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.