THE COMMONHOLD AND LEASEHOLD REFORM BILL

FACT SHEET No 3 - COLLECTIVE ENFRANCHISEMENT OF FLATS

The Commonhold and Leasehold Reform Bill includes a number of changes to the collective enfranchisement provisions in Chapter I of Part I of the Leasehold Reform, Housing and Urban Development Act 1993. These are intended to meet the Government's commitment to make it easier for leaseholders of flats to buy their freeholds. The Government has concluded that the existing rules are too complex, and contain unnecessary restrictions which have effectively prevented many leaseholders from enfranchising under the 1993 Act. 

Existing rules: -

To be eligible, individual leaseholders must be ‘qualifying tenants', which broadly means that a leaseholders must hold a lease which when originally granted was for a period of more than 21 years.  This does not include a business lease;

The lease must also be at a ‘low rent' – there is a complex test for this – unless it is for  ‘a particularly long term' (i.e. over  35 years);

The building must include at least two flats occupied by qualifying tenants.  At least two-thirds of all the flats in the building must be occupied by qualifying tenants;

Any non-domestic component in the block must not exceed 10 per cent of the floor area;

The building does not qualify if it is a converted property of four or fewer flats and a resident landlord or a member of their family is living in one of them;

The group of qualifying tenants seeking to enfranchise must include at least two – thirds of all the qualifying tenants in the block;

At least half of those tenants must satisfy the residence test, that is, they must have occupied the flat for the last 12 months or for periods adding up to three out of the last ten years.

Revised Eligibility Criteria in the Bill

Abolition of residence test;

For individual leaseholders, the low rent test and the ‘particularly long term test' will be abolished;

The resident landlord exemption would be restricted to cases where the resident landlord had carried out the conversion;

The requirement to include at least two-thirds of the qualifying tenants in the block would be removed, but the group would continue to have to hold the leases of at least half of the flats in the block;

The threshold for the non-domestic component will be raised to 25%;

Participating leaseholders must be members of a company which is properly constituted for the purposes of ownership and management.  That will be a private company limited by guarantee which includes the exercise of the right of collective enfranchisement as one of its objects; 

All qualifying leaseholders have the right to participate in the enfranchisement process by becoming members of the company.

Valuation

The Leasehold Reform, Housing and Urban Development Act 1993 sets down certain valuations rules and principles which must be followed in calculating the price payable for the freehold.    In outline, the price payable is an aggregate of three components: -

The open market value of the freeholder's interest in the premises;

The freeholders share of the ‘marriage value' (which must be at least 50% of it but may be more if the parties so agree or a leasehold valuation tribunal so determines).  Marriage value is the additional value created when leasehold and freehold interests are joined reflecting the ability of the participating leaseholders to have a new very long leases granted to them without payment of a premium;

Any compensation for losses (for example, loss of development value) resulting from the enfranchisement

The freeholder is also entitled to recover his or her reasonable costs of dealing with the enfranchisement, other than the costs associated with appearing before a LVT

Revised changes to valuation

The Government has concluded that in a compulsory purchase, landlords are entitled to a fair market price for their interests in the building, including a share of the marriage value, which would normally occur in an open market sale between willing parties when leasehold and freehold interests are merged.

The Government, however, is concerned that the present arrangements for determining the enfranchisement price are complex and can lead to costly arguments, often over matters which have relatively small impact on the overall price.  They provide the opportunity for unscrupulous landlords to drag the process out in order to frustrate leaseholders' legitimate aims.

The Bill introduces the following measures to reduce the scope for dispute:

To share marriage value equally between landlords and leaseholders;

To presume that there is no marriage value where the leases of all the participating leaseholders have more than 80 years to run;

To remove the unfettered right of appeal to the Lands Tribunal against leasehold valuation tribunal (LVT) decisions, so that permission would need to be sought from the LVT or Lands Tribunal;

To set the valuation date as the date on which the first notice was served by the participating group.