Freehold Purchase and Leasehold Enfranchisement

introduction

Freehold property is a form of indefinite ownership, in other words, the owner has that freehold interest forever. By contrast, a Lease is temporary ownership, it lasts as long as the lease does. This is called Leasehold as is the means by which Flats can be individually owned in the UK. Every building is situated on Freehold land, and in a case where a Freehold building contains Leasehold flats within it, those flat owners have particular rights to be able to purchase the Freehold of that building.

There can be a number of advantages in doing so.

Contrary to a popular misconception, owning the Freehold does not nullify the Leases, as the are still required to regulate the responsibilities of the flats owner in conjunction with those of the neighbouring flats.  However, owning the freehold affords these leasehold owners with the entitlement to amend the terms of their leases at their discretion, and in practice this is most often utilised by the implementation of extensions to the duration of those leases to that of 999 years in length.

Often buying the freehold will have secondary benefits such as the acquisition of managerial control over the running of the building. However, that is dependent on whether the legal entitlements currently rest with the Freeholder in the capacity as landlord.

If the leaseholders within the building wish to purchase, then it may be possible, providing at least 50% of them, form a group to legally claim this together. This is known as Leasehold Enfranchisement, or more specifically "collective enfranchisement". It is a means by which those leaseholders can compel the sale of the Freehold of a block of flats to them on terms that are prescribed within the Leasehold Reform, Housing and Urban Development Act 1993

If on the other hand, the Freehold owner has voluntarily seeks to sell the Freehold, then a different process manifests, which is known as the "Right of First Refusal", which is governed by the Landlord and Tenant Act 1987. This law is intended to prevent the Landlord for selling until he has first given a pre-emption right to the leaseholders in the building to buy the building first.

In other words, the Landlord must offer the sale of the building to all the leaseholders first, using a notice known as a "Section 5" Notice, and he effectively breaks the law if he does not do so and goes ahead and transfers the Freehold regardless.

Buying a Freehold or Just a Lease Extension?
This is a somewhat common question posed by leaseholders, as the desire to resolve a short lease situation is often a significant, if not the primary motivation for either course of action. When a leaseholder first becomes a Freeholder, they are entitled to modify those leases which they own as leaseholders, most significantly by extending them without the need to pay a Premium (purchase price). As such, it is only sensible to commence a legal "claim" and pay to buy one or the other to achieve those same ends, but not both. There is a relationship between the price of the Freehold and the Lease Extension prices within a Freehold block. To best understand these concepts it is best to first consider what a lease actually is? It is a contract between a Landlord and Tenant, granting that Tenant temporary ownership rights over a property. Surprisingly, it is not fundamentally dissimilar from the short tenancy agreements that you may be accustomed to for short terms accommodation (tenancy agreements). The main difference between it and long leasehold being that instead of short lettings usually being for a terms of 6 or 12 months, a long leasehold is typically originally granted for 99 years or 125 years. But you may wonder, 'what happens when those years expire to 0?' Well, the concept is that the owner of the Freehold reclaims ownership of that particular leased property. One would expect that If he were to do so, he would then be able to create a brand new lease for that property on the open market and thereby sell the flat for its full value to a new leaseholder for the full market price. Due to the lease length effectively providing for how soon the Landlord will obtain that full market price of the flat, you can begin to understand that the shorter a lease becomes the greater the financial impact to the Landlord if the lease was to be renewed and thereby preventing that Landlord from reclaiming his asset. This is therefore a crucial factor into the equation for lease extension prices under the statutory regime as well as freehold values. So a lease that, say, has only a year left, will cost virtually the entire price of a flat's market value - whereas the cost of an extension when the lease is still long will cost relatively little in comparison. We call this unexpired term of the lease "reversion". Whether the reversion is low or high will be the most significant factor impact ing how much a lease extension will cost.
HOW IS THE FREEHOLD PRICE CALCULATED
If we turn to a Freehold purchase situation, particularly that of Leasehold Enfranchisement under the 1993 Act, the reversion is also what is used to calculate how much the Freehold will cost. Simply put, when purchasing a Freehold asset that contains leasehold flats, the buyer is effectively preventing the Landlord from claiming all the lease extension money he would derive under all the leases in the block. While there are other mathematical factors which need to be accounted for in the equation (such as development value), essentially the leaseholders are paying the Landlord all of this lease extension money for all the flats in the building in order to buy the Building. As such, just as the longer leaseholders wait to buy lease extensions, the more the extension will cost - the same is true in the case of buying the Freehold using this method of Collective Enfranchisement. The longer one waits to buy the Freehold, the shorter the leases will become thus inflating the Freehold price. In the case of a voluntary sale on the other hand (under the aforementioned 'Right of First Refusal'), this is a little different. While it is likely that any prudent Landlord will use a similar method of calculation to set the price offered, he is not bound to use any particular formula for the offered price of the Freehold. The Landlord could pluck figures 'from the sky' as it were. Within the context of a voluntary sale, the Landlord is effectively only limited by the fact that he commits an offense if he proceeds to sell at a particular price without having first offered that price to the leaseholders first.
Summary
Whether you extend your lease or purchase the Freehold there is legislation that sets out a formal procedure which would be considered in each circumstance. There are certain exceptions to ones eligibility and the legislation can be complex, which is why we would recommend that those thinking of embarking with such endeavours should seek proper legal advice from those who specialise within this field such as ourselves. We advise both landlords and tenants (commercial and residential) on their respective rights under the legislation. We advise companies, individuals as well as groups of individuals throughout the UK. We are able to advise and act for you regardless of your location within the UK. It is not necessary for you or your property to be local to us as many clients now prefer to be contacted electronically or by telephone. You will most likely require a Surveyor in these types of property claims and should you require it we are able to put you in touch with recommendations for specialist surveyor in your area.
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