Buying your Freehold or
extending your lease
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Contents
Who should read this booklet?
2
hoW Would you benefit?
3
flat oWners – extending your leases
4
flat oWners – getting together to buy the freehold
8
house oWners – buying your freehold
14
hoW the priCe is CalCulated
18
leasehold Valuation tribunals
22
international links
25
Who should read this
booklet?
You should read this booklet if:
• you are the owner of a leasehold house or flat;
• your house or flat is held on a lease originally granted for a term of more than 21 years (regardless of how many years remain on the lease);
• you are concerned at the effect of the declining lease term on the value and marketability of your house or flat; • you wish to sell the property soon and/
or have some available capital to invest in enlarging your interest in the property.
Note it makes no difference now, save for
a very limited number of leasehold houses, whether your house or flat is owned by a company or by an individual, or whether it is owner-occupied or sublet to tenants. The sections that follow on the three main rights under the leasehold reform legislation are necessarily repetitious to a significant extent, because most
leaseholders will only be seeking to exercise rights under one of the three links of the legislation and it was thought better to repeat common provisions rather than require the reader to cross-reference between different sections of the booklet.
3
hoW Would you benefit?
There are three main benefits ofexercising your statutory rights to extend your lease or acquire your freehold: • Protection from loss of value as a
result of declining lease term, so that you will be able to enjoy fully the benefits of any rise in the market in good times, and, in more difficult times, your property will not be less attractive in the market because of the length of the lease. Overseas buyers in particular seem, in our experience, to be more attracted to freehold or (as flats are never themselves freehold, even if the freehold is owned collectively by the leaseholders in the building) near-freehold interests.
• Especially for flat owners getting
together to acquire the freehold of their building, a process known as ‘collective enfranchisement’, the ability to manage the property yourselves rather than be
dependent on a landlord and his managing agents (over whose appointment you have no control and who are legally answerable only to the
landlord, even though you pay their fees through service charges) to carry out such important functions as the maintenance of the exterior and the common parts of the building. • The elimination of ground rent; while
often in long leases ground rents are nominal, there are many occasions where they are not, particularly after rent reviews. The prospect of such a review can be off putting in the market, and, especially in Central London where such reviews tend to be linked to the market rent or capital value of the property, albeit a (usually) small percentage of that figure, the resulting increase can be several thousand pounds a year. If the freehold is acquired, then the rent can be eliminated because there is no longer an external landlord, and even if you are simply extending the lease of your flat, the law states that the rent will be ‘a peppercorn’, that is nil, for the whole of the term of the new lease, not just the extension period.
4
flat oWners –
extending your leases
do you qualify?
Yes, if:
• you are the owner of a lease of a flat originally granted for a term in excess of 21 years; and
• you have been the owner of the lease for at least two years when you make the application for the new lease. Please note that for these purposes, you become the owner on the date when your ownership is registered at the Land Registry, which may be a couple of weeks or so after the date when you complete the purchase of the flat. We will check that date before the notice is served to ensure that it is not served prematurely.
What do you qualify for?
A 90-year extension to your present lease at a peppercorn rent. In other words, say that you currently hold a lease which has 30 years to run at a ground rent of £500 a year; on completion of the procedure and
payment of the agreed or determined price, you will exchange that lease for a new lease of 120 years with no ground rent. Other charges, such as service charges, are unaffected.
What is the proCedure?
Before you submit your claim, we do advise you to have a valuation carried out by a specialist valuer to assess the price which you are likely to have to pay for the lease extension. We have contacts with a number of the leading valuers in the field, and can recommend one or more if you wish. We will prepare for you a claim notice, which you must sign personally. Companies should sign using the same formal execution method as for Deeds. The notice will contain an offer as to the price to be paid for the new lease. While this will almost certainly be a low offer, it should not be too low, as this could invalidate the notice, being regarded as an abuse of the
5
statutory process. The courts have said that any offer must be capable of being justified by valuation evidence if it is to be a valid one.
We will then serve the signed notice on the landlord, giving the landlord a date, at least two months ahead, by which time he must serve a counter notice admitting that you have the right to the new lease, or, if he does not admit it, stating why not. From the moment the notice is served, you are liable for the landlord’s reasonable legal costs in considering the claim, and for his valuation fees.
In addition, you may be asked (on the large Central London Estates you will certainly be asked) for a deposit equal to 10% of the price you offer in the notice.
