leasehold enfranchisement (or leasehold reform)

1. The purchase by the holder of a long-term lease of the freehold interest (or strictly a fee simple) of the property that is the subject of the lease, subject to the payment of compensation to the landlord for the loss of his right to rent for the term of the lease and the value of the property at the end of the term (the 'reversionary value'). The compensation is based on the maket value, but as the amount is determined by statute and it is not entirely the full market value of that reversion. ('Enfranchisement' generally refers to the purchase of the freehold—setting the tenant free of any obligation to the land owner—but the right to an extended lease is encompassed within the statutory provisions; although the qualification requirement to enfranchise or extend the lease are not identical and are mutually exclusive.)

In English law, a number of statutes have been enacted (and subsequently amended) to permit the holder of a long-term tenancy to acquire the freehold. For example, a lease originally created for a term of not less than 300 years, with an unexpired residue of not less than 200 years, where no rent or money value is payable and which is not liable to be determined by re-entry for a breach of condition, may be enlarged into a fee simple (Law of Property Act 1925, s. 153). This process is completed by the tenant executing a 'deed of enlargement'. In addition, there is a right of compulsory purchase of the freehold by the trustees of any church, chapel or other place of worship (including a minister's or caretaker's house used in connection with the place of worship), if the property is held under a lease granted for at least 21 years (Places of Worship (Enfranchisement) Act 1920, as amended by Leasehold Enfranchisement Act 1967, s. 40).

Originally the tenancy had to be one granted at a low rent. However, since 26 July 2002 in England (or 1 January 2003 in Wales), this requirement has been effectively removed in respect of the right to acquire the freehold, except for certain 'excluded' tenancies (such as a property in a designated rural area or, in some cases, a tenancy entered into on or before 1 April 1997 or after that date one granted for 35 years) (LRA 1967, ss. 1A(1), 1AA, as added and amended) (although if the right to enfranchise arises solely because the low rent requirement no longer applies, there is a different basis for the assessment of the purchase price). The 'low rent' requirement still applies to the right to an extended lease.

Since 26 July 2002 (or 1 January 1, 2003 in Wales) in most cases, there is no longer a residency requirement (Commonhold and Leasehold Reform Act 2002, Sch. 14, para. 1); thus, a corporate tenant, second home owner or a non-resident has a right to acquire the freehold, provided they meet the other statutory requirements. If the enfranchisement process was started prior to the those dates then, at the date of the notice of Tenant's Claim, the tenant must have been occupied of the house as his only or main residence for the previous three, or periods amounting to three of the previous ten years (LRA 1967, s. 1(1)(b)). Any period during which the tenant occupies the house, but is not as a tenant, is excluded.

If there is more than one tenant who might meet the qualifying requirements (e.g. a tenant and subtenant), it is the inferior tenant who has the right to acquire the freehold and the superior tenants(s) has no such right (LRA 1967, s. 1(1ZA)). Also, if the leaseholder of the house has sublet a flat on a long tenancy and that subtenant would be a 'qualifying tenant' with a right of collective enfranchisement (as set out in para. 3. below), that headleaseholder is prevented from acquiring the freehold, unless he has been occupying the house, or a part thereof, as his only or main residence (whether or not it is used for other purposes) for the last two years, or periods amounting to two years in the last ten years (LRA 1967, s. 1(2)(b)).

The right to acquire the freehold (an estate in fee simple absolute) of the house and premises may be exercised at any time during the currency of the tenancy. A tenant exercising this right must serve notice of that intention in accordance with the statutory regulations using the prescribed form (LRA 1967, s. 5, Sch. 3, para. 6; Form 1, Leasehold Reform (Notices) Regulations 1997 (SI 1997/640)). In turn the landlord has two months to reply to the notice using the prescribed form stating whether he accepts or rejects the tenant's claim with reasons for the rejection if applicable (LRA 1967, s. 5, Sch. 3, para. 7; Form 3, Leasehold Reform (Notices) Regulations 1997 (SI 1997/640)). If the landlord does not reply to the tenant's notice, or rejects it, the tenant has a right to apply to the county court for a resolution. In addition, the landlord may be able to prevent the tenant's right to enfranchise if (a) he has proposals to redevelop the property and requires to demolish the whole or reconstruct the whole or a substantial party of the property (LRA 1967, s. 17); or (b) he requires the property for his own or his family's occupation (LRA 1967, s. 18).

