Frequently Asked Questions - Enfranchisement of a Leasehold House
Under the Leasehold Reform Act 1967 the Lessees of houses under long leases were given the right to the freehold of their house. There have been a number of legislative changes to this right culminating in the Commonhold and Leasehold Reform Act 2002. As a consequence the qualifying criteria have now been simplified although there can still be highly technical legal issues which arise and the valuation formulae are complex. These FAQs are necessarily general in nature and you should not act or refrain from acting without taking specialist advice on your particular circumstances.
What are the qualifying criteria?
A: The main ones are as follows although it should be noted that there are a number of exemptions and special situations:-
The property in question must be a house – see the next question
The house must be held under a long lease, i.e. one which was granted for a term of more than 21 years
The house must have been owned by you for more than two years
It is no longer necessary for the person exercising the right to have lived in the property. There is no residency qualification, only one of ownership.
Part of an adjoining building goes under my house – can I still enfranchise?
A: Interestingly there have been a number of cases on what constitutes a house. It is necessary that the building be self-contained and be divided vertically from any adjoining property. There is no right to enfranchise if a material part of other premises runs either under or over your house. If the part of the adjoining property is material then there is no right to enfranchise.
How much will I have to pay?
A: The valuation formulae are complex but are primarily based on ground rents and yields and the length of the unexpired term. It is very important to be aware that if your lease has less than 80 years left at the date you serve your Notice on the freeholder you may (unless your lease is one that falls under the 'original' basis of valuation) also pay what is known as a marriage value which can considerably increase the price. In addition you will have to pay costs – see below.
Do I need a valuer?
A: It would be extremely unwise not to have a formal valuation from a valuer specialising in this field. It is important both for negotiations and before you serve the Notice on the landlord to have an idea of how much you are likely to have to pay, although the legislation does not require that a proposed price be stated in the Notice.
Do I have to pay the landlord’s costs?
A: Yes you will need to pay the landlord’s reasonable professional costs which will normally be solicitors and surveyor’s fees. These include those relating to considering and assessing your notice and generally dealing with the statutory process and the valuation aspect and also the conveyancing of the freehold.
What other costs must I pay?
A: You will also have your professional costs which will be those of your solicitors and surveyors and, in some more complex cases, possibly those of a barrister. Estimates should be obtained. There will also be the usual payments to third parties as with any conveyancing transaction including Stamp Duty Land Tax (depending on the price you pay), Land Registry fees and other incidental disbursements such as search fees. As this is a specialist area any professional fees are unlikely to be cheap but we believe that we provide good value for money. The ultimate cost will depend on a number of factors including the complexity of the transaction and how long it takes and importantly whether or not it is necessary for the matter to be referred to the First Tier Tribunal.
What about ground rent and the other covenants in the lease?
A: As part of the price you pay you will be buying out the ground rent and therefore this will no longer be payable. The Act specifies which rights and other covenants contained in the lease will still apply to the freehold once it has been acquired. Although perhaps a secondary consideration to the price, the question of covenants and rights is one which needs to be looked at carefully.
What if the freeholder disputes my entitlement to claim or we cannot agree on the price?
A: In most instances claims to enfranchise are resolved by negotiation between the valuers for each party. In those minority of cases where there is a dispute as to entitlement then the matter can be referred to a county court or where the price cannot be agreed then the matter can be referred to the First Tier Tribunal (FTT) for a determination. This can be a lengthy and expensive process. As for costs in the county court as a general rule the losing party is responsible for the winning party’s costs. However this is by no means a hard and fast rule and often the costs outcome depends on the conduct of the parties, negotiations undertaken, reasonableness of the costs and directions given by the court. As for matters which are determined by the FTT, generally the parties will be responsible for their own costs, however the FTT does have the power to determine that one party shall pay the other party’s costs where the application has been dismissed by the FTT or where a person has acted unreasonably.
What about tax?
A: Leaving aside the Stamp Duty Land Tax payable on the price the other primary taxes to think about are Capital Gains Tax and Inheritance Tax. With CGT if the property is your principal private residence you will benefit from the same exemption as you did when the property was leasehold. If it is not your principal private residence then the price you pay and certain other expenses would be dealt with as part of your base cost for CGT purposes but this is an area which you will need to look at together with a tax adviser. If the house is producing a rental income you will need to determine your income tax position. On Inheritance Tax depending on your circumstances you may be able to structure the acquisition so that the freehold is taken in the name of your children whilst you would continue to hold the property under the lease and occupy it. This is a potential way round the reservation of benefit anti avoidance legislation but it does involve highly sophisticated tax planning, there are consequential matters to consider and it will probably only be relevant in a limited number of cases. Nevertheless for the right person it could produce a saving.