This will need to be provided on 14 days’ notice. If for any reason the claim does not proceed, either because the landlord defeats the claim or because you withdraw for any reason, you will be entitled to the return of the deposit, with interest, but less the landlord’s legal and valuation costs. If the claim proceeds to completion, the deposit (but without interest) will be taken into account in calculating the balance due. The landlord then serves his counter notice. If he admits the claim, then you
move straight on to the price negotiations. If he does not, then we will consider with you the stated reason and advise as to whether you should seek to enforce your right through court proceedings.
but Can the landlord refuse
the Claim?
If the procedure has been correctly followed, and you qualify according to the criteria stated earlier, then there is no reason why the landlord could refuse the claim, unless your lease has less than five years to run. If this is the case, then the
landlord can refuse to grant an extended lease if he can show, if not agreed then to the satisfaction of the court, that he intends to redevelop the building at the end of the lease, and cannot do so without getting possession of your flat. This makes no difference to any other statutory rights you may have to remain in occupation at the end of the lease.
the Claim is admitted; What
happens noW?
The landlord’s counter notice will contain a
counter-offer, which is likely to be as
optimistic from his point of view as your offer was from yours, and therefore do not let it put you off from proceeding with the claim. Thus the battle lines are drawn, and you or your valuer will now negotiate with the landlord’s valuer to find a mutually acceptable price. If the landlord granting the lease extension is not your immediate landlord, but a superior landlord, then it and the immediate landlord will both have an interest in the negotiations. Normally the superior landlord will conduct them, agree the price with you, and then agree separately with the immediate landlord the division of the price between them. The negotiations then take place. They will
usually be successful in reaching an agreed price, unless there are peculiar factors relating to the flat and the valuers cannot agree on their effect on valuation, or either landlord or leaseholder (or their respective valuers) is unreasonable in their expectations. A guide as to how the price is calculated is found at on page 21 of this booklet.
There is a time limit on negotiations, however. If agreement has not been reached on all terms, that is the price to be paid and/or the terms of the new lease, within six months following the date of the landlord’s counter notice, then an
application must be made, usually by your solicitor, to the Leasehold Valuation Tribunal (LVT) for a determination of the
price and any outstanding terms. Failure to do so will mean that the whole claim will lapse, and therefore this deadline is carefully diarised by the BDB team as soon as the counter notice is received.
The application to the LVT does not mean that negotiations cannot continue, but the LVT will set a hearing date, and if agreement has not been reached by then, there will be a hearing to determine the price and any outstanding terms of the Lease. There is a separate section dealing with LVT hearings at on page 22 of this booklet.
At the same time as the valuers are negotiating the price, the BDB team will be endeavouring to agree the terms of the
6
new Lease with the landlord’s solicitors.
The general rule is that, apart from the length of the lease and the ground rent, it should be in the same form as the present lease, subject to necessary
modernisations. However, some landlords, notably the Cadogan, Portman, and Wellcome Trust Estates, endeavour to exploit this modernisation loophole to impose their current standard form of lease, which can be significantly more onerous than your present lease. The BDB team will endeavour to ensure that the new lease has all the modern features which will make it acceptable to mortgagees and in the market, but imposes no new material burdens or charges which are not stated or implied in the existing lease.
hoW long do you haVe to Complete
the purChase onCe the terms are
agreed?
Once all terms are agreed or determined, the matter moves to completion. The basic rule is that completion of the new lease should take place within two months of
the terms being settled. However, either party can serve a notice at any time during that 2 month period requiring completion to take place on a date not less than 21 days from the date of the notice. This is a power not frequently used by landlords (save by the Wellcome Trust), but is there nonetheless. After two months, there is a possibility that the landlord may try to avoid the grant of the new lease, by seeking a court order striking out the leaseholder’s claim on the ground of delay, and similarly, if the delay is on the landlord’s part, the leaseholder may apply to the court for an order compelling the landlord to grant the new lease without further delay. If no-one does anything, then the claim for the new lease will lapse four months after the terms were settled.
if the Claim lapses, Can you put
in another?
Yes, but only after a gap of one year after the previous claim was withdrawn or deemed to be withdrawn (for instance, the end of the four-month period mentioned in the previous paragraph).
When the lease is Completed, What
do you haVe to pay?
In addition to the price of the new lease, you must pay the landlord’s reasonable legal fees for the investigation of the claim and the preparation of the new lease, and the landlord’s valuation fees. Stamp Duty Land Tax and Land Registry fees are also payable at the usual rates. This liability arises as soon as the notice claiming the new lease is served. These fees may be challenged at the LVT if they are considered to be unreasonable; the BDB team will advise you on whether such a challenge is worthwhile.
do the tWo leases then run in
parallel?
