Buying the freehold or extending the lease of a house

The Leasehold Reform Act 1967 gave long leaseholders of houses the right to buy their freehold ('enfranchisement') or to extend their lease.[1] In general the price for purchasing a freehold is less for houses let at a low rent and with a long term left to run on the lease.

If the sale price cannot be agreed between the freeholder and the leaseholder, an application can be made for the First-tier Tribunal (Property Chamber) to determine the price.

A lease extension under the Leasehold Reform Act can only be for 50 years with no subsequent extensions, so it will usually be in the leaseholder's best interests to buy the freehold. If the leaseholder wishes to sell the property, they can claim the right to enfranchise and then sell this right on with the property. This would avoid the need for the new leaseholder to wait until they have held the lease for long enough to enfranchise in their own right.

Leaseholders who have extended their lease under the Leasehold Reform Act 1967 have the right to buy the freehold after the end of the original lease.[2]

To qualify for lease extension or enfranchisement under the Leasehold Reform Act 1967, there are certain conditions that must be met.[3]

Lease has been held for two years

The leaseholder must have held their lease for the two years prior to the application.[4] In a case where an application for enfranchisement was made in the name of the leaseholder by his trustee in bankruptcy, it was held that the ownership condition was not met as the lease had vested in the receiver.[5]

Property must be a house

A house for this purpose is defined in the Act and includes any building designed or adapted for living in and 'reasonably so called' a house, 'notwithstanding that the building is not structurally detached, or was or is not solely designed or adapted for living in'.[6]

Under the statutory definition, a purpose built block of flats is not a 'house', but where a building is:

• divided horizontally, the flats which it is divided into are not separate 'houses', but the building as a whole may be

• divided vertically, the building as a whole is not a 'house' although any of the units it is divided into may be

Both aspects of the definition need to be satisfied, so just because a property has been designed for living in does not mean it is automatically a house 'reasonably so called'. A property that was once a house 'reasonably so called' can cease to be one when changes are made to it.

Semi detached or terraced properties

Where a property (P1) is not structurally detached from a neighbouring property (P2), P1 still qualifies as a house as long as no 'material part' of it either 'overhangs' or 'underhangs' P2.[7] This restriction excludes from the definition of a house properties which are divided both horizontally and vertically, ie where there is a 'dog leg' in the dividing line.

In one case, the court held that a property (P1) qualified as a house where it was joined to its neighbour by a party wall which was several stories higher than P1.[8] The argument that the extended party wall created an 'overhang' was rejected.

Designed or adapted for living in

Whether a building is designed or adapted for living in involves a consideration of its function based on its physical characteristics. 'Adapted' does not have a technical meaning, and just means 'made suitable'. The question of whether a building is a house is to be determined by reference to its actual current use.[9]

Shops

Shops with accommodation above can reasonably be described as houses for the purpose of the Act provided that a material part of the building was designed or adapted for and used for residential purposes.[10]

In one case,[11] the Court of Appeal held that a building comprising a flat above a shop was a house 'reasonably so called' even though works to the building had removed the internal connection that originally existed between the flat and the shop. The Court also held that just because a building is most commonly referred to as a 'shop', this did not preclude it from being a house under the provisions of the Act.

Ancillary premises

A property that is ancillary to another, such as a shed, is excluded from the rights given by the Act.[12]

Commercial property

A property predominantly used for commercial purposes, such as offices, is not a house even if it looks like a house, or is referred to as a house for other purposes (such as for English Heritage listed buildings). Nor is a property, originally designed for living in and then adapted for commercial purposes, a house unless it is subsequently re-adapted for living in as a house.

Dilapidation does not prevent a property being a house.[13] The terms of the lease and the original purpose of the building maybe taken into consideration but are less important factors than the actual use of the building.[14]

Meaning of 'living in'

'Living in' means more than staying in, so a self-catering hotel let to tourists would not be a house 'reasonably so called' but a similar building letting rooms to students for longer term occupation could be.[15]

Hostels

It has been held in the County Court that a property could not be both a hostel and a house: the two terms were mutually exclusive. The description offered by the lease – of the property as a hostel – was of material significance as the lease pre-dated the 1967 Act.[16]

Lease must be for 21 years or more

The lease must be for a fixed term of 21 years or more, whether or not it can be terminated before the end of the fixed term by notice by the leaseholder or by forfeiture. It will still qualify if the lease has less than 21 years left to run but was originally longer.

Let at a low rent: lease extension only

The requirement for the property to be at low rent does not apply to enfranchisement but does apply to an application to extend the lease.[17]

For lease extension, the property must have been let at a low rent.[18] The definition of a low rent depends on the date the lease was granted.

