leasehold reform : blocks

A GUIDE TO COLLECTIVE ENFRANCHISEMENT


Introduction
This guide is divided into 2 sections: the Procedure and the Valuation.

THE PROCEDURE

1. GENERAL
There have been several amendments since the Leasehold Reform, Housing and Urban Development Act 1993 (notably the Commonhold Act 2002) which set out the modern rights for tenants to claim the freehold of a block of flats. Below is a brief summary of the points.

1.1 A qualifying leaseholder
 The lease was originally for a term greater than 21 years
 A shorter lease which contains a clause providing a right of perpetual renewal
 There is no longer either a residency test nor an ownership test for collective enfranchisement

1.2 A qualifying building
 There must be a minimum of two flats in the building
 No more than 25% of the internal floor area to be in non-residential use

The following are excluded from collective enfranchisement, although individual lease extensions may still be possible:

 A building converted into four or fewer flats (and not a purpose-built block) AND the same person has owned the freehold since before the conversion into flats AND he or an adult member of his family has lived there for the past 12 months
 The freehold includes any railway track or structure for railway track
 Buildings within a cathedral precinct
 National Trust properties
 Crown properties (although they have volunteered to comply with the principles of the Act)

1.3 Eligibility
 At least 2/3 of the flats in the building must be let to qualifying leaseholders
 The participating leaseholders must not be less than half the total number of flats in the building. For example, if there are 10 flats in the building, at least 5 of the qualifying leaseholders must participate
 Where there are only 2 flats in the building, the leaseholders must participate 

2. PROCEDURE

2.1 The RTE Company
The right to enfranchise may only be exercised through a Right to Enfranchise (RTE) Company, no matter how small the building. There are various regulations that govern the aims and objectives of such a company and this is best explained and set up by the group solicitor. Every qualifying leaseholder has the right to become a member of the RTE Company and must be invited to join the Company before an initial notice is served, although they retain rights to participate at any time before completion. Until the relevant (and final) sections of the 2002 Act are enacted, this procedure is not an obligation yet, but it is advisable to canvas the support of other leasehold owners in the building.


2.2 Making the Claim
In order to trigger the statutory procedures for acquiring the freehold, the RTE Company must give the landlord (and any intermediate head lessor) a formal notice of claim, which is normally prepared by a solicitor. 

The Notice must state:

 Details of the property to be acquired, including a plan
 A statement showing that the building qualifies
 Details of any leasehold interests to be acquired, e.g. an intervening head lease 
 The proposed price apportioned as necessary between the freeholder and any intermediate landlords
 The full name and addresses of all the qualifying leaseholders, who the participating members of the RTE Company, and details of their leases

The price stated in the Notice must be realistic as, if not, the claim will be invalid. There is no hard and fast rule about what is a realistic price, but it is acceptable to reduce the amount by a small margin to allow the parties some room for negotiation.

2.3 Landlord’s Response
The landlord must respond with a formal counternotice within two months, also stating the amount it is prepared to accept for the freehold. If the counternotice is not given in time, the RTE Company is entitled to the freehold on the terms set out in their notice. 

2.4 Negotiation
Once the Notice and counternotice have been given, the parties will normally negotiate to agree the price for the freehold. If the price cannot be agreed amicably, the dispute is referred to an independent body, the Leasehold Valuation Tribunal (LVT). 

3. TIMESCALES
We are often asked how long the whole process takes but it is difficult to predict until it is known how far apart the parties are in their valuations. In our experience, the average time taken is about 12-18 months, but the Act sets out time limits for various phases in the process, and they are:

3.1 Counternotice
The RTE Company cannot require the landlord to give the counternotice in less than 2 months. In our experience, landlords normally use the whole of this period to respond.

3.2 Application to the LVT
If the price cannot be agreed amicably, the earliest either party can apply to the LVT is 2 months from the date of the counternotice. While either party is allowed to make an application, there is a further rule that if the RTE Company does not make an application within 6 months of the date of the counternotice (assuming no earlier application has been made by the landlord), the claim is deemed withdrawn. This is a trap that leaseholders fall into all too often, and great care should be taken not to miss this deadline.

3.3 Decision of the LVT
Generally it takes about 2 months for a hearing to be held, and a further 1-2 months before the decision is published, after which either party has a further 4 weeks to apply for permission to appeal to the Lands Tribunal.

3.4 Completion of the New Lease
Once the parties have agreed the price, or the deadline to appeal the LVT’s decision has expired, the parties have 4 further months in which to complete the transfer. If completion has not taken place by then, the RTE Company must make a court application to protect its right to the new lease at the price agreed or determined by the LVT. 

4. THE LEASEHOLD VALUATION TRIBUNAL
If the parties cannot reach agreement amicably on price or the terms of the new lease, the matter can be determined by the Leasehold Valuation Tribunal. 