No – your existing lease is cancelled as part of the process, and any mortgages on the existing Lease will be transferred over to the new Lease. In our experience, clients frequently use the lease extension process to remortgage their property.
7
if there is an immediate landlord
and a superior landlord, and the
neW lease is granted by the superior
landlord, does the immediate
landlord drop out of the piCture?
No – because of a legal device in the 1993 Act, the immediate landlord will remain your landlord under the new lease until the immediate landlord’s own lease expires.
is there any Way in WhiCh the
landlord Can terminate the lease
before the end of the extended term?
Yes; the landlord can ‘break’ the new Lease on the original expiry date of the previous lease (the end of the thirty years in the example we gave earlier), but only: • if he can show (to the court in the
absence of agreement) that he wishes to carry out major works to the building and cannot do so without getting possession of the flat (note that this is an onerous test for the landlord to pass – for instance, merely wishing to join the flat with a neighbouring flat to form a larger unit is not enough); and
• if he pays compensation to the leaseholder equal to the full market value of the property at the time. In default of agreement, this is determined by the LVT.
Can you WithdraW from the proCess?
Yes, you can withdraw from the process at any time up to completion of the new lease. However, if you do, then you must pay the landlord’s legal costs and valuation fees, and you will not be able to make another claim for one year following withdrawal.
8
flat oWners –
getting together to
buy the freehold
The process by which a group of flat owners in a building acquire together the freehold of the building is known as collective enfranchisement.
do you qualify?
Yes, if:
• you are leaseholders in a building, or combination of buildings, with vertical boundaries (ie no encroachment of other buildings under or over material parts of yours);
• not more than 25% of the building (excluding common areas) is given over to non-residential uses;
• two thirds of the flats in the building are let on long leases – that is, originally
granted for terms in excess of 21 years; • none of you (including a group of
connected companies) owns three or more flats; if one or more of you does own three or more flats, then it may still be that the building is enfranchisable, but it would have to be so on the assumption that none of those flats were let on long leases; and
• as a group, you all hold such long leases and together own at least 50% of the total number of flats in the building.
Note the two-year ownership requirement
for obtaining an extended lease does not apply to participation in collective enfranchisement claims.
What do you qualify for?
To acquire the freehold and all intermediate landlords’ interests in the building, save (in the latter case) for non-communal areas.
What is the proCedure?
Before the statutory procedure is commenced, we strongly advise that leaseholders considering enfranchisement carry out two initial steps. The first is to have a valuation carried out by a specialist
valuer, who will provide a report to you as to the price you are likely to have to pay for the freehold. Those instructing the valuer should be sure that they have funding from their fellow leaseholders for the valuer’s fees before doing so. The second preliminary step, once the valuation has been considered and the participants know what they are letting themselves in for, is for the participants to enter into a written agreement, which
would constitute an enforceable contract, undertaking to each other to do everything possible to further the claim, including, most importantly, providing their share of the price and costs (including any stamp duty land tax) when the time arises. Such agreements commonly cover a maximum price for the freehold to which the
participants are mutually committed, and the grant to themselves by the new freehold company of new 999-year leases of their flats once the freehold has been acquired. We will then prepare a claim notice, which all participants must sign personally. Companies should execute the notice formally as if it was a Deed. The notice will contain an offer as to the price to be paid for the freehold and other intermediate interests. While this will almost certainly be a low offer, it should not be too low, as this could invalidate the notice, being regarded as an abuse of the statutory process. The court has said that any offer must be justifiable by valuation evidence if it is to be valid.
We will then serve the signed notice on the landlord, giving the landlord a date, at least two months ahead, by which time he must serve a counter notice admitting that you have the right to the freehold, or, if he does not admit it, stating why not.
From the moment the notice is served, you are liable for the landlord’s
reasonable legal costs in considering the claim, and for his valuation fees.
The landlord then serves his counter notice. If he admits the claim, then you
If he does not, then we will consider with you the stated reason and advise as to whether you should seek to enforce your right through court proceedings.
but Can the landlord refuse
the Claim?
If the procedure has been correctly followed, and you qualify according to the criteria stated earlier, then there is no reason why the landlord could refuse the claim, unless two-thirds of all the leases in the building have less than five years to
run. If this is the case, then the landlord can refuse to part with the freehold if he can show, to the satisfaction of the court if not agreed, that he intends to redevelop the building at the end of the leases, and cannot do so without getting possession of the flats. This makes no difference to any other statutory rights you may have to remain in occupation at the end of the leases.
the Claim is admitted; What
happens noW?
