BGBG

Property Management and Leasehold Enfranchisement

Are you a property developer considering your options for selling a residential property or development? Do not forget to consider the importance of management issues and leasehold enfranchisement rights in making your decision

Are you a property developer considering your options for selling a residential property or development? Do not forget to consider the importance of management issues and leasehold enfranchisement rights in making your decision

Property Management

When you decide to sell a property development you will need to ensure that any ongoing management issues are addressed.  There are various ways that a sale can be structured to deal with this.

If you have developed a block of flats, then you will probably be selling the leasehold estate in each flat.  You will therefore need to decide what you are going to do with the freehold estate. Are you going to retain this, sell it to a third party or transfer it to a management company which the owners of the leasehold estates control?

If you are retaining the freehold, or at least retaining this for a certain period, not only is it important to consider how you want the properties to be managed in terms of insurance, repair and maintenance but you should also make sure that you are well aware of the legal rights your tenants may have. Tenants have the right to be consulted over any expenditure that you may want them to pay for via a service charge or otherwise and, if you fail to follow the appropriate procedure, you may find yourself unable to recover costs that you have incurred.  You also should be aware that tenants can take over the management of the building themselves.  You do not have to have done anything wrong for them to do this although in practice it is usually unhappiness with costs or some other aspect of the management that inspires tenants to want to manage the freehold themselves.

For more information...

Please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 for a free discussion or email geoffrey.cotterill@everymanlegal.com

In addition you should always consider the effect of leasehold enfranchisement rights where you are selling properties on long leases as retaining the freehold yourself may turn out to be fruitless.  You may even find that the tenants can make it difficult for you to sell the freehold should you decide to do so in the future….

Leasehold Enfranchisement

Leasehold enfranchisement legislation became part of UK law in 1967 and, over the past 5 decades, it has continued to evolve having been subject to a number of reviews, legal challenges and amendments. The legislation gives tenants under residential long leases the right to buy their landlord’s freehold interest in the property outright, or acquire an extended term lease, whether or not the landlord actually wants to do either of those things. Since 1987, there has also been a separate right of pre-emption if the landlord decides to sell the freehold.

1. Leasehold Enfranchisement: the right to purchase the freehold

This gives the tenants of flats in a building the right to collectively purchase the freehold to the building, together with any head leases.  To qualify, the building must be independent, or the relevant part of the building must be capable of independent development. The building will not qualify if it has 4 or less units and has a resident freeholder (i.e. the freeholder lives in one of those units).

The building must also contain 2 or more flats held by ‘qualifying tenants’ and have at least two thirds of the flats held by ‘qualifying tenants’. A qualifying tenant is a residential tenant who has a long lease (a lease of more than 21 years when it was granted) which they have owned for at least 2 years.  At least one half of the qualifying tenants in the building will need to participate in the purchase of the freehold (unless there are only 2 flats in which case both must participate).

The right to purchase a freehold also applies to long leaseholders of houses. In order to qualify, the house must be held under a long lease. The house must also have been owned for more than 2 years.

These general rules are, of course, subject to exceptions and limitations.

The procedure for exercising the right to purchase a freehold has strict time limits and requirements prescribed by law. Failure to adhere to any of the steps or time limits involved can have unintended legal consequences. If you are a tenant seeking to exercise this right, or a freeholder who has received notice from your tenants that they want to exercise this right, your very first step should always be taking professional legal advice.

2. Leasehold Enfranchisement: the right to a lease extension

As, collective enfranchisement is not always possible, tenants of certain long leases of flats (as above, a lease that was granted for more than 21 years) have the right to extend their leases. In order to be eligible, the tenant must have owned the lease for at least two years before serving a notice requesting a lease extension.

The procedure for a lease extension, under this legislation, involves the creation of a new lease for which the tenant will have to pay a premium (i.e. a purchase price).  The new lease will:

  • be for a term of 90 years plus the remainder of the term of the existing lease;
  • at a new rent of a peppercorn (i.e. a nominal rent);
  • otherwise be on generally the same terms as the existing lease save for minor modifications and statutory amendments; and
  • contain a clause giving the landlord the right to possession of the flat for the purposes of redevelopment during the period of 12 months ending on the date the original lease would have expired and in the last five years of the term of the new lease.

There are strict rules setting out the basis on which the premium is to be calculated.  In general it will represent the increased value of the Property as a result of the extension.  As with the right to purchase a freehold the procedure for exercising the right to a lease extension has strict time limits and legal requirements prescribed by law. As soon as a tenant has served the initial notice requesting a lease extension the statutory procedure will have been triggered. To protect your interests you should take legal advice as early as possible in the process.

Our dedicated team of solicitors, based in Witney, Oxfordshire, would be happy to answer your questions.

Contact Us

3. The Right of First Refusal

The right of first refusal arises where a landlord of premises comprising a number of flats wishes to make a disposal affecting the whole or part of the premises. The landlord may not dispose of the premises unless he has first served the “qualifying tenants” of the flats in the premises with an offer notice setting out the terms on which the landlord is proposing to dispose of the premises and giving the qualifying tenants the opportunity within a set period of time to match the offer the landlord has already received. If the tenants want to match the offer, the landlord must dispose of the premises to a nominee of the qualifying tenants. If they reject the opportunity to buy the premises on the terms of the offer the landlord can proceed, within a limited period, to make the disposal to a third party, but effectively only on the same terms as stated in the offer notices.

In practice the problem with the legislation from the landlord’s point of view is that very few buyers will make an offer on the basis that they then have to wait until the tenants decide whether or not to step in first and that even if they refuse, they are then stuck with the terms previously proposed no matter what comes up in the conveyancing process.

The legislation itself is poorly drafted and has been tinkered with over the years in an attempt to make it work better.  It is still easy however for landowners to unintentionally fall foul of its provisions and find out after the event that the contract they have agreed to sell the freehold is null and void and that it is facing both a civil claim for recovery of the purchase price and a prosecution for having committed a criminal offence.

I was very impressed with the team. Everything was dealt with promptly. I felt completely safe in their hands, every detail that I needed to be aware of was explained clearly.