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The Leasehold Reform Act 1967 gives leasehold tenants of houses the right to buy the freehold. This is what our Property Litigation solicitors will be exploring in this article. The right to buy the freehold (and any intermediate leasehold interest, for example, the head lease) without the Landlord’s agreement is called ‘enfranchisement’. Some landlords will sell the freehold without you needing to make a formal claim.
The 1967 act has been amended and extended over the years, which has made the rules for calculating the price complicated. The latest amendments are set out in the Commonhold and Leasehold Reform Act 2002, which simplified the rules for qualifying for enfranchisement and gave leaseholders extra rights.
The right allows the leaseholder to buy the freehold of the house and premises. Premises can include any garage, outhouse, garden, yard, and any items left to the leaseholder with the house. The premises must be let with the house, but this could be under a separate lease or deed.
The Landlord can ask for the premises to be included in the sale if keeping them would cause the landlord hardship or inconvenience. Alternatively, they can ask to keep certain premises if they have an interest, or it would cause hardship or inconvenience if sold.
Qualifying for Enfranchisement
The right to enfranchise depends on the house, the lease, and you meeting certain conditions.
The house: The house must be a building which is reasonably considered a house, divided vertically from any adjoining house. It does not matter if the building has been divided into flats as long as you have the lease of the whole house.
The lease: the lease must be long, originally for more than 21 years or with a right to renew.
The leaseholder: You must be the leaseholder of the house when you apply for enfranchisement and must have held the lease for the past two years. (Also, if you have the right to buy the freehold, if you die, your personal representatives can serve a notice to buy it within two years of the grant of probate or letters of administration.)
What is the Formal Procedure?
The procedure is set out in the 1967 act and the Enfranchisement Regulations (the regulations). The procedure for houses does not follow the same clear timelines as when enfranchising flats or extending your lease.
You start the process by serving a tenant’s notice (in the prescribed form) on your Landlord, also referred to as a section 5 notice. Your Landlord is the person who has a tenancy of 30 years or more than you - this will usually be the freeholder. However, if there are any other landlords besides the freeholder, you should also serve a notice on them.
You do not have to include a proposed price in the notice, unlike when serving notice to extend your lease. By serving notice on the Landlord, you are effectively creating a statutory contract between you and the Landlord concerning the sale of the freehold. The contract is based on the conditions of sale set out in the regulations. The price must be agreed upon using the formula set out in the 1967 Act.
The formula set out in the 1967 Act provides two methods for valuing houses. These are referred to as:
- Section 9 (1) – where the house will be valued according to the original valuation basis, that is, the site’s value.
- Section 9 (1A), 9 (1C) – where the house will be valued according to the special valuation basis, i.e., the house’s value, including a share of the marriage value.
If your lease meets the initial low rent test, the house will be valued under section 9(1). If the lease does not meet section 9(1) criteria, it will be valued under the special valuation basis.
The leaseholder and Landlord cannot choose which valuation to use. It depends on the qualification criteria and can be complex. It is always advisable to instruct a surveyor to determine the premium payable.
Notice in Reply
If the Landlord wants to serve a ‘notice in reply’, they should do this within two months of the date of the tenant’s notice. If the Landlord does not serve a notice in reply, it does not prevent them from negotiating over the valuation or challenging whether the tenant’s notice is valid. However, there could be cost consequences if the matter goes to court.
If the Landlord does not serve a notice in reply, they cannot later challenge the extent of the premises they want to be included in, or excluded from, the claim.
A notice in reply should state whether the Landlord admits your claim to buy the freehold and, if not, why not.
At this point, the Landlord can ask for a deposit of three times the yearly rent of the property.
Next Steps
If the Landlord admits the claim in the notice in reply, the procedure to follow is governed by the regulations, which set out the conditions of sale. These apply, along with the negotiations, when agreeing on the price.
Under regulations, the sale should complete at least four weeks after the price is agreed. Suppose the price cannot be agreed upon - in that case, the leaseholder can apply to the First-tier Tribunal (Property Chamber) or the Leasehold Valuation Tribunal in Wales for a decision on the premium payable. The tribunal may also deal with any disputes relating to the sale, such as the extent of the house or premises.
If the Landlord does not admit your claim (either in the notice in reply or by not serving a notice in reply), you will have to apply to the county court to buy the freehold.