Basics on lease extensions, purchase of freehold and absent freeholder
In 1993 the Government introduced the Leasehold Reform, Housing and Urban Development Act whereby qualifying tenants of flats have a right to either extend their leases or collectively purchase the freehold title from the Landlord on payment of a premium.
Many long leaseholders can find themselves running out of time on a lease that once seemed to last a lifetime. Even if they have 70 years left on a lease, many people can find themselves with difficulty in trying to sell such a lease on, or even to get a mortgage, since in commercial and investment terms, the lease is considered too short.
Consequently, The Government made legislation which allowed the Tenant to follow a process which would allow them the right to extend their lease or even purchase the freehold. This would allow more flexibility to sell to a prospective buyer and can also allow the new freeholders to grant themselves very long leases, such as 999 years.
It is best to try and extend the lease or purchase the freehold before your lease has less than 80 years left to run. Before this time all that needs to be paid to the Landlord is a premium for the purchase. However once the lease has 80 years or less left, the Landlord then becomes entitled to 50% of what is known as the ‘marriage value’. This is the difference in value of the property before your purchase and that of the property after. This amount can be considerably more than the simple premium you would have to pay to the Landlord before the lease dropped below the 80 year mark.
Qualifying Tenant
In order to use this right, the correct procedures must be followed as laid down in the Act. Only a ‘qualifying tenant’ has the right to demand the purchase of the freehold. This is a tenant of a flat which has a long-lease which was granted for at least 21 years. For a block of flats it is necessary for at least 50% of the flats in the building to participate in the purchase for the procedure to be used. If there are only two flats, then both tenants must participate. Where one owner owns several flats they are considered only one person, so a majority of owners are still needed.
Qualifying Property
The property itself must be mainly residential. It cannot be made up of more than 25% commercial premises.
The Initial Notice
The first step in the procedure is to issue the landlord with an ‘Initial Notice’ giving the landlord specific information including who the ‘Nominee purchaser’ is, by when the Landlord needs to respond to the notice and what terms they are offering the landlord for the purchase. The ‘Nominee Purchaser’ is usually a company set up by the tenants for the purposes of purchasing the freehold. It is extremely important that the information is given correctly on the notice, as if anything is missed then the notice is not valid. Should it be that the notice is invalidated for any reason, then another claim cannot be made against the landlord for another 12 months and the landlord could seek the costs of the abortive transaction from the tenant.
Counter Notice
Once the notice has been correctly served the Landlord must give a counter notice within the time limit specified. This must be at least two months after the original service on the Landlord.
The counter notice must specify if the landlord agrees to the tenants right to purchase the freehold or whether they are denying the right. There are only a limited number of grounds on which the landlord can rely to deny the right. This includes the invalidity of the notice or the fact that they have the intention to develop the property (this can only work if at least two-thirds of the flats have left than five years left on the leases).
Should the Landlord agree to the notice, he must specify exactly which terms laid out are agreed on and which he wishes to negotiate on. If they parties cannot come to an agreement as to the terms, then either party can apply to the Leasehold Valuation Tribunal (LVT) for them to determine any matters in dispute between them. If the landlord denies the tenants the right, then they may apply to the Court within two months of receiving the counter notice to put their argument as to why the landlord is not entitled to deny them the right.
If the landlord fails to respond to the notice then the tenant can apply to the Court within six months from when the counter notice should have been given, for a vesting order where the Court will determine the terms of the acquisition.
Once the terms are agreed or determined by the Court or LVT the landlord has an obligation to prepare the draft contract and to provide it to the tenant within 21 days of the agreement/determination. The tenants then have 14 days to make any amendments to the draft, failing which it will be deemed approved. If the tenants have made any changes, then the landlord will be given a further 14 days to make his amendments. It should be noted that the landlord can require the tenants to pay a deposit of £500 or 10% of the purchase price (whichever is greater). Additionally the tenants are liable for the reasonable costs of the landlord in valuing the property (except for negotiations), in providing information required by the tenants and in dealing with the conveyance. However, they are not liable for the landlord’s costs of negotiations or LVT proceedings, should it go down that route.
In a relatively straightforward case the entire process should take around six month from start to finish. If it is necessary to apply to the LVT or to the Court, then it could take considerably longer.
Absent freeholder problems
A major concern of some tenants is that they feel that if their landlord is absent and cannot be traced, then they lose their right to extend the lease or purchase the freehold. This is not the case although there is still extra aggravation and cost.
The Act allows for the tenants to seek a vesting order from the Court to enable them to utilise this right. The Court must be satisfied that reasonable efforts were made to trace the landlord. Evidence to prove this would include making a land registry search of the Landlords last known address and trying to serve him at that address and producing a Witness Statement confirming that someone tried to visit the landlord at his last known address and they weren’t there and no forwarding address was available. Additionally a notice should be served in the London Gazette or local paper, and proof of this must be shown to the Court.
On application, the Court may either set a date for a hearing where it will be necessary to satisfy the judge in person that you made your reasonable efforts to find the landlord, or alternatively the judge may be satisfied with the documentation sent to him in the application and grant the order without a hearing.
On granting of the vesting order the Court will set out that the freehold title may be purchased by the leaseholders. The matter will then be deferred to the LVT to determine a reasonable premium that would have to be paid into the Court.
Most absentee cases are decided by the LVT without a full hearing. Rather directions are provided to the tenant to produce certain documentation and valuations. They will then determine what price is to be paid to the Court. This decision is then sent back to the Court along with the money and the Court will then make the final order to transfer the freehold to the tenants. In this way even tenants with an absentee landlord can have the benefits of the right to purchase the freehold.