These notes have been prepared to give you information on the general position relating to the collective right of residential tenants to acquire the freehold interest of their landlord or to exercise a right on an individual basis to apply for a lease extension.

The Rights

The rights of tenants of certain long Leases of flats to acquire the freehold (on a collective basis) or to extend the term of their existing Leases were introduced by the Leasehold Reform, Housing and Urban Development Act 1993 ("the 1993 Act") as amended by the Commonhold and Leasehold Reform Act 2002.

Collective Enfranchisement

The collective right to acquire the freehold can be exercised by tenants who hold long Leases (that is, Leases that were granted for a term of over 21 years) and includes the right to acquire the freehold in any common areas such as gardens or parking areas that the tenants have the right to use.

Nominee Purchaser

A nominee purchaser is appointed by the tenants to the purpose of this right and presently there is no restraint on who the nominee purchaser for the tenants who exercise their right should be. Typically it will be a special purchase company owned by the tenants who participate in the enfranchisement.

The membership of the nominee purchaser is a matter for the tenants participating in the enfranchisement and, therefore, as long as there is a sufficient majority of participating tenants to make a claim, they can exclude any of their neighbours. The 1993 Act provides no remedy for a tenant who wishes to participate in the enfranchisement but who is rejected by the participating tenants.

Proposals have been put out for consultation whereby enfranchisement has to take place through a right to enfranchise company ("RTE Company") but secondary legislation is currently needed in this regard as to the constitution of an RTE Company, which is currently an ongoing process.

The RTE Company proposals do seek to remedy the current position whereby a tenant who wishes to participate is excluded from the enfranchisement process by making it a requirement that the RTE Company must invite all qualifying tenants in the building to participate in the claim. One potential consequence of this is that such an invitation could include qualifying tenants who are connected to the landlord of the building (and indeed the landlord himself if a device of nominee Leases is adopted). The landlord could then have an insight into the participating tenants' advice on valuation etc in the enfranchisement process. How Parliament intends to address this potential difficulty has yet to be seen.

Nature of the Building

The building in which the enfranchisement is to be exercised must be a self contained building and it must contain two or more flats held by qualifying tenants and at least two thirds of the flats in the building must be held by qualifying tenants.

A building will be excluded if there is a resident landlord and it does not contain more than four units. In this connection, the landlord (or an adult member of the landlord's family) must have lived in one of the flats in the building as his or her only or main residence for the previous 12 months. The building must also be the product of a conversion which took place when such landlord was the freeholder and the building must not be, or form part of, a purpose built block.

There are also other excluded buildings one of which is any building within a cathedral precinct.

Qualifying Tenants

As mentioned above, at least two thirds of the flats in the building must be held by tenants who hold Leases that were granted for a term of over 21 years.

The notice initiating the collective enfranchisement process must be given by at least half of the qualifying tenants in the building.

Unlike a tenant's right to claim an extension of his or her Lease under the 1993 Act (known as individual enfranchisement) there is no requirement for a tenant who is going to participate in collective enfranchisement of the freehold to have held their qualifying Lease for any particular length of time.

Purchase Price

The purchase price will be a matter of valuation and will take account of the following:

1. The open market value of a landlord's interest in the building.
2. A marriage value which applies because tenants under existing Leases have a special interest in buying the freehold. In this connection a landlord is entitled to half the marriage value except where a Lease has 80 years or more left to run when it is assumed that there is no marriage value in connection with that Lease and so none is payable.
3. Compensation for severance. If enfranchisement lowers the value of other property belonging to the landlord then compensation has to be paid for this.

Lease back Arrangements - Resident Landlord

Where there is a resident landlord (i.e. freeholder) and the nature of the Building permits enfranchisement, the 1993 Act makes provision for the freeholder to claim a Lease back of the premises occupied by him in the counter-notice issued to the qualifying tenants' claim.

There are detailed provisions for the terms of the Lease back set out in the 1993 Act but the principal point is that the Lease must be for a term of 999 years at a peppercorn rent.

There is no consideration to be paid for a Lease back claimed by a freeholder because the effect of carrying out a valuation under the 1993 Act is to simply remove the premises to be leased back from the calculation figures.

Whilst the freeholder is in a position to elect to take a Lease back of premises occupied by him, he does not have to do so in which event the nominee purchaser would not be protected from paying the market value for freehold interest in the premises occupied by the freeholder. This might put off some nominee purchasers but a nominee purchaser would, nevertheless, have the opportunity to sell on the freehold acquired to another party to recoup expenditure acquiring it in the first place.

Individual Lease Extension

In some cases this is seen as an more attractive proposition for tenants than collective enfranchisement as it enables a tenant to apply individually (subject to meeting certain conditions) for a new lease of the tenant's flat in substitution for the tenant's existing lease for a term expiring 90 years after the end date of the existing lease at a peppercorn rent.

A premium is payable for the lease extension to compensate the landlord for the loss of rent for the remainder of the term.

We hope that this information is helpful to you in understanding Enfranchisement. We would be delighted to assist you further and to answer any specific queries you may have.

For further advice contact our team direct or talk to your usual contact in the firm.