The landlord’s counter notice will contain a
counter-offer, which is likely to be as
optimistic from his point of view as your offer was from yours. Do not let it put you off from proceeding with the claim. Thus
the battle lines are drawn, and you or your valuer will now negotiate with the landlord’s valuer to find a mutually acceptable price. If there is more than one landlord, for instance a freeholder and an intermediate landlord, then it and the immediate landlord will both have an interest in the negotiations. Normally the superior landlord will conduct them, agree the price with you, and then agree separately with the immediate landlord the division of the price between them. The negotiations then take place. They
will usually be successful in reaching an agreed price, unless there are peculiar factors relating to the building and the valuers cannot agree on their effect on valuation, or either landlord or
leaseholder (or their respective valuers) is unreasonable in their expectations. A guide as to how the price is calculated is found later in this booklet.
There is a time limit on negotiations, however. If agreement has not been reached on all terms, that is the price to be paid and/or the terms of the freehold transfer (land to be transferred, rights to be granted or reserved, restrictive covenants to be imposed), within six months following the date of the landlord’s
counter notice, then an application must be made, usually by your solicitor, to the Leasehold Valuation Tribunal (LVT) for a
determination of the price and any outstanding terms. Failure to do so will mean that the whole claim will lapse, and therefore this deadline is carefully diarised by the BDB team as soon as the counter notice is received.
The application to the LVT does not mean that negotiations cannot continue, but the LVT will set a hearing date, and if agreement has not been reached by then, there will be a hearing to determine the price and any outstanding terms of the freehold transfer. There is a separate section dealing with LVT hearings at the end of this booklet.
At the same time as the valuers are negotiating the price, the BDB team will be endeavouring to agree the terms of the Transfer with the landlord’s solicitors. The
landlord is entitled to certain provisions in the transfer which are reasonably required to protect the landlord’s interest in nearby property, and this is particularly relevant on the large Estates such as Grosvenor, Cadogan, Portman, Wellcome or Howard de Walden. Some negotiate on a case by case basis; others, such as Grosvenor and
11
Portman, impose these terms by means of court-approved management schemes covering whole areas, such as (in Grosvenor’s case) Belgravia.
hoW long do you haVe to Complete
the purChase onCe the terms are
agreed?
Once all terms are agreed or determined, the matter moves to completion. The basic rule is that completion of the freehold acquisition (encompassing of course any intermediate leasehold interests), or at least exchange of contracts with a fixed completion date, should take place within two months of the terms being settled. After two months, there is a possibility that the landlord may try to avoid the transaction, by seeking a court order striking out the leaseholders’ claim on the ground of delay, and similarly, if the delay is on the landlord’s part, the leaseholder may apply to the court for an order compelling the landlord to transfer the freehold without further delay. If no-one does anything, then the claim for the freehold will lapse four months after the terms were settled.
if the Claim lapses, Can you put in
another?
Yes, but only after a gap of one year after the previous claim was withdrawn or deemed to be withdrawn (for instance, the
end of the four-month period mentioned in the previous paragraph).
When the aCquisition is Completed,
do you only haVe to pay the balanCe
of the premium?
No – you must also pay the landlord’s reasonable legal fees for the investigation of the claim and the legal work in respect of the transfer, and the landlord’s
valuation fees. This liability arises as soon as the notice claiming the freehold is served. Stamp Duty Land Tax and Land Registry fees are also payable; the rate of SDLT payable depends on the price and number of participating flats.
Can you WithdraW from the proCess?
Yes, the process can be aborted at any time up to exchange of contracts, or (if there is no contract) completion of the freehold transfer. However, in such a case, you must pay the landlord’s legal costs and valuation fees, and you will not be able to make another claim for one year following withdrawal. As to whether individual leaseholders can withdraw from the collective process, this will be a matter for the terms of the leaseholders’ agreement. Once the notice is served, the subsequent withdrawal by individual leaseholders does not affect the validity of the claim.