The price paid for the freehold is determined at the date of the Notice of Tenant's Claim and depends primarily on whether: (a) the rateable value of the house and premises on March 31, 1990 was £1,000 or below in Greater London or £500 elsewhere (if there is no rateable value at that date a statutory formula is provided to establish a notional value); or (b) the rateable value exceeds those limits. The 1967 Act as originally enacted provided that if the rateable value fell outside the statutory limits there was no right to purchase the freehold. However, the right of enfranchisement has now been extended to any tenant who otherwise satisfies all the other statutory conditions (LRA 1967, s. 1A, as inserted by LRHUDA 1993, s. 63), although there is a difference in the basis of valuation.

In the case of properties in category (a) above (sometimes called "section 9(1) cases"), the price payable is the amount that "the house and premises, if sold in the open market by a willing seller, might be expected to realise", but subject to a number of statutory assumptions (LRA 1967, s. 9(1)).

  These assumptions are:

• the landlord is selling an estate in fee simple, subject to the existing tenancy (i.e. the landlord's reversionary interest);
• if not already done so, the lease has been extended as provided for under the 1967 Act (i.e. by 50 years), but subject to any right that the landlord has to resume possession for redevelopment purposes. The result of this provision is that any option to renew or purchase in the existing lease is ignored, as is any landlord's break clause;
• that the statutory right of the tenant to acquire the property is ignored (i.e. the sale is voluntary);
• if applicable, the property is being sold subject to the same rentcharges as in the conveyance to the tenant (although in practice most rentcharges are redeemed prior to the conveyance);
• the vendor is selling "with and subject to the same rights and burdens" as exist at the time of the conveyance and will become a part thereof (e.g. existing easements and restrictive covenants);
and

• no account is taken of any enhanced price that might arise from the tenant, or members of his or her family's who reside in the property, having any interest in buying the property, i.e. no account is taken of any marriage value resulting from the tenant acquiring the landlord's interest.

Accordingly the landlord's interest is valued as the sum of the capital value of the existing rent for the residue of the term and the present capital value of the assessed modern ground rent for the deemed 50 year extension, plus the value of the landlord's reversion thereafter to the house and buildings with the tenant in possession. The rent for the deemed extension to the lease is the rental value of the land based on its existing use at the date of the tenancy, but excluding the value of the building (although it may be assumed that a provision will be inserted in the extended lease for a revision of the rent after 25 years from the commencement of the new term) (LRA 1967, s. 15(2)). In most cases the value of the landlord's final reversion is small and it is common to value the modern ground rent in perpetuity.

For properties in category (b) above (sometimes called "section 9(1A) cases"), the price is assessed in the same way as for (a), with all the same assumptions. However, (i) the fact that the tenant or a member of his or her family may make a bid to purchase the freehold is not ignored; and (ii) no assumption is made that the lease has been extended. As a result, the price is increased by the 'marriage value' but this is fixed as 50% of the difference between the value of the property immediately before the date of the tenant's Notice of Claim and the value of the tenant’s interest immediately after the acquisition of the freehold (unless the unexpired term of the existing tenancy exceeds 80 years, in which case the amount is taken as nil) (LRA 1967, ss. 1(1D), 1(1E), as inserted by CLRA 2002, ss. 145, 146). It is also assumed that when the tenancy comes to an end the tenant has a right to remain in possession of the house and premises (LRA 1967, s. 9(1A), as inserted by Housing Act 1974) (in effect the property is valued on the basis that the tenant has a long residential tenancy, i.e. one for a term of 21 years). As a result, the price paid is the value of the capitalised ground rent for the term of the existing lease, plus the present value of the reversion to the land and buildings with the tenant in possession and the element of marriage value. If the tenancy has been extended under the LRA 1967, it is assumed it will terminate on the expiration date of that term. In addition, it is assumed that the tenant has no obligation to carry out any repairs, maintenance or redecorations to the leased property (whether required under the terms of the lease or by statute) and the price is reduced to take account of any improvements carried out by the tenant or the tenant's predecessors in title (LRA 1967, s. 9(1A)(c)(d)).

