Overview of Enfranchisement Law
Forms of ownership
There are two main forms of property ownership in England. These are freehold and leasehold. Freehold is the equivalent of absolute ownership. Leasehold is ownership for a specific period. That can be any period, for example as little as one week, or as long as 999 years. A leasehold interest is created by a document called a lease (or tenancy, which has the same meaning). The period for which the lease was granted is called its “term”.
Rent is not payable by the owner of a freehold. The rent which a lessee has to pay is very flexible. It can be zero (frequently referred to as a “peppercorn” rent); a small rent (often a “ground” rent); or a large/market rent. The rent can be variable or fixed. Variations can themselves be set changes, or can be linked to, e.g. market values from time to time, price indices, or income from subletting of the building.
For technical reasons, flats cannot simply be owned freehold, and are therefore nearly always leasehold. There is a further form of ownership called commonhold. This is not common in practice but does allow flats to be owned freehold.
Enfranchisement – general
The phrase “enfranchisement” is used to cover three rights which tenants potentially have. Strictly only the first two of these are actually enfranchisements. They are:
- The right of a tenant of a house to acquire the freehold;
- The right of tenants in a block of flats together to buy the freehold (this is called “collective enfranchisement”); and
- The right of a tenant of a flat to extend the lease of his flat by an additional 90 years. The new lease has no rent, both during the term of the 90-year extension and during the remaining term of the original lease. This right can be exercised as many times as the tenant wishes.
Maisonettes and duplexes are treated as flats for this purpose.
Tenants of the flats may also have a further right, called “right to manage”. This does not involve them acquiring any land interest in their flats or the block. It simply transfers the management from the landlord to a body set up by the tenant. No premium is payable.
Who qualifies to enfranchise?
The basic rule is that a tenant under a “long lease” qualifies to exercise these rights. A “long lease” is a lease originally granted for a term of more than 21 years (irrespective of what now remains of the original term). If there is a chain of long leases in the building, it is the most inferior long lease which qualifies. Subject to two minor exceptions relating to claims to the freehold of a house, there is no residence test. Accordingly, companies and investors can bring or participate in claims.
In relation to claims to the freehold of a house and a lease extension of a flat, the lessee cannot bring the claim until he has owned the lease for two years. However, once a claim has been made, the lessee can sell his lease with the benefit of the claim to another person, who does not have to wait two years before he can claim.
There is no two-year ownership rule for collective enfranchisement. The key qualification requirements in relation to the premises claimed are as follows:
- They must either be structurally detached; or must constitute a vertical division of a building, whose structure is such that it could be redeveloped independently of the remainder of the building, and whose services are separate from, or can be relatively easily separated from, those serving the rest of the building.
- Ignoring common parts, the internal floor area of any part of the premises used as commercial premises must be 25% or less of the internal floor area of the premises as a whole.
- They must contain two or more flats held by tenants on long leases.
- The total number of flats held by tenants on long leases must be not less than two thirds of the total number of flats in the premises.
- The claim must be brought by tenants with long leases who hold 50% or more of the total number of flats in the premises claimed.
In relation to the last three points above, a person is treated as not holding a long lease if he or it (with, if a company, other companies in its group) would otherwise hold three or more of the flats on long leases.
There are two principal components of the price payable.
The first is the value of the landlord’s interest in the house or the building subject to enfranchisement, or the diminution in the value of that interest in the case of a lease extension claim. There are two main elements to that:
- The loss of the right to vacant possession of the house or flat at the end of the term of the tenant’s lease. This is called the “reversion”. It is usually calculated by taking the current vacant possession value, and deferring it over the remaining term of the lease at an agreed deferment rate.
- The capitalised value of the rent which the tenant would have paid during the remainder of the term of his lease.
The second component is marriage value. Marriage value is only payable if, at the date the claim is brought, the tenant’s lease has 80 years or less unexpired (or in the case of a collective enfranchisement, payable only in relation to leases where that applies). Marriage value is the extra value released by the combination of the leasehold and freehold interests. The landlord receives 50% of the marriage value released.
There are a number of artificial assumptions which can make these calculations difficult. Some favour the tenant, some the landlord. In particular, certain improvements carried out by the tenant or its predecessors are ignored; that can be significant in the case of house claims.
Where there is more than one landlord, each landlord’s interest is valued separately. In the case of flats, the 50% of marriage value payable to the landlord is shared between the landlords in proportion to the value of their respective interests (or diminution in that value, as applicable). In a collective enfranchisement, if one landlord’s interest has a negative value, that is deducted from the value of the immediately superior landlord’s interest (or as high up the chain as is necessary). This can be a significant issue if an intermediate landlord is liable to pay a significant rent, but as a result of lease extension claims, has no rent coming in from his own tenants.
It may also be possible to claim for compensation for the diminution in value of other land owned by the landlord(s).
In the case of houses, the price payable for a few lower value houses is significantly discounted. These are buildings which originally qualified for enfranchisement when the legislation was first enacted in 1967, or as slightly extended in 1974. There are relatively fewer houses to which this still applies which have not yet been enfranchised.
The valuation date in all cases is the date the claim is made.
If the parties cannot agree the price, it is determined by a First Tier Tribunal (“the FTT”). The FTT is a relatively informal tribunal. Where significant sums are at stake, it is normal for the parties to be represented by counsel and highly experienced expert witnesses and, in those cases, proceedings resemble court procedure. Expert witnesses are instructed by and paid by each party. However, their prime duty is to be an independent expert, and that duty is owed to the FTT, not the landlord or tenant who instructs them.
There is a possibility of an appeal from the FTT to the Land Chamber of the Upper Tribunal (“the UT”) on a legal issue or an issue of wider importance, subject to permission being given by the FTT or the UT. There is a possibility of a further appeal on a legal point only to the Court of Appeal and, ultimately, the Supreme Court.
The tenants are liable for the landlord’s reasonable costs of and incidental to three matters. These are:
- Investigating whether the claim is validly brought;
- The landlord’s valuation; and
- The conveyancing costs associated with the freehold transfer or the grant of the lease.
In particular, the tenants are not responsible for landlord’s costs in negotiating the price or the documents, nor before the FTT or the UT. With a small exception (£500) for landlords who act unreasonably, a landlord is not responsible for a tenant’s costs in the FTT or the UT, irrespective of the outcome.
If a case is appealed into the courts, the usual cost rules apply in relation to the proceedings in court, i.e. normally loser pays winner’s costs.
What is a house?
There are rarely difficulties in identifying what constitutes a flat. For the purposes of enfranchisement legislation, a “house” is defined as any building:
- Which is designed or adapted for living in; and
- Which it is reasonable to call a house.
This is the basic definition, and there are a number of more detailed points. The definition has a lot of complexities. It clearly includes buildings in mixed use. In particular, there is no exclusion (equivalent to that for collective enfranchisement) where more than 25% of the internal floor area is in commercial use.
The issue has been the subject of several prominent hearings, including before the Supreme Court, but unfortunately there is still no absolute answer as to what is a house. It is clear that a building originally built as a dwelling house but now solely in commercial use is not a “house”, and that such a building that is now solely in residential use is a “house”, but there is a lack of certainty as to the status of such a building in mixed use, meaning that each property must be assessed on a case-by-case basis.
Please note that this is a summary of the principal way in which enfranchisement operates, and the detailed rules are extremely complicated.