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A Guide to Acquiring Your Freehold House

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, which nowadays, applies to most 3-4 bedroom houses and bigger.

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, e.g. the Crown is exempt from the Act although they do comply with many aspects apart from properties within the 'Excepted Areas', i.e. around the major London parks.

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 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 lessee) 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 counter-notice 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 counter-notice have been served, the parties will normally negotiate to agree the price for the enfranchisement. If the price cannot be agreed amicably, the dispute is referred to an independent body, the First-tier Tribunal ("FTT").

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 Counter-notice
The tenant cannot require the landlord to give the counter-notice in less than 2 months. In our experience, landlords normally use the whole of this period to respond.

3.2 Application to the FTT
If the price cannot be agreed amicably, the earliest either party can apply to the FTT is 2 months from the date of the counter-notice. 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 not delay as he earns no interest on the premium, no matter how old the claim.

3.3 Decision of the FTT
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 Upper Tribunal.

3.4 Completion of the Enfranchisement
Depending upon precisely when certain notices are served, the tenant only has to complete the purchase within 1 month of the price being agreed, although this can be extended to 2-4 months. 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 FIRST-TIER TRIBUNAL
If the parties cannot reach agreement amicably on price or the terms of transfer, the matter can be determined by the FTT.

4.1. General
The FTT is best described as a less formal version of a court, headed by a lawyer, a valuer and sometimes a lay person as well. The tribunal issue directions in advance with a strict timetable for the submission of evidence 2-3 weeks prior to the hearing date and if the hearing proceeds they listen to the evidence and cross-examination presented by expert witnesses. After a period of deliberation, the tribunal then issues its decision. The decision is binding on the parties, subject to a limited right for either party to appeal.

4.2. Costs
Costs can frequently run to many thousands of pounds, and the FTT now has the jurisdiction to award costs, but usually only if there has been an abuse of procedure. Generally costs cannot be recovered, regardless of who 'wins' the case. Therefore, it is vital that the decision to take a case to the FTT 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 and the tenant 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

6.1. 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).

6.2. The investment value will therefore be dependent upon the lease terms (and the rent review provisions in particular), the yield rate applied to value the term, the freehold value of the house with vacant possession, and the deferment rate. The deferment rate is the discount rate for assessing the future reversionary investment value to the landlord should he sell it today.

6.3. There are various assumptions to be considered about the house; firstly, it is assumed that the tenant has no obligation to carry out any repairs or maintenance to the house (so it is valued as seen), 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.

6.4. Once the freehold value of the house has been established, the figure is discounted in direct proportion to the number of years before the landlord regains possession. Case law has now established a generic deferment rate of 4.75% for houses for leases with between 20-71 years unexpired at the date of claim, and only in very exceptional circumstances can this be challenged.

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 do 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.

7.2. 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 enfranchise, often misquoted as the "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" needs to be stripped out of the existing leasehold value, but the amount varies depending on the length of the lease.

7.3. As there is little market evidence of non-enfranchisable leases, valuers often refer to previous settlements of claims that have taken place over the years, and from which several graphs of relativity have been produced. There remains a degree of uncertainty surrounding this part of the valuation, and settling the value of the existing lease will be largely down to negotiation.

7.4. 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 Calculator, 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 or lease provisions. We therefore accept no liability for anyone relying upon its information, and instead urge you to contact us for a full appraisal.

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