Shamin Kashem: Buying The Freehold With A Resident Freeholder
Here Shamin highlights the situation that some leaseholders find themselves in when they want to buy the freehold but the freeholder owns and lives in one of the other flats in the block.
Different scenarios will be illustrated by starting off on the basis that the flat owner would not qualify because of the “resident landlord exemption” which is set out in s10 of the Leasehold Reform Housing and Urban Development Act 1993 (the 1993 Act).
Under the resident landlord exemption if the building was converted into no more than 4 flats by a freeholder who owned the building before the conversion then as long as that freeholder or an adult member of his family have lived in one of those flats for the preceeding 12 months as their only or principle home, the leaseholders in that building would not have the statutory right to claim the freehold.
The only way the leaseholders will have an opportunity to buy the freehold is if the freeholder is willing to sell it voluntarily. In that event it may not need to offer the freehold to all the tenants under “the right of first refusal” by s5 of the Landlord and Tenant Act 1987 (the 1987 Act) if the resident landlord exemption for that Act applies under s58(2) of the 1987 Act.
Hampered Under Both Acts?
Therefore the best option if tenants are hampered by the resident landlord exemption under both Acts, is for one or all of them to approach the freeholder beforehand to see if he is willing to dispose of his freehold. As a incentive, you may have to offer a bit more than you might otherwise have to under statute (plus a 999 year lease as well). The good news here is any one of the tenants can decide to buy the freehold off the landlord in their own name, without having to get a majority or all the others to join in.
Where there is no possibility of a voluntary purchase of the freehold, then the only alternative for the leaseholders is individual claims for a lease extension under s42 of the 1993 Act.
Resident Landlord Exemption Does Not Apply
If any of the factors that make the resident landlord exemption apply are not present, the leaseholders could then qualify and make a claim under s13 of the 1993 Act. So a group of leaseholders would qualify (even with a resident landlord) if, for example:
- The building is a conversion but contains more than 4 flats; or
- The building is a purpose built block of flats; or
- The building was converted to 4 flats, but not by the current freeholder who now resides in one the flats or;
- The building is a conversion but neither the landlord nor his family member(s) reside in one of the flats (e.g. it lets it out to a third party under an assured short hold tenancy).
So what if the leaseholders do qualify even with a building that contains a flat that is either owned (or possibly occupied) by the landlord?
The leaseholders have to offer a premium for the freehold. This is calculated by reference to the value of the reversion (freehold interest) of the flats in the building. Where those flats are let on long leases (more than 21 years), a specialist surveyor will calculate the premium payable to buy out the freehold of those flats. If the landlord’s flat is also owned under a long lease, the calculation will include an amount to buy out the freehold of that flat too. If the landlord’s flat is not owned under a long lease but it is still a part of the freehold, then the tenants must offer a price that includes the market value of that flat.
Imagine a building with 4 flats, 3 are let on long leases. The 4th is owned by the landlord, but not on a long lease. He is not resident there, (or perhaps he is), but it’s a purpose built block. That flat might sell on the open market for £300,000. When making a claim for the freehold, the leaseholders will need to put in an offer to reflect that market value. So if the premium to buy out the other flats comes to say, £30,000, the total amount that might be payable would be £330,000.
A landlord in receipt of such an offer has a choice when it replies with a counter notice under s21 of the 1993 Act. If it accepts that the leaseholders have a right to buy the freehold it can:
- Offer a price which includes what it considers is the appropriate market value of its flat,, the effect of which is that the landlord agrees to a price for the buiding including the flat and walks away on completion or;
- Elect to retain the flat, the effect of which is that the landlord sells the freehold to the building but keeps his flat, and is given a 999 year lease in return for selling the freehold to the whole building
If the landlord elects to retain the flat then the price of the freehold would be substantially less than offering an appropriate market price for the flat as he is not selling his flat but retaining most of the market value within the 999 year lease. So using the example above, the freehold might sell for say £35,000 in total, but the landlord would become one of the leaseholders.
Therefore before making a claim, leaseholders should be wary of what the consequences are if they proceed and to take valuation and legal advice beforehand.