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Leasehold enfranchisement generally (see Glossary for meaning of enfranchisement)

Collective enfranchisement

The opportunity for residential lessees to come together collectively to acquire the freehold of their building was first provided by the Leasehold Reform, Housing and Urban Development Act 1993. Although intended to achieve much of what is now seen as the advantages of a commonhold arrangement, the practicalities of the rules, and the inability of many buildings and individual lessees to qualify, has meant that relatively few claims have been successfully made. The changes introduced by the 2002 Act seek to overcome these difficulties and mean that, in principle, all long leaseholders (twenty-one years or longer but see fuller details in the Glossary section) in the building will be able to participate if they wish to do so without having to meet a residence test and without having to have held the lease for any minimum period of time. A recent assignee of a lease within the building can continue with the participation started by the assignor subject to the service of notice within the prescribed period. It will no longer be necessary for a minimum of two thirds of qualifying leaseholders to participate although they will still have to account for not less than half the number of flats in the block in order to make a collective claim and there does still need to be a minimum of two thirds of the flats in the building held on qualifying leases.

The Act provides that a claim would have to be made by a RTE (Right To Enfranchise) company which is to be a private company limited by guarantee and one of whose objects is to exercise the right to enfranchise. All qualifying lessees in the building would be entitled to be invited to become members of the company. As indicated above, when the RTE company exercises its right to make a claim, it must be composed of qualifying lessees participating in numbers equal to at least half of the number of flats within the building unless there are only two qualifying tenants in which case both must be participating members.

Under the old rules, any building which had more than ten per cent of its total floor area given over to non-residential use was unable to qualify for collective enfranchisement. The 2002 Act increases this proportion to twenty-five per cent which should bring many more buildings, with a residential above commercial configuration, into qualification.

NB - the regulations required for RTE companies to be constituted are still not in place and it is evident that the drafting of these regulations has encountered difficulty, thus making the eventual coming into effect of this provision uncertain. Consequently, any acquisition of the freehold will continue to be by a 'nominee purchaser' for the time being. The qualifying rules for collective enfranchisement are now, however, those under the 2002 Act.

There are certain exceptions to the right to enfranchise collectively; the most likely to be encountered is the situation where the building is a converted (rather than purpose built) property containing four or fewer units and the freeholder since before the conversion remains the owner and has lived there, or an adult member of his family has, for the past twelve months. Other exceptions relate to buildings where the freehold includes parts of an operational railway, buildings within the precinct of a cathedral or National Trust and Crown property.

Individual lease extension - flats

Under the new rules, holders of a long residential lease (primarily a lease for an original term of twenty-one years or more but please refer to the Glossary section for further information) are able to require the landlord to grant him a new lease for a term extended by ninety years as long as he has held the lease for a minimum of two years. It is no longer necessary for any form of residence test to be met and so corporate lessees and investors (domestic and overseas) who have never themselves lived at the property can take advantage of the opportunity in a way that was hitherto unavailable to them. Also, for eligibility purposes, the so-called 'low rent test' is now abolished which removes a further obstacle that would have defeated otherwise legitimate claims in the past. As previously, if the immediate landlord is himself a leaseholder with a fixed term of lease, it will be for the freeholder as the 'competent landlord' (see Glossary) to grant the new lease directly to the claimant.

Houses

Where the lease is of a house rather than a flat, a claim is almost certain to be for the freehold rather than for an extended lease and even those lessees who have already extended their lease by fifty years under the 1967 Act (see Links) rather than acquiring the freehold at that time will, under the new Act, be able to acquire the freehold if they would have otherwise qualified in a way which was not available under the old regime. Otherwise, the qualifying criteria under the 2002 Act are the same as for flats (as above).

With houses, however, the 2002 Act excludes certain tenancies that are subject to Part II of the Landlord & Tenant Act 1954 (which deals with business tenancies) unless certain criteria are met such as the need for the original lease to be for a term in excess of thirty-five years. A residency qualification of two years is also retained in respect of houses to which Part II of the 1954 Act applies. These are, however, relatively uncommon but might include the situation where, for example, a headlessee of a house converted into flats seeks to rely upon his or her own direct tenure of one flat as a means of qualifying to enfranchise the freehold of the house as a whole.

(NB - although no longer relevant for eligibility purposes, a rent which is not a 'low rent' may still have valuation implications for claims made under the 1967 Act).

How much will it cost?

The cost of the new lease or the freehold is something which would normally be agreed by negotiation between the parties but which, in the absence of such agreement, would be subject to determination by the Leasehold Valuation Tribunal. The date for valuation purposes will, under the new rules, be fixed at the date at which the claim is made (and, since 28 February 2005, the valuation date for collective enfranchisements has been the date of the claim rather than the date when agreement on price was reached as was previously the case) so that this area of contention should be less of a difficulty and the marriage value will be divided equally between the parties - or, at most, the landlord's proportion will be limited to a maximum of fifty per cent. If the existing lease still has more than eighty years unexpired, the 2002 Act provides that the marriage value will be deemed to be nil. In these circumstances, the price payable would amount to fair compensation to the landlord(s) for the postponement or loss altogether of their reversion together with the capitalisation of any ground rent payable under the existing lease, the loss of any potential to redevelop and any relaxation in or removal of restrictions under the previous lease (such as a prohibition against alterations).

Where there is an intermediate interest, such as a headlessee between the freeholder and the occupational underlessees, the price of the new lease must be calculated and apportioned in such a way as to provide adequate compensation to the headlessee as well as the freeholder.

As regards costs, the making of a formal claim renders the tenant liable for the competent landlord's reasonable legal and valuation costs in dealing with the claim.