12
the nominee purChaser
The 1993 Act requires that the claim notice should nominate the legal entity which will take the freehold of the building as nominee, effectively the same as a trustee, for the participating leaseholders. Often, at the point of the notice being served, the nominees will be two or three of the participating tenants, but it is usual prior to completion for the nominee purchaser to be changed to a newly formed company, limited either by shares or by guarantee, whose shares are owned in the appropriate proportions by the participating tenants.
neW leases for partiCipators
It is usual (indeed it is assumed in the valuation basis for collective
enfranchisements set out in the 1993 Act) for the participating tenants to grant to themselves, through the medium of the nominee purchaser, new 999-year leases of their flats very shortly after the freehold acquisition. Such leases do not attract stamp duty land tax. The grant of such leases has the effect of stripping out the value from the freehold and putting it into the leases of the participators, where it is more easily realisable on the sale of their flats. The share of the freehold will then have value, not so much in cash terms, but in the ability, and in some decisions weighted ability according to shareholding, to take part in the management of the block.
non-partiCipants
Although there is some valuation advantage if some flats do not participate (‘marriage value’ is paid only on
participants’ flats) it is usually in our view preferable for all willing and able flat owners to take part in a collective
enfranchisement. Non-participators simply have a new landlord at the end of the process, in the form of the company owned by their fellow leaseholders; they will have no right to join the freehold consortium later, but may well have their own lease extension rights.
The main complication of non-participants is how to fund the share of the freehold
price attributable to their flats. This is something which needs to be covered in the leaseholders’ written agreement mentioned earlier. There is no ‘right’ way to deal with this problem; sometimes one or some of the participants will fund the non-participants’ flats, in return for an overriding 999-year lease of those flats. Sometimes an outside investor, sometimes called a ‘white knight’, may be attracted. The BDB team is used to discussing alternative proposals with groups of leaseholders according to the particular circumstances of their building.
future management
It is important that the leaseholders agree at an early stage, certainly before
completion of the acquisition, how the building is to be managed in the future. Often this will involve a written shareholders’ agreement binding themselves, their successors and the freehold company. While one of the reasons most frequently put for submitting a collective enfranchisement claim is a desire to get rid of the landlord’s current managing agents, it is our advice that you should appoint managing agents to act as a buffer between the leaseholders as individual occupiers of the building, and yourselves in your collective guise as freeholder. We can recommend a number of good firms for you to consider.
tax Considerations
We do not as a matter of course offer tax advice in respect of a collective
enfranchisement claim, either to the freehold company or to individual leaseholders. This is available to the company on request for a separate fee, and to individual leaseholders provided that there is no conflict of interest with the collective. Collective enfranchisement claims can present useful opportunities for tax planning by separating the ownership of the new 999-year lease and the existing short lease. BDB’s specialist tax lawyers can advise you in this connection.
14
house oWners –
buying your freehold
do you qualify?
Yes, if:
• you are the owner of a lease of a house originally granted for a term in excess of 21 years; and
• you have been the owner of the house for at least two years when you make the application for the new lease. Please note that for these purposes, you become the owner on the date when your ownership is registered at the Land Registry, which may be a couple of weeks or so after the date when you complete the purchase of the house. We will check that date before the notice is served to ensure that it is not served prematurely.
• where (but only where) the house is divided into flats, one or more of which are themselves held on long leases, i.e. those which potentially qualify for a 90-year extension, you have occupied part of the house as your main residence for the past two years or periods amounting in all to two years during the past ten years.
What is a ‘house’ for these
purposes?
A house is in essence a residential building with vertical boundaries, that is with no encroachment over or under it by any other building, and which is reasonably so called. It does not matter if the house has been divided into flats; what matters is the appearance of the building. A building originally built as a single dwelling and subsequently converted will therefore usually continue to be a house for the purposes of the relevant leasehold reform legislation affecting houses, the Leasehold Reform Act 1967. This is the case even if the building has been used/adapted for business purposes in the past; the position is more complicated if the tenant currently uses the property for such non-residential purposes.
What do you qualify for?
To acquire the freehold of your house, including the extinction of any intermediate leasehold interests.
What is the proCedure?
Before you submit your claim, we do advise you to have a valuation carried out by a specialist valuer to assess the price which you are likely to have to pay for the freehold. We have contacts with a number of the leading valuers in the field, and can recommend one or more if you wish. We will prepare for you a claim notice, which you should normally sign personally. Companies should sign formally as if the document were a Deed.
We will then serve the signed notice on the landlord; the landlord then has two months to consider the claim, by which time he must serve a notice in reply admitting that you have the right to the freehold, or, if he does not admit it, stating why not. There is no sanction, however, other than to make a court application for a declaration of your entitlement, to ensure that the landlord keeps to this time limit.
From the moment the notice is served, you are liable for the landlord’s
reasonable legal costs in considering the claim, and for his valuation fees.
In addition, you may be asked (on the large Central London Estates you will certainly be asked) for a deposit equal to three times your current ground rent (with a minimum of £25). This will need to be provided on 14 days’ notice. If for any reason the claim does not proceed, either because the landlord defeats the claim or because you withdraw for any reason, you will be entitled to the return of the deposit, less the landlord’s legal and valuation
costs. If the claim proceeds to completion, the deposit will be taken into account in calculating the balance due.
