What the lease of your flat doesn’t tell you

Episode 1: The right to buy freehold

By David Barnes

Leases are complicated enough to send most people to sleep before they have reached the second page and it takes a special talent (or really bad insomnia) to read all the way through to the end. Nonetheless, even if you get to the last page, your lease will not have mentioned any of the following benefits that Parliament has bestowed upon you:-

• The right in concert with the other flat owners to compel the landlord to sell the freehold of your building to your nominee company.
• The right to extend your lease by 90 years – ie what’s left now plus 90 years.
• The right to prevent the landlord from selling its interest to someone else and to compel the landlord to sell it to the nominee company of all the flat owners.
• The right to take over management of the building from the landlord whether or not it is being done properly.
• The right to challenge service charge demands and get them reduced or extinguished if the landlord has not acted correctly.

Fortunately for lawyers, Parliament saw fit to make much of this extremely complicated and so there is plenty of scope for getting procedures wrong and having to go to court. Even if procedures are followed correctly, unavoidable expense is involved and it will often take months (or more) for things to be sorted out.

In this series of five articles, I look at each of these topics in turn. However, there is not enough space for a full account and these articles cannot be a substitute for specific, expert legal advice if you ever find yourself needing to take matters further.

Houses have sometimes been sold on long leases rather than freehold (the practice is not common nowadays) and there are statutory rights for their owners to buy the freehold or to extend their leases but the details are completely different and this note does not deal with them.

The right to buy the freehold

This is the right of tenants holding long leases to buy the freehold of their building and external common areas using a company to represent them. A long lease is one originally granted for 21 years or more, even though it may now have less than 21 years to go.

You may hear the expression “enfranchisement” and this is used to describe the process whereby a person with a lease of premises compels their landlord to sell the freehold or to extend their lease.

Whatever vehicle is used, its constitution must only allow flat owners to be members. In the vast majority of cases the purchase is made using a nominee company formed by the flat owners for the purpose of acquiring the freehold and managing the property afterwards. This means that the flat owners provide the company with the money and become members or shareholders of it. The company will have to comply with Companies House requirements for annual returns and accounts for which relatively modest filing fees are payable. Failure to do so will cause the company to be struck off (the corporate equivalent of capital punishment) and it will then be necessary to apply for it to be reinstated – a slow and potentially expensive process that has no parallel in human terms since Lazarus.

Pre-conditions

All the following must be met:-

1. The building must be self-contained. It may be a structurally separate part of a larger building divided vertically, such as a house in a terrace of houses – the law thinks of the whole terrace of several houses as one “building” divided vertically into several separate buildings.
2. There must be two or more flats held by “qualifying tenants” (see below) and at least two thirds of the flats by number must be held by qualifying tenants.
3. No more than 25% by floor area of the building may be non-residential (eg a shop, office or other commercial premises) – in calculating the 25% amount, communal areas are ignored. If the percentage exceeds 25%, the flat owners cannot force the landlord to sell the freehold but they will each be able to get another 90 years on their own leases.
4. If the building was converted into not more than 4 flats (ie this does not apply to a purpose built block of flats) and the landlord or an adult member of the landlord’s family has lived in one of the flats as their main residence for the previous 12 months and if the landlord owned the freehold at the time of the conversion, the flat owners cannot force the landlord to sell them the freehold but they will be able to get another 90 years on their leases.
5. The Crown cannot be compelled to sell the freehold but will often do so voluntarily.
6. The building must not be owned by the National Trust.
7. The building must not be within the precinct of a cathedral.
8. The freehold of the building must not include the track of an operational railway – this excludes flats built over the railway but it does not affect flats next to a railway.
9. At least two thirds of the flats in the building must be owned by “qualifying tenants” (see below).
10. The freehold must be claimed by “qualifying tenants” of at least half the flats in the building. Note that it is not necessary for the qualifying flat owners to act unanimously but it is best if they do.

“Qualifying tenant” is simply a flat owner whose lease was originally granted for more than 21 years. The owner does not need to be a human being, does not need to live in the flat and does not need to have owned the flat for any minimum period of time. All the old requirements along those lines have been abolished. However, there are rules that prevent someone from buying several flats and then railroading the other flat owners into buying the freehold: anyone who owns three or more flats is not a qualifying tenant in respect of any of them – and it’s no good hiding behind family members and associates as their ownership is treated as your ownership and vice versa.

The price

The purchase price is the total of the following elements – you will need a valuer who specialises in this to advise you:-

1. Open market value of the landlord’s interest – ie how much could the landlord get if it were to sell on the open market on the date that the flat owners lodged their claim. This has many complexities and subtleties that are far beyond the scope of this note.
2. Marriage value – this is not an easy concept, but it derives from the fact that the freehold is worth more to the flat owners than to anyone else. For example, once they have the freehold, they can grant themselves very long leases at nil annual rents; they will also be in control of the management and repair of the building and so able to achieve economies there as well. The landlord is entitled to half the marriage value in respect of each lease. However, there is no marriage value in a lease that had 80 years or more to run when the claim was lodged. The shorter the remaining time on the lease, the greater the marriage value relating to it.
3. Compensation for severance – again, not an easy concept but if the landlord owns other property it is possible that the value of that other property will be reduced if the flat owners get the freehold of their building.

If the landlord and the flat owners cannot agree the price, the Leasehold Valuation Tribunal will decide. The potential for expense and delay is obvious.

Once the price has been fixed by the valuation tribunal or agreed between the parties, the flat owners must pay a 10% deposit (or £500 if greater) to the landlord’s lawyers to be held pending completion of the sale.

On completion of the purchase and in addition to the price, the flat owners must also pay the reasonable professional fees incurred by the landlord. These can be substantial. They must also pay the landlord’s professional fees if they withdraw or if their claim is unsuccessful.

Procedure

In brief, the flat owners must form a company to acquire the freehold. It may or may not have shares and it will be authorised by its constitution documents to buy the freehold and then manage the building, grant lease extensions etc.

The qualifying tenants must give formal notice to the landlord claiming the right to buy the freehold and confirming the identity of the company to which the freehold will be transferred. The notice and the rules about how it has to be served on the landlord are complex and beyond the scope of this note. However, it is alarmingly easy to get things wrong.

The landlord must respond with a counter notice. There are strict time limits for all this and the consequences of failing to meet the time table can be very severe for the party at fault.

Assignment of claim

If you were one of the flat owners who claimed the freehold, you can sell your flat with the benefit of the claim and the new owner will then take over where you left off.