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It should be noted that this is not meant to describe or cover every case or give a full interpretation of the law as only the courts can do that.
1.What is Collective Enfranchisement?
2.Checking Eligibility (of the building and the tenants)
3.Should I advise the lender that I wish to buy the Freehold?
4.The valuation (Assessing the Purchase Price)
5.What is the price?
6.The Valuation Basis (market value)
7.Selecting and Instructing professional advisers (surveyors and solicitors)
8.The process of Enfranchisement
9.Formal agreement of the parties agreeing Enfranchisement
10.Choosing a Nominee Purchaser
11.The new freeholder
13.The Initial “Trigger” Notice on the Freeholder
15.Formal procedures and statutory time limits
If you have purchased a Leasehold building, as part of a flat, you and or your co-owners have the right to buy the freehold of that building under the Leasehold Reform Housing & Urban Development Act 1993 (as amended).
You must have owned the property for at least two years and at least 50% of the flats in the building, who are qualifying tenants, must agree to the purchase e.g. if there are 10 flats in the building, at least five of the flats of qualifying tenants must participate in the action. Where there are only two flats in the building both flats of the qualifying tenants must participate.
Whilst it is not a requirement, as the Act preserves the lender’s security by effectively swapping their charge from your existing lease to the new Freehold, it is likely that you may want to take a further loan in order to pay for the premium and costs, and they will use the normal credit checks and assessment of your ability to pay, so a refusal at this stage may mean you will have to consider other loan options.
In any event the Land Registry is will alert them to the application to register the new Freehold and they may charge you for their legal register
It is often worthwhile getting an initial valuation carried out by a surveyor so you understand the costs involved and whether everyone involved has or can definitely raise the necessary funds, as once notices have been served, you will have to pay the Landlords costs even if you do not proceed
You can get a quote form a specialist surveyor here
Whilst the valuation of the Freehold interest (known as the premium) is not an exact science it will follow the formula set down in the 1993 Act providing a ‘best and worst’ figure estimating the Leaseholders and Freeholder`s valuation from local experience and appropriating what is known as “marriage value” when the Freehold and Leasehold join together. This will be an estimate of the premium the participating Leaseholders will have to share to buy the Freehold.
It must be emphasised that the figure is not a fixed price but a range within which the price will ultimately likely to be agreed
The Leaseholders will also be responsible for Freeholder`s reasonable legal and valuation costs and also the participating Leaseholders legal and valuation costs that each purchaser will have to bear.
If you meet the qualifying terms the landlord cannot refuse
The valuation method under which the house is to be valued is not a matter of choice by the landlord or the leaseholder but is determined by the qualification rules above as set out in the 1967 Act. It is therefore important to follow the procedure to determine the price
The basis of the valuation method is that the Leaseholder will have a financial interest in the purchase i.e. when the two interests are merged an increase value, known as “marriage value” can arise. This is the increase in value that arises when two separate interests in the same property then come into the ownership of one party and therefore the other party interest, the Freeholder, must be compensated when the long lease expires.
The 1967 Act requires that the marriage value should be shared equally between the tenant and the Freeholder. No marriage value is payable in cases where the unexpired period of the lease is more than 80 years.
The special valuation basis also excludes any improvements by the Leaseholder or that of a predecessor to the lease that add additional value to the property as, if this was not the case, the Leaseholder would effectively pay the Freeholder for improvements carried out at his own expense
Say a flat with a 60-year lease has a market value of £100,000, but the identical freehold flat has a market value of £120,000. So, when the Leaseholder purchases the Freehold the property will rise in value from £100,000 to £120,0000
If the landlord’s freehold interest, in the right to receive the rent is £5,000, then the tenant will, in buying out the Landlords interest for £5,000, make a ‘profit’ of £15,000, known as marriage value
To adequately compensate the Landlord the Leaseholder must pay him for this rental loss which will be the £5,000 plus half of the increase in value being £7,500, the total therefore £12,500
The calculation of the marriage value is a specialist skill relying on comparable evidence and adjustment to reflect differences in location and the standard of comparable flats sold with long leases (effectively freeholds)
Calculating the term
Assume a yield of 6%.
Ground Rent at £6 per annum
Years Purchase for 60 years @ 6% (from tables) is 16.1614
So, capitalising the term will be £6 x 16.1614= £97 say
Therefore, £97 is the sum a freeholder would need to compensate him for the loss of the rental income over the remaining period of the lease, taken as at today’s value
The Freeholder will now loose the right to receive a modern ground rent at the end of the term so in this case, it is necessary to estimate the value, deferred until the end of the existing lease.