The right to enfranchise has been extended by the LRHUDA 1993 to cover tenancies that were previously excluded. This includes: (1) a house having value or rent that exceeds the applicable limits (i.e. one that would have failed the 'low rent' test); and (2) a tenancy entered into before 18 April 1980, but terminable on death, marriage or the formation of a civil partnership. In such cases (sometimes called "section 9(1C) cases") the value, is also determined as for (b). Although in certain cases falling under group (1) above, the assumption that the tenant has a right to remain in possession is excluded (i.e. the property is valued with vacant possession) (LRA Act 1967, s. 9(1)(C)). Thus, the price is the market value of the ground rent and the reversionary value of the house with vacant possession but, in most cases, ignoring the value of any tenant improvements, and subject to other assumptions set out in the LRA 1967, s. 9(1)—especially the provision that the tenant has no obligation to repair or maintain the property. In these cases, the marriage value is also split equally. In addition, in most of these cases, the price payable is increased by an amount that will compensate the landlord for any diminution in the value of other property owned by him, and any other loss or damage to the property being acquired as a result of the enfranchisement (such as a loss of "development value") (LRA 1967, s. 9(A)). Where the lease has already been extended in accordance with the provisions of the 1967 Act, and notice has been given after the original term date of the tenancy, the price is determined on the same basis.

The price may be agreed between the parties, or failing agreement by the Leasehold Valuation Tribunal, with a right of appeal on a matter of law, fact or valuation to the Lands Tribunal (although permission must be given by the LVT or the LT). Once the price to acquire the freehold has been ascertained the tenant may withdraw the application by written notice, although he may be required to compensate the landlord for any interference with his rights. The tenant may not make a further application to acquire the freehold for three years, although he may be able to apply to extend the lease. The service of the notice by the tenant does not create any interest in the land, but the right can then be protected by entry of a notice in the landlord's register at the Land Registry (in the case of unregistered land) or by registration of a Class C(iv) land charge (in the case of unregistered land (the tenant's notice cannot be an overriding interest) (LRA 1967, s. 5(5), as amended by Land Registration Act 2002, s. 133, Sch. 11, para. 8(2)).

Once the price is established, the freehold must be conveyed to the tenant, subject to incumbrances (such as sub-tenancies) and with the benefit of easements (such as rights of way, light and support and utilities). There are statutory provisions regarding the discharge of certain incumbrances (such as mortgages and rent charges) (LRA 1967 ss. 8, 10-13).

There is no right of enfranchisement for the holder of a business tenancy, unless the tenant has occupied the house, or a part of it, as his or her only or main residence (even if it is used for other purposes) for the last two years, or for periods amounting to two years in the last ten years, prior to exercising the right to the extended term (LRA 1967, s. 1(1B)). In addition, the tenancy must have been granted for "a term of years certain exceeding thirty-five years, whether or not it is, or may become, terminable before the end of that term by notice given by or to the tenant or by re-entry, forfeiture or otherwise", LRA 1967, 1(1ZC) (there are provisions in that section to include most perpetually renewable leases, leases that have been renewed or are renewable for a combined term of 35 years, a lease that is terminable after death or marriage or the formation of a civil partnership) and, in most cases, if the tenant is holding over under a long tenancy and the landlord has not served a notice terminating the tenancy. It should also be noted that to constitute a 'business tenancy' some part of the property must be occupied by the tenant for the purpose of his business (Landlord and Tenant Act 1954, s. 23(1)).

These provisions do not apply to certain forms of tenancy such as an agricultural tenancy, a farm business tenancy or a shared-ownership lease. In addition, certain landlords (notably the Crown—although the Crown has indicated that it will comply with the principles of the Act, the National Trust, charitable housing trusts and, in some cases, a registered social landlord) are excluded from these provisions and they do not apply to houses "transferred for the public benefit" (e.g. subject to a claim for Inheritance Tax).

3. The collective purchase by a number of long leaseholders of the landlord's freehold interest (fee simple estate). (This right does not apply to a single flat, although a leaseholder has an alternative individual right to an extended lease.) "Qualifying tenants" who occupy two or more flats in a "self-contained building" (or a part of a building that is capable of being considered as a self-contained building) have the right to a "collective enfranchisement" of the freehold interest held by their landlord (Leasehold Reform, Housing and Urban Development Act 1993, Part I, Ch. I, as amended by Commonhold and Leasehold Reform Act 2002). (There is no definition of building in the 1993 Act, but as it contains flats it would be expected to be a "built structure" and not a "caravan or houseboat" (Malekshad v Howard de Walden Estates Ltd [2003] 1 AC 1013, 1027 (HL)—referring to the use of the word in the 1967 Act).

