In the third of a six-part series on mixed-use properties and the rights of residential tenants, Peta Dollar examines the collective enfranchisement of flats
The ability of long leaseholders of houses to enfranchise was extended to flats in order to enable flat leaseholders also to protect what was considered to be a depreciating asset.
The Leasehold Reform, Housing and Urban Development Act 1993, as amended by the Commonhold and Leasehold Reform Act 2002, (the “1993 Act”) provides for:
- the enforced sale of the freehold of a building to the leaseholders acting together, normally through the medium of a company (collective enfranchisement) (Chapter I of the 1993 Act); and
- the grant of a new lease of an individual flat (Chapter II of the 1993 Act).
Like the right to enfranchise a house under the Leasehold Reform Act 1967 (as amended), but unlike the pre-emption rights enjoyed under the Landlord and Tenant Act 1987 (as amended), the right to collectively enfranchise is a free-standing right that is not dependent on the freeholder proposing to dispose of that freehold.
As with the right to enfranchise a house, there is no residence requirement for a qualifying tenant to exercise the right of collective enfranchisement.
When does the legislation apply?
In order for leaseholders to exercise their rights under the legislation, the building and sufficient leaseholders must meet the qualifying criteria. In addition, a sufficient number of qualifying leaseholders must act together.
Building
Section 3 of the 1993 Act requires that:
- The building be a self-contained building or part of a building, such that it constitutes a vertical division of the building that could be redeveloped separately. Case-law indicates that there must be no shared services if the building (or part) is to be self-contained.
- The building should contain at least two flats held by qualifying leaseholders (if the building contains only two flats, both leaseholders must participate in collective enfranchisement).
- No more than 25% of the internal floor area (after excluding common parts) must be for non-residential use (see section 4(1)(b) of the 1993 Act).
- At least two-thirds of the flats must be let to qualifying leaseholders.
Qualifying leaseholders
A qualifying leaseholder must:
- have a long lease, generally an original term of more than 21 years (or less where the lease contains a non-perpetual renewal clause, operable without payment of a premium), with break clauses and forfeiture provisions being disregarded;
- have a lease of a flat (short-term accommodation let on a similar basis to an aparthotel has been held not to be a flat);
- not have a lease of three or more flats in the building; and
- not be a business or commercial leaseholder.
A leaseholder will qualify despite having a charitable housing trust as its immediate landlord (so long as the leaseholder has a long lease), and despite having a shared ownership lease with a total share of less than 100%.
There is no residence requirement, but if both the tenant and the sub-tenant are eligible, the sub-tenant will take precedence.
How do tenants exercise their right?
An initial notice must be served by the leaseholders, given by not less than half of the total number of flats. The date of the notice becomes the valuation date, and triggers the liability of the leaseholders for the landlord’s costs. The notice must:
- specify a date for service of the landlord’s counternotice, which must give the landlord at least two months to respond;
- state what property and interests the leaseholders seek and be accompanied by a plan;
- contain a genuine, bona fide offer by way of purchase price, though not necessarily one that the leaseholders expect the landlord to accept;
- specify the identity of the nominated purchaser;
- be signed by each participating tenant personally (in England, an agent or attorney can also sign, but not currently in Wales).
The landlord’s counternotice must then:
- be served within the time set out in the leaseholders’ initial notice;
- be given by the landlord at law (ie the landlord registered at the Land Registry as proprietor of the building);
- state whether or not the landlord agrees with the claim (giving reasons if he rejects it) and state which of the proposals he agrees with and set out any counter-proposals; or claim a redevelopment right (only available if at least 2/3 of the leases are due to terminate within five years of the date of the leaseholders’ initial notice, and the landlord cannot reasonably redevelop without obtaining possession of the building); and
- seek a leaseback of any non-qualifying unit within the building (such as commercial units, flats let on assured shorthold tenancies etc), if he requires this.
If the landlord accepts the claim he must set out his counter-proposals (if any), and may require the leaseholders to acquire any other property owned by him which would be of no practical benefit to him or would cease to be capable of being managed by him.
