As an alternative to a lease extension, leaseholders in a block can acquire the freehold in what is technically known as enfranchisement (as a rule this is more than 50% participation). There are certain circumstances where the leaseholder’s can approach the freeholder on an informal basis (without serving notice) but these are generally very rare, owing to the added complexity of an enfranchisement over that of a simpler lease extension. The leaseholders will need a Chartered Surveyor to undertake a valuation of the freehold before they serve notice as the figure contained within this notice has to be reasonable to be deemed valid (in the same way a notice for lease extension can).
With the leaseholder’s notice served, the freeholder will arrange for their surveyor to inspect the property and gather sufficient information to assist with the preparation of a counter notice. The surveyors have up to 6 months to the agree the premium, otherwise it will have to be settled at the First Tier Tribunal. Applications to the Tribunal can be made 2 months after the counter notice has been served.
The first part of the premium for an enfranchisement is very similar to that of a lease extension. The freeholder’s compensation first of all arises from the loss of ground rental income and from the loss of the right to take back possession of the flats at the end of each lease. ‘Marriage value’ is the aggregate value of the freeholder’s and leaseholder’s interest arising from the enfranchisement at a rate of 50%, or in basic terms, half of the uplift in value of each of the flats. The shorter the lease, the greater the marriage value. Marriage value is disregarded when there are more than 80 years left on the lease so acting sooner rather than later is strongly advised.
The element that differentiates an enfranchisement from a lease extension is what is referred to as development value. There are various elements of the freeholder’s title that could be developed with the freeholder’s consent, including but not limited to, an extension in to the roof space or basement area, the creation of a roof terrace or even the construction of an entirely new dwelling. The surveyor instructed by either side will have to inform their client(s) as to the likely compensation due under this section of the Act. If a development is deemed to be very likely to take place, e.g. there is planning permission in place, then the compensation may be so large as to render the claim unaffordable. If development value is far more speculative, very large discounts will need to be applied to account for what is referred to as ‘hope value’.
The appointment of an experienced surveyor and solicitor is arguably even more important than for a lease extension as the possibility of the case being taken all the way to a valuation Tribunal is greater. An experienced surveyor will outline the full scope of the valuation with particular reference to the upper and lower ranges of the premium payable. Their specialist knowledge of the legislation, case law, current precedents and strategies used in valuation, negotiation and Tribunal scenarios will be vital in achieving the best premium possible whether you are the leaseholder or freeholder.
Our Chartered Surveyors are also RICS Registered Valuers and deal with hundreds of cases per year. Negotiations form part of most freehold enfranchisement claims and expert witness representation at Tribunal can also form part of this process. We also work closely with the very best solicitors in the profession, as a tight knit team of client, Valuer and legal representation is required to achieve the very best of results.
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