Acquiring the Freehold of a Leasehold House
Most houses in England and Wales are freehold. This means that the owner has a right to remain on the land and in the house in perpetuity (forever) or until he sells or transfers it, at which point the new owner takes over the right. Although technically the land (and therefore the house) actually belongs to the Crown, for all practical purposes it is owned by the home owner. There are some houses however that rather than being freehold are let on long leases. These are known as leasehold houses.
There are a few reasons for developers granting leases rather than simply transferring the freehold of land they have built. Firstly, it entitles them to collect an annual rent, albeit this is usually a relatively small sum, it means that the developer or his descendants can get the land back at the end of the term and it means that he has greater control over what goes on the land because leasehold covenants are easier to enforce. It is possible, subject to certain conditions, for the tenant under a long lease to acquire the freehold of his property.
Why Bother Buying the Freehold of a Leasehold House?
The first and most obvious reason is to prevent the lease from expiring. There are two things to consider here. First, once the lease comes to an end the property goes back to the landlord. The tenant’s right to the land comes to an end and he loses his property. Second, long before a lease expires a diminishing term will have an effect on its value. Suppose for example you bought a new property on a 99 year lease in 1981. You now want to sell it but you can only sell a 69 year lease, because 30 years have already expired, so obviously in relative terms (that is ignoring inflation) it will not be worth as much as when you bought it. What makes it worse is that many mortgage lenders will not lend money on a leasehold property if there are less than 70 years remaining on the lease. This means you can only sell to cash buyers, who are usually investors and therefore only interested in paying a knock down price.
Many house leases, particularly those granted up to the early part of the twentieth century, were for a term of 800 or 999 years. If you have such a lease then you never have to worry about it expiring but it might still be worth acquiring the freehold. Although the rent will be too low to be a factor, the freehold could represent a good investment opportunity for a specialist type of investor who buys such freehold very cheaply then charges, where permitted under the lease, exorbitant fees for things like retrospective consents to any alterations you have made, such as replacement windows or conservatories, for producing ground rent receipts which you’ll need when you sell and for acknowledging a change of owner. By getting in first you can avoid this fate.
Can Anyone Buy The Freehold of Their House?
Whilst anyone is can offer to but the freehold from their landlord, only a qualifying tenant can force the landlord to actually accept.
When the freehold is acquired under statutory rules this is known as “enfranchisement” and the rules were laid down by the Leasehold Reform Act 1967.
To qualify, the lease must have been originally granted for 21 years or more and the rent must be a “low rent”. Calculating what is a low rent can be quite complex but most leasehold houses will qualify. To give you an idea, for leases granted after 1990 rents of less than £1,000 per annum in London or £250 per annum elsewhere will qualify.
In addition, the current tenant must have held the lease (i.e. owned the property) for at least 2 years. If a qualifying tenant dies after making an initial application his executors can take over. The tenant does not have to have lived in the property, for example he could have let it himself on an assured shorthold tenancy.
How Do I Buy the Freehold of My Leasehold House?
A tenant wishing to buy the freehold of a leasehold house must serve a “desire notice” on his landlord. This notice must specify the property, describe the lease and state what the tenant wants to do, i.e. buy the freehold. The landlord must then respond to the notice within two months, either admitting the tenant’s right to acquire the freehold or explaining why it is denied. This might be because he does not believe the tenant qualifies for the right to enfranchise or for limited other reasons which we’ll get to shortly.
How Much Will Have to Pay for My Freehold?
There’s no such thing as a free lunch. If you want to acquire your freehold you have to be prepared to pay for it. The freehold of a property subject to a long lease is an investment and the landlord has a right to be compensated for both loss of rent he would otherwise have received and loss of the land itself.
There is a complex formula for calculating the value of the landlord’s interest which depends on the remaining term of the lease, the annual rent and the value of the property assuming it was freehold with vacant possession and a specialist valuer will usually need to be employed. If the landlord and tenant do not agree the original valuation the matter will need to be referred to the Leasehold Valuation Tribunal for adjudication. If either party is still not satisfied an appeal can be made to the Lands Tribunal. As an example, take a house with a lease which has 36 years remaining, an annual rent of £15 and an assumed freehold vacant possession value of £75,000. This might lead to a price for acquiring the freehold of something like £2,000 – £2,200.
As well as the premium, the tenant will also have to pay the landlord’s legal and valuation costs as well as any other of his costs associated with considering the tenant’s application. These will be payable whether or not the tenant goes ahead and completes the acquisition.
Can the Landlord Block Me from Acquiring the Freehold?
Provided a tenant is a qualifying tenant and is able and willing to pay the premium and costs then a landlord cannot usually deny a tenant’s claim, however there are two sets of circumstances in which he may. The first is where he intends to demolish the house in order to develop the land. He must have an actual intention and the reason for this exemption is because the land is worth significantly more to him than the normal compensation.
The second is where he reasonably intends to use the property for his own principal residence or as the residence of an adult member of his family. He will have to apply for possession within the final year of the lease and the court will consider the housing needs of the landlord or his family member against those of the tenant before making a decision.
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