Freehold Enfranchisement

The vast majority of flats in England and Wales are held on long leases, but many lessees will have the right to acquire the freehold interest in the building that contains their flat.  In this post I will try to explain the process of acquiring the freehold interest, which is known as ‘collective enfranchisement’, and is covered by Chapter 1 of Part 1 of The Leasehold Reform, Housing and Urban Development Act 1993.

When it comes to selling flats, those that are advertised with ‘a share of freehold’ seem to be more attractive to purchasers than those without.  We will start by looking at how the process works in simple terms.

Firstly, you will note that The Leasehold Reform, Housing and Urban Development Act 1993 always uses the terms ‘landlord’ and ‘tenant’.  In most cases the landlord will be the freeholder of the building and the tenants will be the lessees of the flats in the building.

‘Collective Enfranchisement’ means, simply, that the lessees of flats have the right to acquire the freehold of the building containing their flats.  The ‘collective’ element is important, as it means that the participating lessees, as a group, will acquire the freehold of the whole building containing their flats.

At this stage we need to look at a number of legal definitions to see what type of premises qualify for collective enfranchisement.

The premises themselves will qualify if they meet the following requirements:-

• They consist of a self-contained building or part of a building
• They contain two or more flats held by qualifying tenants
• The total number of flats held by such tenants is not less than two-thirds of the total number of flats contained in the premises

The above definition really encompasses all properties, from a house converted into two flats up to and including a multi-storey block containing many flats.
A flat is defined as a separate set of premises:-

• Which forms part of a building
• Which is constructed or adapted for use for the purposes of a dwelling
• Either the whole or a material part of which lies above or below some other part of the building

The above definition obviously includes both purpose-built and converted flats.

One area that needs to be clarified at this stage is what we would term ‘mixed use’ premises, such as a building containing flats and shops, or flats and offices.  If the floor area of the ‘non-residential’ part of the building exceeds 25% of the internal floor area of the premises as a whole, then the right to collective enfranchisement does not apply.

Another grey area is properties with resident landlords (i.e. where the freeholder occupies one of the flats in the building.)

In a limited number of cases, buildings with resident landlords may be excluded from collective enfranchisement.  For a property to be excluded from enfranchisement the conditions below would have to be satisfied:-

• The premises must contain not more than four units
• The premises must not be, or must not form part of, a purpose built block of flats
• The same person must have owned the freehold of the premises since before the conversion of the premises into two or more flats or other units
• The freehold owner, or an adult member of their family, must have occupied a flat or other unit contained in the premises as their only or principal home for the previous twelve months.

This is quite a stringent requirement and it means effectively that the only premises that would be excluded would be a house that has been converted into four or less flats by a freeholder who still occupies one of the flats.

Next we need to look at the qualification requirements for the tenants (lessees) of the building.  Generally, lessees will qualify if they are tenants of a flat held on a long lease.  This will usually mean that the lease was initially for a term of at least 21 years.  As most flat leases were initially for 99 year or longer, the majority of lessees will be qualifying tenants for the purposes of the Act. Incidentally, if the lease is in joint names the lessees are regarded as jointly constituting the qualifying tenant of the flat.

There are a number of cases where the lessee of a flat will not be regarded as a qualifying tenant for the purposes of the Act.  The principal situation is where a lessee who would otherwise be a qualifying tenant owns the leases of three or more flats within the same building.  The main reason behind this is to ensure that collective enfranchisement rights are extended, on the whole, to owner-occupiers rather than property speculators or investors.

In order to proceed with a claim for collective enfranchisement a number of qualifying tenants need to be involved in the process and these are called the ‘participating tenants’.  At least half of the tenants in a building need to participate in order for a valid claim to proceed (i.e. if there are six flats in a building at least 3 lessees must participate in the enfranchisement.)

The question that is always asked at this stage is how this works in practice if only half of the tenants (lessees) participate.  The situation is actually quite simple; the ‘participating tenants’ have to acquire the freehold interest in the entire block and they will, in effect, become the ‘landlord’ of the tenants that are not participating in the acquisition.

To summarise the points we have looked at so far, collective enfranchisement applies to either converted or purpose built flats and the following requirements have to be met:-

• There must be at least two flats in the building, but there is, for practical purposes, no upper limit.
• At least two-thirds of the flats must be owned by qualifying tenants.
• The flats must be held on long leases. (i.e. for an initial term of at least 21 years)
• At least half of the lessees in the building must participate in the acquisition of the freehold.

n the next few posts we will go onto to look at the formal procedures that must be followed and how the price payable for the freehold is calculated.

If you would like any further information on Freehold Enfranchisement do not hesitate to contact us on 020 8360 7615 or by email.