Leases are time-limited and when they expire, they return to the sole ownership of the freeholder. However, leaseholders and freeholders are free to make alternative arrangements. Perhaps the freeholder would like to buy out the remaining years on the lease or even to sell the lease to the leaseholder for a certain price. Both of these options effectively end the lease and give full ownership of the property to either the leaseholder or the freeholder. When the leaseholder is allowed to buy the freehold, it is known as ‘enfranchisement’ and the parties then need to agree a price and terms.
The law can now force the sale or extension of a lease and certain rules now apply in these areas. For example, long leases must be granted for at least 21 years but freeholders in the past would attempt to insert clauses unfairly and unreasonably which made the lease difficult to extend or enfranchise. Recent legislation has outlawed such practice and made such clauses irrelevant.
If a leaseholder and freeholder agree to enfranchisement, a price must be agreed either between the parties or with the intervention of the Leasehold Valuation Tribunal (LVT). The Leasehold Reform Act dictates that leaseholders should only pay for the freehold they acquire and not the lease which they already have. Therefore the price should recognise both the value of the lease already held and the value that the property would sell for under normal circumstances. Once a price is agreed or set by the LVT, either party can serve a notice on the other within 4 weeks demanding completion.
The price will also need to recognise the ‘marriage value’ – a value which recognises that the combined value of the lease and the freehold is greater than if each was sold separately. Legislation dictates that the freeholder should receive half of this amount however the value is low for leases with a long time left and doesn’t apply to leases with over 80 years to run.
Collective enfranchisement can be very expensive and requires careful consideration because pulling out of the process half-way through will mean that the leaseholders have to cover their freeholder’s costs for no gain. Leaseholders can serve a notice on the freeholder demanding information which would be relevant to a sale including planning restrictions, deeds and reports from surveyors. This can help when making a decision.
When a group of leaseholders opt for collective enfranchisement they need to set up a Right to Enfranchise company which will then own the freehold. This company must then comply with the Memorandum and Articles made by the government which can be frustratingly bureaucratic. The company will be controlled by participating members but all leaseholders must formally be invited to join when the company is set up.
The company will then send an initial notice listing all participating leaseholders and the properties involved. A price should also be included and the freeholder will then have 8 weeks in which to reply, either agreeing to the enfranchisement or rejecting it with appropriate reasons. The freeholder can request proof that the leaseholders qualify for enfranchisement and the RtE company must respond within 3 weeks otherwise the notice will be void. The freeholder must also state whether or not they deem the price acceptable.
The idea of the counter notice is that it starts a process of negotiation over the price and terms for the enfranchisement. However, if parties cannot agree, the case will need to be referred to the LVT. This must be done between 8 and 24 weeks after the counter notice is served. After 6 months, the notice will essentially become void.
Once a price and terms are decided upon, contracts should be exchanged within 8 weeks. The nominee purchaser will then have a further 8 weeks to ask the court to transfer the freehold.
In order to extend a lease, the leaseholder will need to pay a fee to the freeholder which accounts for the:
• Market value of the freehold: ultimately the freeholder will now not have possession of the property for 90 years and they should therefore be remunerated. This value will be higher where there is little time left to run on the lease
• Marriage value: (as mentioned earlier)
The process for pursuing lease extension is similar to that for enfranchisement. A section 42 notice is served upon the freeholder detailing the relevant property, the leaseholder’s rights, the proposed price and a date (no less than 8 weeks ahead) by which the freeholder must respond. Upon receipt of the notice, the freeholder will have the right to enter the property to value it. The freeholder will either accept the leaseholder’s request or reject it giving grounds for doing so. A price should be suggested and terms should be negotiated or referred to the LVT between 8 and 24 weeks after the counter notice is served. Once settled there are 8 weeks to exchange contracts and then a further 8 weeks to apply to the court to extend the lease.
Need enfranchisement advice? Call our lease enfranchisement solicitors
We have a dedicated team of leasehold property experts who would be happy to give you advice on lease extension or lease enfranchisement.
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