The lease must be at a low rent for the whole of the two years of the qualifying period, if applicable and at the time the leaseholder notifies the freeholder of their intention to extend the lease:

• for leases granted before 1 April 1990 or where a contract was entered into before 1 April 1990, the rent should not exceed two thirds of the rateable value

• for leases granted on or after 1 April 1990, the rent must not exceed £1,000 per year in Greater London and £250 per year elsewhere

• in addition to the above, for leases granted between the end of August 1939 and the beginning of April 1963, the original rent should not exceed two thirds of the original letting value. The letting value is the best annual return that would have been obtainable in the open market for the grant of the lease

Certain leaseholders are excluded from both enfranchisement and the right to extend the lease. These are:

• leaseholders of charitable housing trusts[19]

• where the letting is an agricultural holding [20]

• shared ownership leaseholders who paid premium of no less than 10% of the value of the house [21], where there is a provision in the lease for the freehold to be transferred to the leaseholder (usually on the purchase of the remaining shares) or where the property is in a designated protected area[22]

• leaseholders whose landlord is a specified body who will require the land within ten years for redevelopment[23]

Enfranchisement only

Some properties transferred for the avoidance of inheritance tax on condition of public access are excluded from the right to enfranchisement.[24]

Lease extension only

The following are unable to acquire a lease extension but qualify for enfranchisement:

• some long leaseholders whose leases are terminable by notice after a death or marriage or civil partnership[25]

• leases with a high rateable value[26]

Leases with a high rateable value

Leases with a high rateable value are excluded from the right to extend the lease, but not from the right to buy the freehold.

For leases created since rates were abolished, a high rent test is substituted. The rateable value limits are related to the rateable value on the 'appropriate' day, which is 23 March 1965, or a later date if there was no rateable value on the register at this date.[27]

A lease has a high rateable value if it was created:

• on or after 1 April 1990 where the annual rent (which is worked out on the basis of a formula) is more than £25,000 per year

• after 1 April 1990 and the rateable value exceeds £400 in Greater London or more than £200 elsewhere on the 'appropriate day'

• after 18 February 1966, the 'appropriate day' is on or after 1 April 1973, and the rateable value exceeds £1,000 (London) and £500 (elsewhere)

• on or before 18 February 1966, the 'appropriate day' is on or after 1 April 1973, and the rateable value exceeds £1,500 (London) and £750 (elsewhere)

Residence requirement

The residence requirement was removed by the Commonhold and Leasehold Reform Act 2002, but preserved where part of the premises are sublet on a long lease, and for certain business tenancies.[28]

Where it applies, the residence period is two years or periods amounting to two years in the last 10 years.

In limited circumstances, the freeholder may be able to prevent extension or sale. These are:

• if the leaseholder gives notice of their wish to enfranchise or extend the lease, the freeholder can apply to the court before the notice takes effect to get an order that they can resume possession, as they needs the property for themselves or a member of their family[29]

• where the lease has been extended or the leaseholder has applied to extend, the freeholder may be able to reclaim possession either during the last 12 months of the original lease or during the 50 years extension. They would have to apply to the court and prove that they need the property for the purposes of development (such as demolition or reconstruction). Compensation would be paid to the leaseholder[30]

To buy the freehold of a house, the leaseholder must serve a notice in a prescribed form[31] on the freeholder of their desire to purchase. This places a contractual obligation on the freeholder to sell it to the leaseholder.[32] The freeholder must reply by serving a notice within two months stating whether they accept the leaseholder's right and, if not, the grounds for objection.

The leaseholder can withdraw from the right if the price is not agreeable and must do so within one month of the price being set but will not be able to apply again for 12 months.[33] The leaseholder is still liable for the freeholder's costs and may be liable to pay compensation to the freeholder if the claim has affected their power to dispose of the premises or any neighbouring premises.[34]

The cost of buying the lease varies depending on whether or not it has already been extended, how long it has left to run and the market value of the property with the leaseholder in residence.[35] Valuations can be obtained from a qualified surveyor. If there is a failure to agree a price, then the price can be fixed by the First-tier Tribunal (Property Chamber).[36]

In practice, it is usually necessary to employ a solicitor or licensed conveyancer in order to complete the procedure. Conveyancing covers the legal work involved in transferring ownership of a property from the seller to the buyer. It includes checking the documents confirming ownership, Land Registry and local authority searches, and preparing the contract for the sale.

The legal costs of both sides of using a solicitor or conveyancer are payable by the leaseholder.

The procedure for extending the lease is similar to that for buying the freehold.

The leaseholder must serve a notice in the prescribed form[37] on the freeholder who must serve a counter-notice.[38] The freeholder must then grant a new lease of 50 years plus the amount of years left on the existing lease. The new lease replaces the original lease and the terms should be basically the same as the original lease.

An application to extend the lease can only be made before the original lease expires.

The new ground rent is determined according to what would be reasonable at the time of the extension, and can be reviewed after 25 years.[39] If there is a disagreement, the rent can be determined by the First-tier Tribunal (Property Chamber).[40]

In practice, it is usually necessary to employ a solicitor or licensed conveyancer in order to complete the procedure of extending the lease. The costs of both sides are payable by the leaseholder.