Whilst rare, some houses are held on leases as opposed to the usual freehold title. The Leasehold Reform Act 1967 gives leaseholders the right to either extend their lease or to acquire the freehold.
The Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act) is now pretty well known by both industry professionals, leaseholders and the general public alike. What is much well know, mainly due to the scarcity, is the process to extend a lease or enfranchise a leasehold house. There are certain areas of London and indeed the country, where this type of tenure is more common, and the issues that this presents to the owners of these properties is certainly complex.
Before we had the 1993 Act, we had the Leasehold Reform Act 1967 (the 1967 Act) and it is this Act that gives the leaseholder either the right to extend their lease by a further 50 years or to acquire the freehold. Under the former, the freeholder cannot charge a premium but will be able charge a ‘modern ground rent’. This ground rent is usually significantly higher than the rent that the leaseholder is currently paying, but will only kick in upon the expiration of the original lease. The enfranchisement methodology is a lot more complex, but both are subject to stringent qualifying criteria based on the terms of the tenancy.
One part of the criteria is particularly important and that is the part that determines firstly the right to extend and secondly the valuation method of the enfranchisement. If it is determined that the property qualifies under Section 9(1) of the Act, then it is to be valued under what is referred to at the Original Valuation Basis, so called because the original reasoning behind the 1967 Act was that the freeholder owned the land and the leaseholder owned the house. At the end of the lease, the freeholder would be left with the vacant piece of land which he could then let at a ‘modern ground rent’.
The second method of valuation under Section 9(1A) is rather different and is based on the reality that the freeholder will gain possession of a house and not a cleared site. The methodology is very similar to that of enfranchisement under the 1993 Act and would include marriage value if the lease is under 80 years. The very nature of this produces a much more expensive premium but it is not for the leaseholder to choose.