4.1 General
The LVT is best described as a less formal version of a court, and they will issue directions and listen to the evidence and cross-examination presented by expert witnesses. After a period of deliberation, the tribunal will issue its decision. The decision is binding, subject to a limited right for either party to appeal. 

4.2 Costs
Costs can frequently run to many thousands of pounds, and they cannot be recovered, regardless of who ‘wins’ the case. Therefore, it is vital that the decision to take a case to the LVT is completely unemotional, nor should it be taken on a pure point of principle unless there is a genuine commercial rationale for doing so.

4.3 Impartiality
Being a quasi court, all expert witnesses must conduct themselves in accordance with the Civil Procedure Rules. The valuer must be truthful, unbiased and open-minded, and he cannot withhold any evidence that could prejudice your case. 


THE VALUATION


5. INTRODUCTION
The price to be paid for the freehold is a combination of the following 3 component parts:

(i) The diminution in the investment value of the property to the landlord arising from the sale of the freehold.

(ii) A half share of the marriage value released by the sale, and

(iii) Compensation for any loss or diminution in the value of any other property that is directly attributable to the freehold sale

The price for the collective enfranchisement will always contain (i), frequently (ii), and occasionally (iii), depending on the circumstances of the individual case. Each element will need to be ascertained separately for the landlord and any intermediate landlord. 

5.1 The Valuation Date
The date on which the RTE Company’s notice is served (i.e. when it is received by the landlord) is known as the valuation date and it is a fixed snapshot in time. 

6. DIMINUTION IN THE INVESTMENT VALUE OF THE PROPERTY
This comprises the loss to the landlord for being denied the total ground rents payable through the present term AND the loss of the landlord’s reversion when he would expect the leases to expire. 

The investment value will therefore be dependent upon the lease terms (and the rent review provisions in particular), the yield rates applied to both the term and reversion, and the long leasehold value of each flat with vacant possession. There are various assumptions to be considered about the flats; firstly, it is assumed they are in good repair but unmodernised (in accordance with the lease), and secondly, any improvements carried out by the tenants (or their predecessors) may be disregarded. Generally, improvements have to be tangible additions, such as extra bathrooms, where one had not existed before, so the replacement of a kitchen or bathroom may not qualify.

Once the total of the long leasehold values of the flats has been established, the figure is discounted in direct proportion to the years the landlord must wait before regaining possession. This discount rate has been established for many years at 6% in Central London, however, a recent decision of the Lands Tribunal awarded a rate of 5.25% in respect of a house in Chelsea, and it has encouraged many landlords to seek lower rates. Because this decision is relatively recent, it is too early to say whether the decision signals a permanent downward shift.

7. MARRIAGE VALUE

7.1 The Concept
The simplest way to explain the concept of marriage value is to say that the sum of the values of the landlord and RTE Company parts does not equal the value of the whole, and the difference between these two figures is known as the marriage value. It is often misquoted as the difference between the value of the existing lease and the freehold with vacant possession, but this takes no account of the landlord’s interest, and is wrong. 

The extra value that is released by each participating tenant obtaining a share of the freehold is the marriage value, and the Act provides for it to be shared equally by the landlord and the RTE Company. However, if any existing lease has more than 80 years left to run at the valuation date, then no marriage value is payable. In addition, any non-participating flats can be assessed at zero marriage value, although it is common to allow for an element of ‘hope value’ that those flats will seek lease extensions in the not too distant future.

It should be noted that the Act requires us to value the property as if the RTE Company had no rights to extend the lease, i.e. in a “no Act world”. Clearly, if the existing lease had no prospects to extend or buy the freehold, then it would have a lower value compared with a property that could. Therefore this “hope value” needs to be stripped out of the existing leasehold value, and usually the shorter the lease the greater the hope value. As there is little market evidence of non-enfranciseable leases, valuers often refer to previous settlements of claims that have taken place over the years, and from which a graph of relativities can be produced. There are various different graphs in circulation that establish a range of relativities for leases of the same length. However, there is uncertainty surrounding this part of the valuation, and settling the value of the lease will be largely down to negotiation.

Obviously, besides the length of the lease, there are other factors in the lease that affect relativity. Predominantly these are the rent, repairs/service charge, permission to alter the flat or not, the restrictions on assignment/underletting, and the user clause. Clearly, the lower the relativity, the greater the marriage value and the more expensive the collective enfranchisement.

8. COMPENSATION FOR ANY OTHER LOSS
The landlord is entitled to recover any other losses that he may incur as a consequence of the freehold acquisition. This might occur if, for instance, there was development potential to extend the block upwards or sideways, or if the block was part of a larger development site from which the landlord could no longer benefit. However, the landlord will have to demonstrate a very compelling case to succeed in such an action.


Disclaimer
This document is intended for general guidance only, it does not cover all aspects of enfranchisement, and therefore no liability for its contents is accepted. Please contact this firm if you wish to discuss a specific case.

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