leasehold reform : houses

A GUIDE TO ACQUIRING YOUR FREEHOLD


Introduction
This guide is divided into 2 sections: the Procedure and the Valuation. There are two methods of valuing houses, but as the rules for smaller houses are complicated and relatively rare in Central London, the guide below only relates to the valuation process for enfranchising larger houses.

THE PROCEDURE

1. GENERAL
There have been numerous amendments since the Leasehold Reform Act 1967 and importantly, the right to claim the freehold has been extended to include larger houses. Below is a brief summary of the major points, but please be aware that there are several exceptions to the normal rules.

1.1 Qualifying
Broadly, the term at the start of the lease must be for more than 21 years, and the house must be vertically divisible, i.e. must have no overhang or underhang with a neighbouring building. If the tenant has owned the property for more than 2 years, they will probably qualify to claim the freehold. There is now no need for a tenant to have lived in the property as their only or main residence, as this test has been abolished. 

1.2 Basis of Valuation
There are a number of different ways of calculating the enfranchisement price depending on the facts of the case. For small houses the price may only comprise compensation for the lost rent and the loss of the land the property was built on, but larger houses have to compensate the landlord for the building as well as the land. 

2. PROCEDURE

2.1 Making the Claim
In order to start the process, the tenant must give the landlord (and any intermediate head lessor) a formal notice of claim, which is normally prepared by a solicitor. Unlike flats, the notice does not need to state the amount the tenant is prepared to pay for the enfranchisement, although they must give the basis of valuation that they are relying upon (a large or small house). It should be noted that the landlord is entitled to require the tenant to pay a deposit equal to three times the ground rent.

2.2. Landlord’s Response
The landlord must respond with a formal counternotice within two months, stating whether the claim is admitted and on which valuation basis the premium should be calculated. The landlord might also impose particular covenants on the tenant as part of the transfer. 

2.3 Negotiation
Once the notice and counternotice have been given, the parties will normally negotiate to agree the price for the new lease. 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 9-12 months, but the Act sets out time limits for various phases in the process, and they are:

3.1 Counternotice
The tenant 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 no ‘last’ date for application, but it is highly likely that the landlord will delay as he earns no interest on the premium, no matter how old the claim. 

3.3 Decision of the LVT
Generally it takes about 4 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 3 weeks to apply for permission to appeal to the Lands Tribunal.

3.4 Completion of the New Lease
Depending upon precisely when certain notices are served, the tenant normally has to complete the purchase within 4 months of the price being agreed.  During the first month, he can withdraw from the transaction unilaterally.  After the end of the second month, he will be liable to pay interest at 2% above Base Rate.  If at that point in time the tenant still has not completed, the landlord can give two months' notice requiring him to complete.  If this is missed, then the tenant forfeits the claim, the tenant becomes liable for the landlord's costs, and the tenant would have to start all over again if he wanted to.

4. THE LEASEHOLD VALUATION TRIBUNAL
If the parties cannot reach agreement amicably on price, 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 enfranchisement price is not the market value of the property, either on the present lease or the freehold. Instead it is made up of 3 component parts:

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

(ii) A half share of the marriage value released by the merger of the landlord’s and the tenant’s
interests in the property, and

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

The enfranchisement price 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 tenant’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 ground rent payable through the present term and the denial to sell or re-let the property at the end of the lease, when he would expect the property to be handed back (the reversion). 

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 freehold value of the house with vacant possession. There are various assumptions to be considered about the house; firstly, it is assumed to be in good repair but unmodernised (in accordance with the lease), and secondly, any improvements carried out by the tenant (or his predecessor) may be disregarded. Generally, improvements have to be tangible additions, such as extra bathrooms or a rear conservatory, where one had not existed before, so the replacement of a kitchen or bathroom may not qualify.

Once the freehold value of the house has been established, the figure is discounted in direct proportion to the years the landlord would have had to wait before regaining possession. This discount rate has been established for many years at 6%, 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 most 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 tenant 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 the merger of the two interests is the marriage value, and the Act provides for it to be shared equally by the landlord and the tenant. However, if the existing lease has more than 80 years left to run at the valuation date, then no marriage value is payable. It is therefore critical to apply for the freehold before the lease drops below such a point (if possible). It should be noted that the Act requires us to value the property as if the tenant had no rights to extend the lease, i.e. in a “no Act world”. Clearly, if the existing lease had no prospects for enfranchisement 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 existing 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 house 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 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 loss of his freehold interest. This is rare, but it might occur if the loss of the house spoils a development opportunity for a much larger scheme. 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.

We invite you to try our Online Calculation, but please be aware that it may not be an accurate reflection of the likely premium as this simple model will not cover any unusual circumstances/ lease provisions. We therefore accept no liability for anyone relying upon its information, and instead urge you to contact us for a full appraisal. Please note that this online calculation is not done on the "site value" basis.

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