The landlord then serves his counter notice. If he admits the claim, then you move straight on to the price negotiations. If he does not, then we will consider with you the stated reason and advise as to whether you should seek to enforce your right through court proceedings.
but Can the landlord refuse
the Claim?
If the procedure has been correctly followed, and you qualify according to the criteria stated earlier, then there is no reason why the landlord could refuse the claim.
the Claim is admitted; What
happens noW?
The landlord’s counter notice will be followed, usually quite quickly, by an offer from the landlord as to the price for the
freehold, which is likely to be an extremely optimistic one from his point of view. Thus the battle lines are drawn, and you or your valuer will now negotiate with the landlord’s valuer to find a mutually acceptable price. If the freeholder is not your immediate landlord, but a superior landlord, then it and the immediate landlord will both have an interest in the negotiations. Normally the superior landlord will conduct them, agree the price with you, and then agree separately with the immediate landlord the division of the price between them.
16
Although there is no strict time limit as in the case of lease extensions or collective enfranchisement, either party can apply to the Leasehold Valuation Tribunal (LVT) for
a determination of the price and any outstanding terms of the freehold transfer after two months following the admission of the claim. In a rising market, it will usually be the landlord who does so. The application to the LVT does not mean that negotiations cannot continue, but the LVT will set a hearing date, and if agreement has not been reached by then, there will be a hearing to determine the price and any outstanding terms of the Lease. There is a separate section dealing with LVT hearings at page 22 of this booklet. At the same time as the valuers are negotiating the price, the BDB team will be endeavouring to agree the terms of the freehold transfer with the landlord’s
solicitors. The landlord is entitled to certain provisions, provided that in most cases they were included in the lease, which protect or enhance the landlord’s interest in adjoining property. This is particularly important on the large Central London Estates, such as Grosvenor, Cadogan, Wellcome, Portman or Howard de Walden. Some negotiate on a case by case basis; others, such as Grosvenor and Portman, impose these terms by means of court-approved management schemes covering whole areas, such as (in Grosvenor’s case) Belgravia.
hoW long do i haVe to Complete the
purChase onCe the priCe is agreed?
Once all terms are agreed or determined, the matter moves to completion. The basic rule is that completion of the freehold should take place within two months of
the terms being settled. If the landlord serves notice to complete and completion does not take place, interest is payable over a further 2 month default period; if completion does not take place during that period, then the claim will lapse.
if the Claim lapses, Can you put
in another?
Yes, but only after a gap of one year after the previous claim was withdrawn or deemed to be so (for instance, at the end of the 2 month period mentioned in the previous paragraph).
When the freehold is Completed, do
you only haVe to pay the balanCe of
the premium?
No – you must also pay the landlord’s reasonable legal fees for the investigation of the claim and the legal work in respect of the freehold transfer, and the
landlord’s valuation fees. This liability arises as soon as the notice claiming the freehold is served. Stamp Duty Land Tax and Land Registry fees are also payable at the usual rates.
Can you WithdraW from the proCess?
No, strictly you may not withdraw from the process at any time after the notice has been served, save for a brief one-month window after the price has been agreed or determined by the LVT. Some landlords will waive this rule to allow withdrawal. However, if you withdraw, then you must pay the landlord’s legal costs and valuation fees, and you will not usually (depending on the terms of withdrawal) be able to make another claim for one year following withdrawal.
18
hoW the priCe is
CalCulated
The calculation of the price payable on enfranchisement or lease extension is made according to a well-recognised formula, with a number of variables. Please note that where houses under the 1967 Act are concerned, the formula only applies to medium and high value houses; for lower value houses, for instance where (in general terms) the rateable value on 31 March 1990 was no more than £1,000, a different method of calculation is used. But for all other houses, and for all lease extensions and collective enfranchisements under the 1993 Act, the calculation follows the principles set out below.
In short, the landlord is entitled to a premium equal to the aggregate of two elements – 100% of the value of the landlord’s interest in the property, and 50% of the marriage value, a term which
we will explain below.
The valuation is made as at the date of the tenant’s claim notice.
