LEASEHOLDERS RIGHTS OF ACQUISITION OF THE FREEHOLD TO A HOUSE
In a number of areas in England and Wales it was a common practice for Developers in the early part of the twentieth century to sell a new build house as a Leasehold. A Leasehold means the right to own a Property for a defined period of time- called “ a term of years”- subject to paying to the owner of the Freehold, a fixed annual rent and complying with obligations called “Covenants”. Quite often there is a Covenant which states that you cannot alter the external appearance of the House or build any extension or out building without the consent of the Owner of the Freehold. This is called “ a Consent Covenant”.
The Developer retained the Freehold to the house and therefore the entitlement to receive the annual rent and to police and enforce the covenants against the Leaseholder of the house. Often the Developer sold this Freehold interest to third parties, usually what are called Property Portfolio Companies.
If you imagine a Ladder- the first rung of the Ladder is occupied by the owner of the Freehold. The second rung is occupied by the Leaseholder. But what if the Leaseholder would like to occupy the first rung- acquire the Freehold? This is termed Enfranchisement of a Lease which means that the Lease is freed up from the overriding Freehold and the owner of the Lease becomes owner of the Freehold. The ability to acquire the freehold is set out in theLeasehold Reform Act 1967 as amended
The following rules apply
- A Long Leaseholder means a person who owns a Lease granted for a term of 21 years or more of a house, where none of the exclusions at point 3 below apply
The Lease to the house which you are acquiring will satisfy this requirement
- The Long Leaseholder must have owned the Lease for two (2) years. Originally the Long Leaseholder had to have also resided at the Property for two years, but the Residency Requirement was removed by the Commonhold and Leasehold Reform Act 2002
These days many owners of the Freehold are prepared to dispense with the two year ownership requirement and sell straight away. However this cannot be guaranteed in every instance. You should let us know at this stage whether you would like us to approach the Freehold Owner to establish whether he/ she would be prepared to sell the Freehold in the House to you and if so what the Purchase Price would be
- The Act will not apply to any of the following scenarios
- Where the owner of the Freehold is a charitable housing trust and the house forms part of its charitable work
- Where the house comes within the precincts of a Cathedral.
- Where the house is owned by The Crown
- Where the house is owned by The National Trust
- Where the house is located on a parcel of land which is shared by another Property. An example is a house located at the back of a shop where the owner of the shop has granted a lease to the house.
- Where the Owner of the Freehold acquired the house before 18th February 1966 and wishes to acquire the house for his or her occupation or for the occupation of a member of his family
- The Leaseholder of the house serves a Notice Of Intention to acquire the Freehold on the owner of the Freehold. There is no prescribed form of Notice, but the Notice must give details of the following
- The Address of the Property
- The Lease
- Evidence that the Applicant Leaseholder has owned the Property for at least two years.
- The Owner of the Freehold must respond in two months with a Counter Notice. This Notice will specify whether the Freehold Owner accepts the Leaseholder is entitled to acquire the Freehold. The Landlord must set out reasons if he / she does not believe the Leaseholder is entitled. Disputes as to eligibility are determined by the local County Court
- Where the Freehold Owner accepts that the Leaseholder is entitled to enfranchise, he / she may demand a deposit of either £25 or three times the annual ground rent whichever is the greater, pending agreement being reached as to the purchase price to acquire the Freehold . Where the Parties cannot agree the price it is determined by a Leasehold Valuation Tribunal
- The Purchase Price is the value of the Freehold of the house if it were sold on the open market subject to the existing Lease. In other words the Leaseholder is paying for what he has not got. Once a price has been agreed or set by the Leasehold Valuation Tribunal, either party can serve a Notice to Complete on the other. From our experience the price is usually several hundred pounds. The Owner of the Freehold can also require you to pay their Legal costs in selling the Freehold.
Implications In Acquiring The Freehold
- You will own both the Freehold and Leasehold Interests in the House, subject to our comments at point 3 below
- You will no longer have to pay the annual rent reserved in the Lease nor be subject to complying with the covenants in the Lease. So if there were a Consent Covenant as explained at page 1 of this Guidance Note, this would cease. You will remain subject to any covenants which affect the Freehold of the House however.
- It is possible to bring the Leasehold Interest to the House to an end by what is called, “the merging and extinguishment” of the Lease within the Freehold. Where the Lease contains rights over adjoining land, as explained in our Report, these Rights can upon application to the Land Registry be carried forward and added to the Freehold Title. The affect is that the Rights will continue for the remaining period that the Lease would run. We can best explain this by the following example
a) The Lease to the House enjoys a right of way on foot and with vehicles over a back lane (“ the Right of Way”)
b) The Lease was granted for 999 years from 1st January 1940 and therefore would expire on 31st December 2939.
c) On the 1st July 2011, the owner of the Lease to the House acquires the Freehold.
d) The Freehold Title will acquire the benefit of this Right of Way until 31st December 2039
ACTION BY YOU
- Decide whether you wish us on completing your purchase of the Leasehold to a house, to enquire of the Freehold Owner whether they would be prepared to sell to you at this stage the Freehold of the House, notwithstanding that you have not owned the Property for two years?