The 'self-contained' building must be owned by a single freeholder (different self-contained parts of the building cannot be held by different freeholders (LRHUDA 1993, s. 4(3A), as amended by Housing Act 1996, s. 107(2)); the building must comprise two or more flats held by "qualifying tenants"; and not more than 25 per cent of the internal floor area (excluding common parts) must be used for non-residential purposes. Also, the total number of flats held by qualifying tenants must be not less than one-half of the total number of flats in the building (if there are only two qualifying tenants, both must be purchasers).

A qualifying tenant must hold the flat under a long lease (a lease granted for a term of more than 21 years, or a similar category of lease as defined) (LRHUDA 1993, ss. 7–8, as amended by CLRA 2002, s. 117). In the case of a flat held on a long underlease, it is only the underlessee who is the qualifying tenant and if there are joint tenants, they qualify together as one tenant (LRHUD 1993, s. 5(4)(a)(b)). Any reference to the lease held by a qualifying tenant means "a lease held by him under which the demised premises consist of or include the flat (whether with or without one or more other flats)", LRHUDA 1993, s. 101(3). Thus, the tenant can qualify if he holds a lease that extends to common parts, two or more flats, or even business premises, so long as those parts are demised to the tenant (Howard de Walden Estates Ltd v Aggio [2008] 4 All ER 382, [2009] 1 AC 39 (HL)). On the other hand, a tenant can only be a 'qualifying tenant' in respect of one flat at any one time, so that if a tenant would be a qualifying tenant in respect of "each of two or more flats contained in the premises", then his right to any flat is excluded in this calculation, whether held under a "single lease or otherwise" (LRHUD 1993, s. 5(5)). As a rule, the tenant who wishes to acquire the freehold of a flat in a building that is divided horizontally, in accordance with the provisions of the LRHUDA 1993, takes precedence over a tenant of the house who has a right to acquire the freehold in accordance with the provisions of the Leasehold Reform Act 1967, unless the latter has been in possession of the house, or part of the house, as his or her main or only residence for the last two years, or periods amounting to two years in the last ten years (LRA 1967, s. 1(1ZB)). There are no longer any residency requirements that apply to the tenants (LRHUDA 1993, s. 6 repealed by CLRA 2002 s. 180, Sch. 14); thus, a company may be one of the collective tenants.

The process of collective enfranchisement is started by the nominee purchaser (usually a company set up for the purpose, but it may be one or a number of the qualifying tenants), acting on behalf of the owners of at least one-half of the flats in building, serving notice on the reversioner (the 'initial notice') specifying, among other things, the premises and any common areas or appurtenant property to be acquired (with a plan), any leasehold interest to be acquired, any premises that have to be leased back to the landlord, the name and address of the purchasing company, the names and addresses of all the qualifying tenants and the proposed purchase price for the freehold, and stipulating a period of not less that two months for the landlord to serve a 'counternotice' (LRHUDA 1993, s. 13). Although a matter for potential negotiation, the proposed purchase price, or any counter offer by the landlord, should be made in good faith (and preferably based on professional valuation advice) (Cadogan v Morris [1999] 1 EGLR 59, [1999] 77 P & CR 336, 340–1 (CA)—in relation to a tenant's notice to acquire a new long tenancy under the LRHUDA (viz. extended lease), a proposed 'nominal' price made the notice invalid; 9 Cornwall Crescent London Ltd v Kensington & Chelsea RLBC [2006] 1 WLR 1186 (CA)—in relation to a landlord's counter notice to a request for collective enfranchisement, an 'excessively' high price did not make the notice invalid, but recommended that the notice be given in "good faith"). The counter notice from the reversioner, which must be served within the required period of time, may accept the all or part of some of the proposed terms or state alternative terms in respect of disputed issues (including a statement of an intention to apply to the court if the landlord has a genuine intention to redevelop the premises) (LRHUDA 1993, s. 21). If terms are not agreed within a further period of two months either side has a period of six months from the date of the counternotice to apply to the leasehold valuation tribunal (LVT) to "determine the matters in dispute". When all the terms are agreed or determined by the LVT and a binding contract has not been entered into by the end of the "appropriate period", either side can apply to the court for a vesting order in respect of the applicable interest. If, within the required period, no application is made to the LTV, the initial notice is deemed to have been withdrawn and the entire process comes to an end for at least one year (Goldeneagle Properties Ltd v Thornbury Court Ltd [2008] EWCA Civ 864, [2008] 45 EG 102 (CA)—for a review of the timing of the notice periods). Once the purchasing company has acquired the property it applies to register the title at the Land Registry and then grants new long leases (usually 999 years) to the participating members.

