Pros and Cons of Buying the Freehold
By Nicholas Kissen, Senior Legal Adviser This article originally appeared in Flat Living magazine, Winter 2011 It was not until...
This guide is not meant to describe or give a full interpretation of the law; only the courts can do that. Nor does it cover every case. If you are in any doubt about your rights and duties then seek specific advice.
When leaseholders of flats in a building are considering buying the freehold they will usually look at buying under the Leasehold Reform Housing & Urban Development Act 1993, known as Collective Enfranchisement. Alternatively, they might have the opportunity of buying under the Right of First Refusal if the freeholder is selling. There can be another option under the Landlord & Tenant Act 1987 Part iii in circumstances where a landlord has consistently breached his management obligations over a period of time.
This advice guide will describe:
- the qualifying criteria/eligibility;
- the procedure involved
First you must check that the building qualifies, there are enough qualifying leaseholders and the landlord is not exempt..
There are three requirements for the building to qualify:
- it must contain at least two flats;
- no more than 50% of the building is in non-residential use; and
- Not less than two thirds of the flats in the building are held by “qualifying tenants” (see definition of “qualifying tenant “ below)
The building will be excluded if more than 50% of the internal floor space (excluding the common areas) is in non-residential use, e.g., is used as offices or shops.
An acquisition order cannot be pursued where the landlord:
- is an exempt landlord;
- is a resident landlord; or
- Where the premises is within the functional land of a charity.
An exempt landlord is one which is a:
- local authority;
- an urban development corporation;
- a registered housing association or a fully mutual housing association; or
- or a charitable housing trust.
A resident landlord is one where:
- the building/premises is not purpose-built; and
The landlord is resident on the premises at the time and has occupied it as his principle, or main residence for the past 12 months.
The right to acquire the freehold via an acquisition order is given to “qualifying tenants”. These are leaseholders under a long lease. A long lease is one which was originally granted for a term of more than 21 years.
The following leaseholders are excluded:
- those with business tenancies;
- those owning three or more flats in the building; and
- sub-tenants where the landlord is a qualifying tenant.
- You will then need to establish that there are enough qualifying leaseholders for a successful application. The minimum number of participating leaseholders must equal not less than two thirds of the available votes (one vote per flat let to qualifying tenant).
Example: – If there were 20 flats in the building at least two thirds of these, 14, would have to be owned by qualifying tenants for the building to qualify. If ,for example , 16 were qualifying tenants then at least two third of those would need to participate to be able to apply for an acquisition order ,so at least 11 would need to participate , in this case.
Grounds for making the application
An acquisition order may be made by the county court where it is satisfied that:
- the landlord is in breach of any obligation relating to the repair, maintenance, insurance, or management of the premises in question;
- a manager has been appointed by the First-tier Tribunal (Property Chamber) in England or the Leasehold Valuation Tribunal in Wales (the Tribunal) for the period of two years prior to the application being made and the appointment is in force at the date of the application to the county court;
- in either case the court considers it appropriate to make an acquisition order in the circumstances.
Instructing professional advisors
For those intending to embark on this procedure it is prudent to seek specialist advice from lawyers and surveyors, as this is a civil court procedure which will require compliance with the Civil Procedure Rules. Additionally, there are cost implications where a landlord is able to successfully resist an application.
Leaseholders should take all possible steps to ensure their chosen advisor has full knowledge and experience of the legislation, practices and procedures. While LEASE does not recommend any particular professional advisor, lists of solicitors and surveyors claiming expertise in the legislation are available from our website.
Before an application for an acquisition order can be made, the qualifying tenants must serve a Preliminary Notice on the landlord in (under section 27 of the 1987 Act).
The notice must state:
- the name and address of the qualifying tenants;
- the addresses of their flats;
- the name and address for the service of notices in England and Wales if different;
- that the tenants intend to make an application to the court for an acquisition order, but may not do so if the landlord puts right the requirements set out in the notice which are capable of being remedied;
- the grounds on which the order will be sought, and the matters which will be relied on in establishing those grounds; and
- that the landlord should take steps to put right those matters that are capable of being remedied within a reasonable time limit as specified in the notice.
