This note has been prepared to provide guidance on the procedure for the acquisition of a freehold (enfranchisement) by the tenants of flats in a building. The freehold interest in the building is owned by the landlord or freeholder. The law is contained in the Leasehold Reform, Housing and Urban Development Act 1993 as amended by the Commonhold and Leasehold Reform Act 2002. Unless otherwise stated references in this note to a section are to sections in the 1993 Act; it is intended to be only a summary of the law and reference must be made to the Act for the detailed provisions.
Eligibility to enfranchise
Section 3 of the Act states that eligibility to enfranchise applies to any premises if:
(a) they consist of a self-contained building or part of a building;
(b) they contain two or more flats held by qualifying tenants;
(c) the total number of flats held by such tenants is not less than two-thirds of the total number of flats contained in the premises.
Section 4 provides that if more than 25% of the premises is used for commercial purposes it will not be possible to enfranchise.
Section 5 specifies who is a qualifying tenant: s/he must be a tenant of the flat under a ‘long lease’, which is defined in section 7 to include a lease granted for any term of years exceeding 21 years. It does not apply if the lease is a business lease or the immediate landlord is a charitable Housing Trust and the flat forms part of the housing accommodation provided by it in the pursuit of its charitable purposes.
Section 10 contains provisions which are relevant if there is a resident landlord. Section 11 contains provisions entitling a qualifying tenant to obtain information about the title to the building - a notice requiring information can be served on the landlord or to any person receiving rent on behalf of him.
Section 13 contains the provisions for the service of the initial notice which is required to exercise the right to collective enfranchisement. The notice must be given by qualifying tenants of at least one half of the total number of flats in the building. The 2002 Act, when brought into force, will require that the notice must be given by a right to enfranchise (RTE) company. The initial notice must be in the statutory form. It must, amongst other things, specify the premises of which the freehold is proposed to be acquired; contain a statement of the grounds on which it is claimed; specify the proposed purchase price; state the full names of all the qualifying tenants of flats in the premises and the addresses of their flats; and contain particulars in relation to each of the qualifying tenants. It must also state the full name or names of the person or persons appointed as the nominee purchaser and specify the date by which the landlord must respond to the notice. That date must be not less than 2 months after the notice is served.
Section 14 contains provisions relating to the participating tenants and nominee purchaser.
Section 21 contains provisions relating to the counter notice from the landlord. It must contain a statement as to whether the landlord admits or denies the right to collective enfranchisement. If the right is admitted it must also state which, if any, of the proposed terms are accepted. In respect of any terms which are not accepted, the landlord must make a counter proposal. It may also set out rights which a landlord wishes to retain.
Section 24 provides that where a counter notice has been given and any of the terms of acquisition remain in dispute two months after service of the counter notice, a residential property tribunal (RPT) may, on the application of either the nominee purchaser or the landlord, decide the matters in dispute. Any such application must be made not later than six months from the date on which the counter notice was served. Where a counter notice has been given and all the terms of acquisition have been either agreed between the parties or determined by a tribunal but a binding contract has not been entered into within two months of the service of the counter notice, either party may apply to the court to make an order under section 24(4).
Section 25 contains provisions where the landlord fails to serve a counter notice and section 26 applies where the relevant landlord cannot be found. Section 28 entitles participating tenants to withdraw from the acquisition before a binding contract is made. If that is done the tenants are liable to the landlord for all relevant costs incurred by him/her in relation to the initial notice.
Section 32 provides for the determination of the price for the freehold and Schedule 6 to the Act specifies how the price is to be calculated. The price will depend on factors such as the length of the remainder of the term, the value of the flats in the building and the ground rents payable. The 2002 Act amended the 1993 Act by allowing the landlord only 50% (instead of the whole) of the "marriage value" - this is the value that is created by "marrying" the freehold and leasehold interests. However, the marriage value is disregarded if the unexpired term of the lease is more than 80 years. Advice must be obtained from a chartered surveyor or valuer as to the price at which the freehold can be acquired - we are not qualified to carry out those calculations but we can recommend a surveyor if you need.
Section 33 requires the purchaser to pay the landlord's reasonable costs in relation to the investigation of the claim, checking title, the valuation of the freehold interest in the premises and the transfer of that interest. These costs must be reasonable and can be determined by the RPT if they are not agreed. For a straightforward matter where terms are agreed after the service of the initial notice without the need for lengthy negotiations (which will normally be conducted by your surveyor) the landlord's valuer’s fee is normally in the region of £750 to £1000 plus VAT. The legal costs of the landlord will be similar.
[Correct as at March 2014]