A number of tenants are excluded from this statutory provision, such as a tenant holding a business tenancy, or a tenant whose immediate landlord is a Charitable Housing Trust and the flat forms part of the housing accommodation provided as part of its charitable purpose, and if the tenant holds a sub-tenancy, the superior tenancy is not a long tenancy, and the sublease was granted in breach of the lease and the breach has not been waived (LRHUDA 1993, s. 5(2)). In addition, in a number of situations a qualifying tenant is excluded from the right to participate in the collective enfranchisement, including if the landlord or tenant has given prior notice to terminate the lease, an order for possession or forfeiture is pending, or compulsory purchase proceedings have been instigated (LRHUDA 1993, Sch. 3). Certain types of disposition are exempt, such as disposals under a will or following insolvency.

These provisions do not apply to premises if there is a resident landlord and (a) the premises do not form part of a purpose-built block of flats (i.e. it must be a building that has been converted into flats), (b) the premises do not contain more than four flats or units, (c) the same person has owned the freehold since before its conversion, (d) that person (or a an adult member of his family) has occupied a flat or an other unit as his only or principle home for at least the last twelve months (LRHUDA 1993, s. 10). A landlord has the right to apply to the court to prevent an individual tenant's right to a new lease, if there is a genuine intention to demolish, reconstruct, or undertake substantial works of reconstruction on the whole or a substantial part of the premises (LRHUDA 1993, s. 47; Majorstake Ltd v Curtis [2006] 37 EG 194 (CA)). The Act does not apply to a tenant linked to an employment by the landlord, an agricultural tenancy, or property where the freehold includes any track of an operational railway (including a bridge, tunnel or retaining wall to a railway track).

The price for the exercise of this collective enfranchisement is the aggregate of (a) the value of the freeholder's interest in the property, based on various statutorily defined assumptions; (b) a share of the marriage value resulting from the purchase; and (c) a payment for any detrimental effect on the value of the freeholder's interest in other property resulting from the purchase (LRHUDA 1993, Sch. 6, para. 2). The principle statutory assumptions are: (a) the vendor is selling a fee simple interest subject to the existing leases and any other intermediate leases; (b) any right to enfranchise or extend a lease by the participating tenants is ignored; (c) any increase in value of any flat due to improvements that have been made at the tenant’s expense are disregard; (d) the terms of sale are as set out in the conveyance that will be made in accordance with the Act (LRHUDA 1993, Sch. 6, para. 3(1)).

The share of the marriage value is fixed at half of that value (unless the unexpired term of the lease exceeds 80 years when it is nil) (Leasehold Reform Act 1967, ss. 9(1D), 9(1E), inserted by the Commonhold and Leasehold Reform Act 2002, ss. 145, 146) (as a rule it is likely that the parties will agree to an equal split of the marriage value and that is the norm for determinations by the Leasehold Valuation Tribunal). Unlike the right to enfranchisement under the 1967 Act (see 1. above), the date on which the valuation is determined is when all the terms (except the price) have been agreed and not the date of the tenants' claim (LRHUDA 1993, Sch. 6, as amended by HA 1996, s. 109).

The landlord is entitled also to a payment to compensate for the loss in value of other property owned by him as a result of the acquisition. This includes any loss of development value (LRHUDA 1967, Sch. 6, para. 5). This does not include the loss in value of the property being acquired as that is taken into account in assessing the market value.

There is a requirement that any intermediate lease is valued separately on the same valuation assumptions (including a proportion of the marriage value and a proportion of the amount payable as compensation the diminution in value of the landlord’s interest in other property resulting from the acquisition). There is a complex formula when the intermediate leaseholder’s interest is very small, and if the value is determined to be negative the price payable will be nil. Failing agreement, the price (or other appropriate terms) is determined by the Leasehold Valuation Tribunal. If the tenants are able to qualify and follow the correct (and complicated) procedure, once the terms are agreed, the freehold is acquired by the purchasing company (LRHUDA 1993, s. 15). There are statutory restrictions on the right to contract out of these provisions (LRHUDA 1993, s. 93).
See also enfranchisement, enlargement, management scheme^(Eng), redemption^(US), right of first refusal, right to enfranchisement (RTE) company, right of pre-emption, secure tenancy, vesting order^(Eng).

Terms in bold are defined elsewhere in the Encyclopedia.
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