the freehold will be reduced by the value of the leaseback.
Leaseback: a lease of 999 years at a peppercorn rent to the former freeholder. A peppercorn rent means that they will not have to pay any money.
The freeholder can choose a leaseback in other cases
Any freeholder may choose to take a leaseback of flats or units not let to qualifying tenants. If the freeholder is a public sector landlord, this is as well as their duty to take a leaseback of certain flats.
Except where it is their duty, a freeholder may decide that they do not want to take a leaseback. This means that you cannot rely on the price of the freehold being reduced by the value of the leaseback. The nominee purchaser should also prepare to be the landlord of the shop or the rented flats after enfranchisement.
Before you start
You can give a discovery notice
If you want, you may give your landlord a discovery notice. This may help you to find out if:
your building satisfies the rules for enfranchisement; and
there are other interests, as well as the freehold, you need to buy.
The discovery notice does not commit you to buying the freehold. Your landlord must reply within 28 days. In your discovery notice you may ask for:
the name and address of the freeholder and all those who hold other interests in the building; and
details of those interests and any other relevant information. You can give the discovery notice on your own, so, at this stage, you do not need to get your neighbours to agree to buy the freehold with you.
You must meet with your neighbours
Because enfranchisement is a group action, you and your neighbours must meet at an early stage to make sure that:
your building satisfies the rules; and
as a group you form at least two-thirds of all the qualifying tenants and you own at least half the flats in the building; and
at least half of those of you who are going to take part must satisfy the residence test.
You must prepare thoroughly before you commit yourselves. You can withdraw your notice to buy the freehold at any time before a contract is made. But if you do, you have to pay the landlord’s costs. After withdrawing, you cannot give notice to buy the freehold of your building for another 12 months. You should obtain professional advice on the value of the freehold and other interests you want to buy before you give your notice to buy the freehold.
The enfranchisement process
For those who have the right and want to buy the freehold of their building, here is an outline of the different stages involved. It is only meant as a guide and does not cover every part of the enfranchisement process.
The initial notice
Enfranchisement starts when you, as a group, first give your notice to the reversioner and all other landlords. This is known as the initial notice. It commits you to pay the reversioner’s and, where appropriate, other landlords’ reasonable costs (see ‘costs’). There is no set form for the notice but you must include certain information.
In most cases ‘the reversioner’ will be the freeholder. But in some cases the court may choose another landlord in the building to be the reversioner instead of the freeholder; for example, if the freeholder cannot be found.
In your notice, you must:
give details of the freehold property which you want to buy. You may want the reversioner to give you certain rights over other property they own, for example, rights of way. If so, you must say what these rights are. You must also show the property affected on a plan, including the property you are buying;
say that, on the date you give the notice, the building satisfies the rules for enfranchisement;
give details of any leasehold interests you want to buy, for example a head lease. If the freeholder is a public sector landlord or a housing association, give details of any flats which must be leased back;
give the price you propose to pay for the freehold of your building, for any extra property such as gardens, and for any leasehold interests[2]
give the full name and address of each of the qualifying tenants, including any who are not part of your group. You must give details of each qualifying tenant’s lease and proof that each lease is at a low rent where applicable. This means giving, for example, the date the lease was entered into and when it began, the length of the lease and the rent due in the first year. You must include details of how long those who satisfy the residence test have lived in their flats. These people must be at least half of the group;
give the full name and address of your nominee purchaser; and
give a date, at least two months ahead, by which the reversioner must give their counter notice (see the next section). Once you have given your notice, the landlord or their agent may visit a flat, at any reasonable time, to value the landlord’s interest. Your landlord must give 10 days’ notice before doing this.
The reversioner’s counter notice
The reversioner must give his counter notice to your nominee purchaser by the date given in the initial notice. In the counter notice the reversioner must:
agree there is a right to enfranchise and either accept your terms or suggest different terms. If there are any flats or other units the freeholder has the right to leaseback and wants to do so, these must be mentioned; or