Posted by Caroline Preist, Partner
Leasehold enfranchisement of residential flats – in a nutshell
Leasehold enfranchisement is the legal principle which empowers residential flat owners to preserve the value of their flats, to take over management of their building, and even ownership of the freehold. In the case of residential flats, the rights are granted by the Leasehold Reform (Housing & Urban Development) Act 1993 and the Commonhold and Leasehold Reform Act 2002.
Leasehold enfranchisement gives three options to owners of residential flats:
- Collective enfranchisement, which is the legal right for a majority group of residential flat owners to force the freeholder to sell them the freehold of the building containing their flats.
- The Right to Manage, which enables a majority group to take over management of the building containing their flats. The landlord’s obligation to repair and insure passes to the majority group, without having to purchase the freehold asset.
- Lease extensions, where individual flat owners have the right to require their landlord to grant them a lease extension of 90 years. In addition ground rent will cease to be payable once the lease extension is granted.
There are related rights benefiting owners of leasehold houses, set out in the Leasehold Reform Act 1967.
Why is it relevant to flat sales?
It can be a solution to problems that hold up sales. Although not always a quick fix, sometimes it can help to educate potential purchasers that they will have options to address any problems discovered in the purchase process. This can help smooth over their concerns and speed up transactions.
How can leasehold enfranchisement assist?
- The short lease: a short lease can prevent buyers getting a mortgage, making the flat difficult to sell. Lenders’ requirements vary but generally speaking, any lease below 85 years can create problems for buyers trying to obtain a mortgage. The shorter the lease becomes, the harder it will be to obtain a mortgage. In addition, buyers’ solicitors may advise their clients to renegotiate the sale price to reflect the expected cost of a lease extension. A lease extension can be managed so that the sale is not delayed at all, if the seller serves notice and transfers it to the buyer. Alternatively, sometimes deals can be done between seller, buyer and landlord and the lease extension and sale happen together.
- Service charge/poor block management issues: common problems of high or disputed service charges can be tackled by groups of flat owners by exercising the Right to Manage. Usually these problems result from a perception of poor management by the existing landlord. Collective enfranchisement or a Right to Manage claim will give the reins to the majority group to see if they can do better.
Leasehold enfranchisement will not be available or appropriate in every case, and should be viewed in conjunction with flat owners’ other rights. We would always recommend that sellers and buyers take independent legal advice on the options available to them.
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