A sample valuation is provided after the comments in this section.
the landlord’s interest
The landlord’s interest in the property comprises two elements: the income stream from the ground rent, and the value
of the reversion, that is the right to recover
the property at the end of the lease. The valuer will value (or ‘capitalise’) the income stream, using a discount rate multiplier which varies according to the length of the unexpired term of the lease, and the perceived security of the income, bearing in mind that failure to pay may lead to the loss of the lease. For anything other than short unexpired leases, this usually leads to a figure somewhere around twenty times the current ground rent. Any future rent reviews under the lease are taken into account under this heading, with the rental value of the property being assessed according to the rent review provisions in the lease, with
the resulting figure being discounted for its being only payable from a date in the future, namely the rent review date. This is then added to the current rent
capitalisation to produce the total value of the income stream.
Save in the case of very long leases (80 years or more unexpired), the capitalised rent is not usually (but may sometimes be) a major part of the total premium payable. If it is, though, the valuers for the landlord and leaseholder can be at odds over the discount rate to be applied to reflect the security of the income.
The main element of the landlord’s interest is usually in the reversion, that is the value of the right to recover the property at the end of the lease. Although where the lease has only a short time to run there may be some discount applied to reflect any security of tenure of the leaseholder, the calculation here is essentially the value of the freehold of the property (or 999-year lease in the case of a flat) discounted by an annual percentage rate, known as the deferment rate, to reflect the period before the end of the lease.
By way of simple example, the value of the right to receive £100 in a year’s time will be £94 if the deferment rate is 6%, £95 if 5%. That may be only a small difference, but if the value was £1 million rather than £100, the difference would be £10,000. You can well understand, therefore, that the deferment rate is a key point of issue for valuers. It is now established, following a Court of Appeal case know as Sportelli that the appropriate deferment rate for single houses is 4.75% and for flats and collective claims 5%. However, in the light of the drop in gilt yield rates since the relevant valuation dates in the Sportelli case, there are moves among the main London ground landlords such as Cadogan or Wellcome to persuade tribunals to reduce the deferment rate by up to 1%. As at September 2012 those efforts have been unsuccessful.
But discussion of the deferment rate should not obscure the main point of argument at this stage of the calculation, namely the open market freehold (or quasi-freehold) vacant possession value of the house or flat. This is usually assessed by reference to ‘comparables’, that is sales (preferably) or other transactions involving similar properties in the same area. As no comparable will be identical to the subject property, either in physical nature, location or lease length, there will be considerable argument between the valuers as to which comparables are the best, and as to the adjustments which have to be made to each comparable to bring it into line with the subject property. Adjustments for time, that is the period between the date of the relevant comparable transaction and the date by reference to which the subject property is to be valued, are often made according to published indices of house/ flat prices in the relevant area, the best known for London (though there are others) being those of Savills and Knight Frank. Another common point of issue under this heading is tenant’s improvements. Any
valuation under the 1967 or 1993 Acts is required to disregard improvements made by the tenant to the property at the tenant’s own expense. In the case of houses under the 1967 Act, this can in some cases go so far as to include improvements made under a previous lease. But the notion of an ‘improvement’ goes beyond repair and redecoration, or the renewal of existing features. It implies something different, ideally wholly new, such as the introduction of central heating, secondary glazing or new windows, but it can include the significant improvement on what was there before, for instance in the case of fitted kitchens and bathrooms.
The aggregate value of the capitalised ground rent and the reversion together
make up the landlord’s interest, which
the landlord is entitled to receive in full. Where the unexpired term of the lease exceeds 80 years, that sum is the whole of the landlord’s entitlement. But for other leases, the landlord’s interest value also goes to form part of the marriage value calculation.
marriage Value
Marriage value is the new value created by the transaction, by the ‘marriage’ of the interests currently held by the landlord and the tenant into a single interest held by the new freeholder or long leaseholder. Save where the unexpired lease has more than 80 years to run, the landlord is entitled to 50% of this figure as part of the premium paid on enfranchisement/extension. For example, say that in a particular case the vacant possession freehold value of a house is £1,250,000, the value of the landlord’s interest in the house is £450,000, and the value of the leaseholder’s lease is £500,000. The marriage value will therefore be £1,250,000 – (£450,000 + £500,000) = £300,000. The landlord will be entitled to 50% of this sum, namely £150,000, and therefore in this example the total price payable will be £450,000 + £150,000 = £600,000.
That is the principle; but the following points must be noted:
• as with the freehold, the leaseholder’s interest is valued disregarding tenant’s improvements.