If the landlord fails to remedy the matters set out in the notice, or if there are other grounds, then the tenant may proceed with the application to the county court.
The requirement to serve a preliminary notice can be dispensed with by the court where it is satisfied that it would not be reasonably practicable to serve such a notice on the landlord. An example of when this may be used is where there is an absent landlord who cannot be located.
Applying to the court
Where the landlord fails to comply with the preliminary notice, the qualifying tenants will be entitled to make their application to the county court. Unlike collective enfranchisement or acquiring the right to manage, the application for compulsory acquisition is made in the individual names of all of the participating tenants rather than in the name of a nominee purchaser. .
In the claim form, the applicants are required to specify a nominated person, who will be joined as a party to the application. The nominated person could be for example, a company incorporated by the participating tenants through which the freehold will be held when acquired. It is the nominated person who will be named in the order as the person acquiring the landlord’s interest.
An order can be made relating to the whole or part of a building and also can include or exclude any yard, garden, outhouse or appurtenances belonging to or usually enjoyed with the building.
The Acquisition Order
When deciding whether to make the order requested, the county court will consider whether the breach is continuing, and the likelihood of future mismanagement of the building. The application will be scrutinised in detail, as the order will ultimately result in the property rights of the landlord being taken away. Where a manager has been appointed by the Tribunal, or where there is an absent landlord, proving that there had been no management of the building will be more straightforward.
An acquisition order may be granted subject to such conditions as the court thinks fit, and in particular its operation may be suspended on terms fixed by the court.
Where the application relates to part of more extensive premises in which the landlord has an interest, and the interest is not reasonably capable of being severed from the more extensive premises, the court is obliged to refuse to make an acquisition order
Role of the First-tier Tribunal (Property Chamber) or Leasehold Valuation Tribunal in Wales (the Tribunal)
Once the order is granted, if it is not possible to agree on the terms of the acquisition between the qualifying tenants /nominated person and the landlord, the nominated person must make an application to the Tribunal for a determination of those terms. Those terms can include the terms of acquisition and the purchase price.
The purchase price will be based on what the landlord’s interest may be expected to realise if it were sold on the open market. It is here that a leaseholder can benefit from obtaining an acquisition order rather than by arranging a collective enfranchisement. The reason being, that there is no marriage value payable where the lease term has reached 80 years or less.
In order to assist the Tribunal in coming to their decision, they may visit the premises to be acquired.
The costs of the application by the qualifying leaseholders may be set off against the purchase price payable if the court is willing to use its discretionary general power to make a costs order in the applicant’s favour. Again, a potential further benefit of compulsory acquisition.
It is still possible for leaseholders unable to find their landlord or to ascertain the landlord’s identity to compulsorily acquire the landlord’s interest. In such a situation, there is no need to go to the Tribunal as the terms of acquisition are determined by the court, and the price to be paid is determined by a surveyor selected by the Senior President of Tribunals. The leaseholders must also pay any amounts (or estimated amounts) owed to the landlord under the terms of the leases.
Discharge of the order
The landlord may apply to the court for the discharge of an acquisition order where it can satisfy the court that:
- the nominated person has failed to complete the acquisition within a reasonable period of time;
- the number of qualifying tenants participating has dropped below the requisite majority; and
- where the 1987 Act no longer applies to the building
The qualifying tenants or the nominated person may serve on the landlord a notice indicating that they no longer wish to proceed. The notice must be served where:
- the number of qualifying tenants participating has dropped below the requisite majority; or
- where the 1987 Act no longer applies to the building.
The landlord can recover costs (other those incurred in proceedings at the Tribunal) where:
- an acquisition order is discharged;
- a notice of withdrawal is served;
- the nominated person is no longer willing to act and there is no replacement;
- the number of qualifying tenants participating drops below the requisite majority; or
- where the 1987 Act no longer applies to the building.
Liability for costs is jointly and severally that of the tenants making the application, and the nominated person.