A Lease is classed as a diminishing asset as the less years remaining on the lease the less valuable it becomes. When the Freehold is bought therefore the flat will be worth more than under a lease and how much more depends upon the remaining length of the lease at the time of purchase
To value this the Valuer will have to consider, the present leasehold value of the flat and the potential freehold value, based upon research into past local comparable property sales.
The Act gives the Leaseholder a right to continue to occupy the property when a long lease expires under an assured tenancy but paying a market rent and a Valuer may also attribute a value to this. This may, in some cases, reduce the value of the freehold interest, however for simplicity this is ignored in this worked example
Let us assume that the purchase of the freehold will increase the value of the property by 10%.
Existing value £100,000 + freehold increase of 10%
As the Freeholders reversion is being valued this will not be until the end of the lease, so the question arises: What is the value of £110,000 in 60 years’ time actually worth today?
The same yield rate used for capitalising the rental income. The multiplier, taken from specialist tables, is the present value that £1 is worth given a rate of return, but see what effect a different yield has on the value
Present value £1 deferred 60 years @ 6% = 0.0303143
So, £110,000 x 0.0303143 = £3,335 say
Present value £1 deferred 60 years @ 7% = 0.0172573
So, £110,000 x 0.0172573 = £1,898 say
In this example a change in the yield rate from 6% to 7% reduces the value by £1,437 and this is often where Valuer’s disagree
The investment value of the freehold (the sum that the interest is likely to achieve in a sale in the market) is the sum of the term (the rent per year) and reversion values (the value of the property at that time)
So, term (£97) + reversion (£3,335) = £3,432
As previously described this potential ‘profit’ only arises from the Freeholder’s being forced to sell, and the Act acknowledges this and requires that he be compensated for the increase in value when the two interests are merged
Using the figures from the example above:
The value of the freehold merged £110,000
Less the leaseholder’s present interest £100,000
The freeholder’s interest £ 3,432
The marriage value therefore being £ 6,568
The Act states that the marriage value be split 50:50 between the freeholder and the enfranchising leaseholder.
In this example the leaseholder would have to pay half of £6,568 being £3,284 plus the value of the freeholder’s interest. Therefore £3,432+£3,284 = £6,716
In this example the calculation is dependent upon value of the house with its present lease, the merged value after purchase of the freehold and the yield rates
The use of different yields, properties used as comparables and variations in the assessment of factors such as location or standard of the properties can lead to a disagreement in yield by Valuer’s representing the Leaseholder and the Freeholder, even working from the same local market information.
As a remaining lease of 80 years plus the marriage value is ignored
Once the decision to purchase has been made and everyone is aware of the costs (and can raise the necessary funds) you should consider appointing a professional adviser to ensure the procedures and process is carried out in accordance with the law and timescales
It should be noted that once the Notice has been served it is vitally important that all the steps and are deadlines met by the Nominee Purchaser as a default at any stage could stall the process, increase costs or make you have to start the whole process again. This will increase costs for you and you will also have to pay the Landlords abortive costs, whether the process completes or not.
Formal agreement of the parties agreeing Enfranchisement
Once you have established that you qualify the first stage will be to establish an association or formal agreement to ensure payments will be made, usually paying their share up-front
There is no statutory right to participate or be invited to join in the purchase of the freehold however it would be best practice to make all tenants are aware of the proposal
A solicitor can be appointed to deal with the procedure as you will also need to come to a formal agreement on issues such as:
The person/company named in the Notice who will acquire the freehold and become the new landlord, conducts the later stages of the process and, on completion, will be responsible for the management of the building.
In most cases, it will be beneficial to establish a company as the tenants will have equal shares and voting rights, although there is no formal requirement to do this. The company must be formed prior to the Initial Notice.
The new Freeholder, more likely a new company formed with appropriate Articles of Association to reflect the purpose of the company and to govern voting rights, the control of shares and the agreement of terms after the freehold is acquired, e.g. that the new freeholder will grant new leases (on terms to be agreed) to all new tenants participating in the purchase.
Prior to the serving of the Initial Notice tenants will need to gather information necessary to
It is essential for the Initial Notice to be correctly served on the freeholder(s) and this must contain the correct information of the interests of the participating tenants and any intervening interests (head-leaseholder).
In some cases, the freehold may be in different ownerships i.e. a ‘flying’ or ‘severed’ freehold. Whilst this does not preclude enfranchisement the notices will need to be correctly addressed
Information you will need to obtain:
If you do not know this information you can obtain this through the following routes:
The service of the Information Notice does not formally commit the tenants in any way and it carries no liability for costs.
