Page last updated at 23:05 GMT, Tuesday, 5 May 2009 00:05 UK

Buying the freehold of your home

Money Talk
Katherine Simpson
Partner at property law firm Pemberton Greenish

Former storage cupboard sold as a studio flat in London in 2005
All this, even the freehold, can be yours

Buying the freehold of your property, known in the jargon as leasehold enfranchisement, has attracted much media interest over the years.

Recent changes to the law have made it easier, or more straightforward, to make a claim.

And falling property values present an ideal opportunity for leaseholders to capitalise on their investment.

However, this area of law can still be off-putting for a prospective claimant because the subject is still complex.

Your rights

The law gives a leaseholder two separate rights.

The most compelling and common reason is to get rid of the landlord

The first is the right to buy the freehold of a building, either individually if you own a leasehold house, or collectively in the case of a block of flats.

You can also seek an extension of your lease instead.

The two laws that deal with these rights are the Leasehold Reform Act 1967 (for houses) and the Leasehold Reform Housing and Urban Development Act 1993 (for collective claims and lease extensions).

The right to make a claim under either Act is restricted in certain circumstances.

For example, if a leaseholder wants to buy the freehold of his house or simply to extend his lease, they need to have owned the property for at least two years at the date of making the claim.

However, in an interesting quirk to the legislation, there is no such ownership requirement in the case of a collective enfranchisement claim.

Why bother?

There are many reasons for an individual or a group of people wanting to buy the freehold of their homes.

The most compelling and common reason is to get rid of the landlord.

You take control of the building and assume responsibility for its day-to-day management and the maintenance of the building.

Disputes between landlords and leaseholders are not uncommon and hostilities can run high.

One of the main benefits of a collective claim is the ability of the new leaseholders to grant themselves 999 year leases, for no ground rent, and on preferential terms.

They can also relax provisions in their leases which might stop them making alterations to their property, or stop them letting their flats to a tenant.

Getting together

Before embarking on a claim, it is important that the leaseholder is well organised.

Katherine Simpson
Katherine Simpson of Pemberton Greenish

Where a group are seeking to collectively buy the freehold of a block of flats, it is preferable to set up a company to act as the purchaser.

This company is known as "the nominee purchaser", and helps to ensure that the company is tailored to manage and run the building.

A reputable firm of solicitors specialising in enfranchisement can create a specially tailored form of company, suitable for the management and running of a block of flats.

The costs of setting it up will comprise legal fees of approximately £600 plus VAT, plus other non-taxable expenses of approximately £50.

All of the participating leaseholders will be given a share in the company, which will need to be registered with Companies House prior to service of the notice of claim.

Two of the participating leaseholders will usually be appointed as directors of the company.

Similarly, since the leaseholders will be buying as part of a group, their respective duties, rights and obligations towards each other must be formally documented.

This contractually binding agreement with each other, usually referred to as a participation agreement, is designed to minimise the scope for arguments later on.

The parties are legally bound to perform their obligations to each other under that agreement, for example to contribute towards the costs of the purchase.

Once the freehold has been acquired, the leaseholders' existing obligations under their leases will be to the new freehold company - effectively themselves - in place of the previous freeholder.

Left out

Rather unfairly, in the case of a collective enfranchisement, provided at least 50% of qualifying leaseholders participate in a claim for the freehold (the statutory minimum), there is no automatic right for others in the block to join in.

Enfranchisement claims can be protracted and in some cases can take up to two years

The consequence of this is that, in the common situation of disputes between neighbours, one group can seek to enfranchise themselves to the exclusion of others.

The law on this point was due to be amended in 2002 but regrettably that change has never been brought into effect.

It is not possible for two claims to acquire the freehold to exist at any one time in respect of the same building, meaning that no competing bid can be launched by the excluded leaseholders.

So those leaseholders who do not wish, or who are not invited, to participate in the claim will have to accept the new freeholder as their landlord.

The excluded leaseholders will however retain the right to launch their own claim to take over the freehold from the new freeholder, subject to satisfying the statutory qualifying criteria.

The costs

Clearly there will be other important issues to consider before buying a lease, whether individually or collectively.

Critically, the leaseholder will need to ensure that they have enough money to do it, both to buy the property itself and pay for the associated professional costs.

As a general guide to cost of the freehold, the fewer years left on the lease, the more the leaseholder will have to pay.

If the lease has more than 80 years left to run, this can significantly reduce the price payable.

The valuation principles, whether in respect of a freehold house or a collective claim, are complex and specialist valuation advice is essential.

If buyers have sufficient equity in the property, a lender may consider extending any existing mortgage to fund an individual freehold house acquisition or the grant of an extended lease.

It is however unusual for leaseholders making a collective claim to secure collective mortgage finance.

Such an arrangement is unlikely to be attractive to a lender, not least because of the need for the mortgage arrangements to accommodate the change in borrowers when flats are sold by the participators.

Taking time

Enfranchisement claims can be protracted and in some cases can take up to two years.

Mansion flats in Lonodn
Buying the freehold with other flat owners makes things complicated

However, in each case the claim starts by serving a notice upon the landlord - usually the freeholder.

The landlord is obliged to reply and serve a counter-notice within a specified period.

That means they either agree that the leaseholder or leaseholders are entitled to proceed with the claim, or alternatively argue that they are not eligible to do so.

The freeholder is not entitled to reject a claim on a whim.

The legislation confers a statutory right and the freeholder may only reject a claim if the leaseholders do not meet the necessary qualifying criteria.

If the landlord accepts the claim but is challenging certain terms put forward by the leaseholders - most commonly the price - negotiations between the two sides continue until a deal is reached.

If an agreement cannot be struck, the matter can be referred to a leasehold valuation tribunal to decide, although this will put up the costs of the transaction.

The related costs can be high as the leaseholders will be obliged to pay the freeholder's reasonable legal and valuation costs as well as their own.

The leaseholders will not however be liable for the freeholder's costs of tribunal proceedings or negotiating the terms.

Getting advice

Enfranchisement claims are subject to strict time limits and failure to observe these can have dire consequences for the defaulting party.

Following agreement of the terms of the purchase or lease extension, the matter becomes similar to a normal conveyancing transaction, subject again to certain statutory time limits.

The law is complex and at times unwieldy, so if you would like to know more about this area, there are some independent organisations that offer further resources and support, free of charge.

LEASE, the Leasehold Advisory Service, is a public body funded by the government to provide free lease advice to both landlords and tenants on the law relating to leasehold enfranchisement.

The Association of Leasehold Enfranchisement Practitioners (ALEP) is likewise intended for both landlords and tenants looking for professional advice on enfranchisement.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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