Category Archives: Collective enfranchisement – 1993 Act

Information specifically relating to the collective purchase of the freehold of a block of flats by its leasehold owners (collective enfranchisement).

Buying your freehold – the basics

This is a short video explaining the basic points to consider if you are thinking about buying your freehold. It covers:

  • whether your building will qualify or not,
  • qualifying leases
  • some other preliminary points to think about.

I hope you find it useful. If you would like to know more then by all means contact me to discuss.

 

Buying the freehold with flat/s owned by the landlord not on a long lease

I want to buy my freehold, but there is one or more flats owned by the landlord that are not subject to a long lease. Can I do this?

Yes. There are two possible pathways. Assuming that the building qualifies (and don’t forget it needs to be at least 2/3 let out on long leases) then there are rights to purchase the freehold in a situation like this.

The key issue is that the purchase notice needs to offer a price that includes the value of this flat and this may seem a little off-putting as this will no doubt add hundreds of thousands of pounds to the proposed purchase price. However, don’t forget that the landlord does have a right to ask for a ‘leaseback’ of this area meaning that at the end of the process, he effectively becomes your tenant under a 999 year lease.

The landlord may not ask for this however (it is optional, not mandatory in most cases) and therefore if this situation applies to you, you will need to make sure that you have funding in place (or access to this) to be able to proceed in this way.  In a case like this specific advice is needed to ensure a successful outcome.

 

I want to buy my freehold and there is a commercial element in the building, can I do this?

The short answer to this: yes, provided that the area in question does not take up more than 25% of the building.

The test can be complicated to apply, but essentially you are looking for a precise measurement of the net internal floor area of the property, compared with the net internal floor area of the remainder of the building. There are a number of rules that need to be applied to determine how common parts are dealt with.

Generally, if these are common to the commercial and residential they can be counted as residential, but if they are wholly commercial, they count within the commercial areas. In anything but the most blindingly obvious case, specialist advice, including specialist measurement advice should be obtained.

I have the situation described above, am I going to have to buy the shop underneath our building?

The short answer to this is, “it depends.” What it depends on is this:

If there is already a long lease in place in respect of the shop (let’s say a 125 year lease or a 999 year lease) then the answer is ‘no’ – you will only be buying in the ground rent element of the shop’s lease – so whilst there will be a cost it will be roughly equivalent to buying in the cost of the ‘freehold’ to one of the flats. The valuation will not be exactly the same and specialist valuation advice should be sought.

The other scenario is where there is no lease in place or where there is a short-term commercial lease (say for 3 or 5 or 10 years).

If this happens you still have the right to buy the freehold, but you will need to consider how you are going to fund the cost of buying in the freehold to the shop. The cost is likely to be significant (it will depend on the rental value of the space) and even if the shop or other area is empty it will have a (most likely) significant value.

If this is your situation then you may need one or more of the flat owners to act as investors to fund this element or to team up with an external funder who might be prepared to invest (if the price is right) in such a situation.

Don’t forget that the landlord may well have a right of ‘leaseback’ in respect of this area if there is no long lease in place. This means that (if used by the freeholder) he will get a 999 year lease at nil rent of the area back from you when the freehold is purchased. This will deflate significantly the overall cost of buying in the freehold.

However, if (as mentioned elsewhere) the freeholder fails to ask for a leaseback , or does not want to, then you may be stuck with the situation mentioned above where you will need to buy the area in question.

When serving notice in a situation like this you will have to offer the full value of the interest and therefore specialist advice should be obtained to understand all of the options and possible outcomes before embarking on any plans to buy the freehold in a situation like this.

 

What is a ‘leaseback’?

Leasebacks and enfranchisement 

Where there are areas in a building that are not subject to a long lease, when a claim to the freehold is made, the freeholder may have certain rights of ‘leaseback’ – that is to say the right to ask for a 999 year lease of these areas.

This means that when the freehold purchase completes, the former freeholder gets back a lease of the area(s) in question for a term of 999 years at a peppercorn (nil) ground rent. He effectively becomes the tenant of the new freeholder (usually a company set up for this purpose), but keeps ownership of the area (such as a flat) that he previously had outright ownership of by virtue of owning the freehold.

In certain circumstances the right of leaseback is mandatory (particularly where there is a secure tenant and the landlord is a local authority). In other cases the landlord has the right to ask for a leaseback in his counter notice, but the option is there for the landlord not to take the leaseback.

If the landlord fails to ask for a leaseback in his counter notice then he will have lost the right to insist upon one. There are a number of interesting cases on this subject and this may well represent an advantage to the flat owners, either as a negotiation tool, or as a way of saying ‘goodbye’ completely to their former landlord.

For flat owners looking to enfranchise, leasebacks are therefore a useful tool. If there is a flat held ‘in hand’ by the landlord and not owned under a long lease, then (provided the rest of the building qualifies) they can avoid having to pay to buy the flat in question as well as the freehold.

Whilst the freehold cost itself may not be that significant (comparative to other property values), the cost of buying in a flat will naturally run into hundreds of thousands of pounds. This might otherwise be a possible barrier to the flat owners buying the freehold.

There are a number of solutions that can be deployed if this issue arises. For instance, one or more of the flat owners might choose to invest in purchasing the flat or unit in question. Another option might be that an outside investor can be found who will purchase the interest.

A third option is that (if as described above) the freeholder chooses to take up their right to a ‘leaseback.’ Whilst the freeholder may not be happy to lose their freehold, at least under this route they keep their rental (or other) investment and the enfranchising flat owners get the advantage of having the price reduced by the exclusion of this area.

In practice, these arrangements can be complex and there may well be a number of other considerations to be gone through (not least of which is whether the building qualifies). To qualify, the building must be at least two thirds let out on long leases. In addition, not more than 25% must be used for non-residential purposes. The right of leaseback can therefore also be used where there is a commercial element that is not already let out on a long lease.

The possibility of using the leaseback provisions in the 1993 Act therefore represents a real opportunity for those seeking to buy their freehold in circumstances where this might not be otherwise possible.