How can enfranchisement help you buy your residential rental property?
Enfranchisement allows leaseholders to buy the freehold of their residential rental property, or to extend their lease for a significant amount of time (for example, enough to cover a lifetime). In this article we look at the different types of enfranchisement and how the process works.
What is enfranchisement?
Enfranchisement was created to enable tenants to continue occupation of their residential property at a fair price and on fair terms.
The statutory regime introduced by the Leasehold Reform Act 1967 (as amended by the Commonhold and Leasehold Reform Act 2002) allows leaseholders to purchase the freehold of their property from the landlord or extend their lease for up to 50 years after the expiration of the existing term. The Leasehold Reform, Housing and Urban Development Act 1993 extended this to allow a tenant of a long lease of a flat to extend their lease by 90 years in addition to the unexpired term. The right to enfranchise may potentially apply to any residential lease granted for more than 21 years, even if leased through an intermediate landlord.
The Leasehold Reform Housing and Urban Development Act 1993 also allows for collective enfranchisement for leaseholders of a building that contains flats to collectively buy the freehold of the property, however, this is not covered within the scope of this article.
What do you need to qualify for enfranchisement?
To qualify for enfranchisement, both the leaseholder and the property will need to satisfy the qualification criteria set out in the statute under which the application is made.
For the leaseholder to qualify, they must generally have a long lease of low rent with an original term of at least 21 years or with a right to renewal, which they have held for the past two years. Personal representatives may apply for enfranchisement on behalf of a deceased leaseholder within 2 years of their death.
For the property to qualify, the building must be reasonably considered a house, divided vertically from any adjoining house. If a property has been divided into flats, it can still be eligible if the leaseholder has the lease for the whole house or if they wish to extend the lease of their specific flat rather than acquire the freehold. Some commercial property may also qualify such as shops with a flat above where the lease is of the entire property.
The Statutory Process
The statutes set out a strict timetable of events from when the landlord receives the initial notice from the tenant setting out the purchase price calculated using the formula in the relevant legislation. The landlord then has two months to formally respond with its counter-terms or they will be bound by the terms proposed by the tenant.
Within this two month period, the landlord, or usually their legal advisor, will undertake specific steps to investigate the title, assess the valuation and satisfy the needs of any intermediate interests. Once the terms have been agreed, the normal conveyancing process is undertaken and completion must take place within four weeks.
Enfranchisement by Agreement
Leaseholders will often approach landlords regarding their wish to buy out their freeholds, without the desire to go through a complex statutory process. The landlord can then decide whether to negotiate a voluntary sale or to insist that the statutory process is adopted.
This works in practice for leasehold houses but with leasehold flats, if any of the leaseholders do not wish to participate, the landlord may be duty-bound serve a statutory notice on every leaseholder to give a collective right of first-refusal.
There are mutual advantages for both the landlord and the leaseholders adopting the informal approach: leaseholders avoid the cost, delay and uncertainty of the statutory process and landlords may be able to negotiate a higher price in return whilst avoiding the time constraints.
The Law Commission are seeking reform of freehold enfranchisement which, if successful, will consolidate the relevant acts under a single statutory regime to:
- Streamline the process and relax the qualifying criteria to make it easier for leaseholders;
- Ease the strain on the recipients of leaseholders’ notices removing automatic acceptance after 2 months, instead incorporating a right for either party to apply to the first-tier tribunal to agree the terms; and
- Allow for lease extensions of 990 years in place of the current 90 years for flats and 50 years for houses, reducing the issue of depreciating value in leasehold properties over time.
The real estate sector eagerly await the fruits of these proposals as it will be the first significant change in residential leasehold law for nearly 20 years.
In the meantime, if you are a landlord seeking guidance on dealing with a request for enfranchisement or a leaseholder looking to acquire the freehold of your leasehold property or extend the lease, please get in touch.