The leaseholders’ nominee purchaser is required to grant lease(s) back to the former freeholder in certain circumstances. In addition, the former freeholder may require, in his counter-notice, the leaseback of any non-qualifying unit. The grant of such a lease takes place immediately after the transfer of the freehold, and the terms of such a lease are prescribed by the legislation. Any deviation from such provisions must be by agreement and with the consent of the First-Tier Tribunal (Property Chamber) (formerly the Leasehold Valuation Tribunal). If a developer creates a head lease of the commercial part of a mixed-use building and a separate head lease of the residential part of the building at the outset, there will be no need to require the grant of a leaseback on enfranchisement – the tenants will “hoover up” the head lease of the residential part, but the head lease of the commercial part will continue in force following enfranchisement.
The landlord also has obligations to provide information to the leaseholders, who are themselves obliged to provide title information to the landlord if required.
There is a strict timetable laid down within the 1993 Act for the steps to be taken after service of the first notice and counternotice. Failure by the leaseholders’ nominee purchaser to follow the timetable may lead to the leaseholders’ initial notice being deemed withdrawn, with a 12-month prohibition on serving a fresh notice.
If the landlord disputes the leaseholders’ right to acquire the freehold, the nominee purchaser must apply to the First-Tier Tribunal (Property Chamber) within two months of the counter-notice for a declaration that the notice is valid and the leaseholders are entitled to the freehold. Where the landlord opposes the initial notice, he has two months from date of service of the counter-notice to apply to the First-Tier Tribunal (Property Chamber) for an order that the right to enfranchise shall not be exercisable.
The parties then negotiate the terms or apply to the First-Tier Tribunal (Property Chamber) for determination of the terms of the acquisition, within two to six months from the date of the landlord’s counter-notice. The parties are expected to enter into the contract within two months of the agreement or determination of the terms of acquisition. The price payable by the leaseholders’ nominee purchaser for the freehold reversion is calculated in accordance with the legislation, and the calculation is complex.
An individual tenant’s right to extension
In addition to the right of collective enfranchisement in relation to the freehold of the whole building, each qualifying long leaseholder has the right to require the grant of a new lease of his own flat at a peppercorn rent for a term expiring 90 years after the term date of his current lease. The landlord is entitled to a premium.
The qualification provisions are similar to the collective enfranchisement provisions, but those provisions relating to the number of tenants within the building, the residential versus non-residential proportions and the number of tenants acting together do not apply. As previously stated, a number of the exclusions relating to the building that apply to collective enfranchisement do not apply here. The leaseholder can still exercise the extension lease right if he has leases of more than two flats. However, the leaseholder must have been a qualifying leaseholder for at least two years by the date of application. Personal representatives may acquire the right, assuming the leaseholder would otherwise have qualified, by serving notice within two years of the grant of probate.
Generally the procedure follows that for enfranchisement. The landlord is able to object to extension on the basis of redevelopment if he can show that:
- the leaseholder’s lease will end within five years of the date of the notice; and
- he intends to demolish, reconstruct or carry out substantial construction works on the whole or a substantial part of “any premises in which the flat is contained”; and
- he needs possession in order to carry out such works.
Generally the extension lease will be in the same form as the previous lease, but there is power to vary the lease terms under the legislation. There are strict time limits for agreeing the extension lease terms, and a party who fails to satisfy these time limits may be forced to accept a form of lease despite the fact that it is clearly wrong.
The premium payable by the leaseholder is based on the diminution in the value of the landlord’s interest, the landlord’s share of the marriage value and compensation to the landlord for losses arising out of the grant of a new lease. The premium increases sharply once the remaining term of the existing lease falls below 80 years.
Peta Dollar is a freelance lecturer, trainer and writer, with particular expertise in relation to mixed use and residential tenants’ rights and is co-author of Mixed Use and Residential Tenants’ Rights: The Landlord and Tenant Act 1987 and Enfranchisement