The leaseholder’s interest is valued on the assumption that it carries no rights to acquire the freehold (in 1967 Act house cases) or extend the lease/take part in a collective enfranchisement claim (in the case of flats under the 1993 Act). The discount from open market value to be made for this factor is a source of
considerable argument, but as a rough guide, it will be about 5% in the case of long leases (more than 50 years unexpired), 10% for medium leases (20-50), and anything up to 25% in the case of shorter unexpired terms. The large Central London Estates such as Grosvenor and Cadogan have their own graphs by which they assess the relativity of unexpired terms (excluding 1967/1993 Act rights) to freeholds – for instance, a 25 year lease has on the best known of these graphs a relativity to freehold of 50% – and they guard these relativities jealously. The apparent resistance of these graphs to changes in the market for short leases over the past few years is a consistent theme of arguments before the Leasehold Valuation Tribunal and Lands Tribunal.
In collective enfranchisement cases, marriage value is paid only in respect of the participating flats. However, landlords’ valuers have circumvented this problem in part by arguing that the likelihood of non-participating flats seeking lease extensions in due course gives the freehold an additional ‘hope value’ in that respect, which is often assessed at half the landlord’s share of the marriage value which would have applied had the relevant flat taken part.
In the case of lease extensions, it is of course not the case that the landlord’s interest is reduced to nil, nor is the lease, even extended by 90 years, as valuable as the vacant possession value of the freehold (the usual discount is 2%), and the marriage value calculation in lease extension cases takes account of this. We hope that the attached sample valuation will assist you in understanding the principles of valuation set out above.
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the Westbourne estate
27 Poolebay Place London SW1
Leasehold Reform Act 1967 as amended Valuation as at [valuation date]
Valuation of lessor’s interest exclusive of marriage value £ £ £
Ground rent currently payable 160
Years purchase for 13.65 years (remainder of lease term) @ 5% x 9.427 1, 508 For reversion to:
Value of freehold interest with vacant possession 1,370,000
Deferred 13.65 years @ 4.75% x 0.5308 728,704
Value of freehold interest with vacant possession 1,370,000
Deferred 13.65 years @ 4.75% 0.5308 727,196 728,704
Add lessor’s share of marriage value
Value of freehold interest with vacant possession (A) 1,370,000
Less
Value of lessor’s interest exclusive of marriage value 728,704 Value of lessee’s interest exclusive of marriage value
(lease of 13.65 years) 442,500
Total current interests (B) 1,171,204
Gain on marriage of interests therefore (A-B) 198,796
50% attributed to lessor 99,398
Enfranchisement price 828,102
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leasehold Valuation
tribunals
If the parties cannot agree on the price payable, then the matter is referred to a Leasehold Valuation Tribunal.
An LVT in any given case consists of two or three members – a chairman (who is usually a lawyer), a valuer, and sometimes a third member who can come from any profession or none. They hear and determine cases, but have no power to award costs – that is, whatever the outcome, each party pays their own costs at the LVT. We normally advise clients to budget for about £15,000 by way of fees for their own advisers at the LVT in single house or flat cases, more in cases of collective enfranchisement.
The LVT is empowered to determine not only arguments on valuation, but also any disputes as to the terms (such as reservations or covenants) in the freehold transfer, or the terms of the extended lease. The LVT is in technical terms an ‘expert’ tribunal, that is to say that it is not bound to consider only the evidence it hears, but can use its own relevant expert knowledge. But it will usually be heavily dependent on the evidence which it hears from the valuers appointed by the two sides, who
give that evidence as experts, that is with a duty to the Tribunal rather than that of the party they represent. Our view is that, while the oral evidence and performance of the expert in cross-examination by the other party’s advocate is important, the quality of the expert’s written Report to the Tribunal is of greatest worth.
Having heard the evidence, which can take two days or more to give, the Tribunal will always inspect the subject property, and, externally at least, any comparables. Their written decisions usually come in about two months after the hearing.
Once the decision of the LVT is delivered, each party has 21 days to appeal to the Upper Tribunal. The consent of the LVT (or, if consent is refused, from the Upper Tribunal itself) is required for any appeal. The Lands Tribunal has the power to award costs against a losing party, but only if that party has acted frivolously or vexatiously.
Time limits for completion as mentioned in the relevant parts of this booklet only begin to run when the decision of the Tribunal is final, ie the time to appeal has passed.
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international links
The firm is a leading member of Lexwork International, a network of 41 mid-sized independent law firms with over 2500 lawyers in major cities across Europe, America and Asia. We also have relationships with law firms in other parts of the world. The personal links built up with like-minded lawyers in the network and elsewhere enable us to ensure that appropriate advice is available from our colleagues overseas.
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For more information please visit us at www.bdb-law.co.uk© Bircham Dyson Bell LLP 2006-2012
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T +44 (0)20 7227 7000 www.bdb-law.co.uk