If the freeholder cannot be found after all reasonable efforts the issue can be resolved in other ways
Enquiries can be made to the Treasury Solicitor who will usually be prepared to sell the freehold to the tenants at open market value by negotiation. There is no legal requirement to serve an Initial Notice.
The Application form can be downloaded from here
If the court is satisfied then it will, under its powers, sell the freehold to the tenants in the freeholder’s absence, subject to application to the First-tier Tribunal (Property Chamber) for the determination of the price and the price being paid to the County Court.
The formal requirements of the Initial Notice are set out in S13 of the 1993 Act and must include the following:
The Initial Notice must be signed by or on behalf of all the participating tenants. (Leaseholders in England being no longer required to sign notices personally when exercising rights under the 1993 Act) and must be served on the freeholder and any other person known or believed to be a ‘relevant landlord’, i.e. an intermediate landlord, or head-lessor or other freeholder
Where the freehold is severed (in different ownerships) the participating leaseholders must decide which of the freeholders will be considered as the reversioner (for the purpose of receiving the Notice and for future dealings in the process). Generally, the major freeholder (the freeholder with the greater share of the freehold) should be chosen as reversioner but copies of the Notice must be served on all other freeholders.
The freeholders have the right to go to court for an order to change the reversioner to another of their number. It should be noted that these costs are to be borne by the leaseholders.
The Initial Notice triggers the statutory procedures for acquiring the freehold and the nominee purchaser is liable for the freeholder`s reasonable costs as from the date he receives the Notice. It is therefore important that the Notice is complete and contains no inaccuracies or misdescriptions, whilst these may, in some cases, be corrected by application to the county court it would involve additional costs and time and an incomplete Notice can be rejected as invalid.
The enfranchising tenants have the right to register the Initial Notice with the Land Registry to protect the freehold being sold during the process as any purchaser of the freehold, subsequent to the registration of the Initial Notice, will take the freehold subject to the application for enfranchisement. The procedure would therefore continue as if the new owner had originally received the Initial Notice.
The service of the Initial Notice also fixes the ‘valuation date’ being the same date that the Initial Notice is served and this is important as, however long the negotiation or determination of the price takes, it fixes the variables affecting the price of the freehold e.g. the present values of the flats and their assumed future value and the remaining number of years left on the lease.
Where this information is required it must be provided within 21 days. This is generally by producing an Official Land Registry copy of the relevant entry
The landlord must serve his Counter-Notice by the date specified in the Initial Notice and where valid must:
If the freeholder can prove to the court that he intends to demolish and redevelop the whole or a substantial part of the building. Only where at least two-thirds of all the leases in the building are due to terminate within a period of five years from the date of service of the Initial Notice.
Where the freeholder owns a flat, or flats, in the building which are not let to a qualifying tenant, he has the option of taking a leaseback on the flat(s) on a 999-year lease. Such situations include where a Local Authority freeholder or Housing Association have a “secure tenant “in one or more flats in their building and therefore must take a leaseback.
Where there is such a leaseback the value of the flat(s) is deducted from the calculations.
If the Nominee Purchaser and the freeholder cannot agree on the price or some other aspects of the conveyance, then two months, following service of the Counter-Notice, either party can apply to the First-tier Tribunal (Property Chamber) for an independent determination on the issue.
In cases where the freeholder fails to serve a Counter-Notice by the date specified in the Initial Notice, the participating leaseholders may apply to the County Court for a Vesting Order. This is an order allowing them to acquire the freehold on the terms of the Initial Notice (including the premium proposed).
The application must be made to the court within six months of the date on which the Counter-Notice should have been received and if the court is satisfied of the right to enfranchise it will grant the Order.
The application fee to the Tribunal depends upon the type of application, the number of dwellings and how much is in dispute. Determinations relating to enfranchisement, lease extension or lease renewal do not require a payment to the Tribunal
The Tribunal determination becomes final after 28 days if either party do not ask for the decision to be “set aside” due to a serious procedural error or new evidence in writing giving the reasons why the applicant believes the decision to be wrong (and the Tribunal considers it to be in the interests of justice to do so) or “leave” to appeal against the Tribunals decision to the Upper Tribunal on a point of law within this period
The Freeholder must provide a draft contract within 21 days of the Tribunal’s determination becoming final (if no application for appeal). The parties are then expected to enter into a formal contract within two months after the Tribunal’s decision becomes final (the “appropriate period”).
If the “appropriate period” elapses without exchanging contracts the the participating tenants must apply to court within a further two months for a Vesting Order.
Further advice can be found at the Government’s website here
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