Tag Archives: collective enfranchisement

What is a ‘leaseback’?

Leasebacks and enfranchisement 

Where there are areas in a building that are not subject to a long lease, when a claim to the freehold is made, the freeholder may have certain rights of ‘leaseback’ – that is to say the right to ask for a 999 year lease of these areas.

This means that when the freehold purchase completes, the former freeholder gets back a lease of the area(s) in question for a term of 999 years at a peppercorn (nil) ground rent. He effectively becomes the tenant of the new freeholder (usually a company set up for this purpose), but keeps ownership of the area (such as a flat) that he previously had outright ownership of by virtue of owning the freehold.

In certain circumstances the right of leaseback is mandatory (particularly where there is a secure tenant and the landlord is a local authority). In other cases the landlord has the right to ask for a leaseback in his counter notice, but the option is there for the landlord not to take the leaseback.

If the landlord fails to ask for a leaseback in his counter notice then he will have lost the right to insist upon one. There are a number of interesting cases on this subject and this may well represent an advantage to the flat owners, either as a negotiation tool, or as a way of saying ‘goodbye’ completely to their former landlord.

For flat owners looking to enfranchise, leasebacks are therefore a useful tool. If there is a flat held ‘in hand’ by the landlord and not owned under a long lease, then (provided the rest of the building qualifies) they can avoid having to pay to buy the flat in question as well as the freehold.

Whilst the freehold cost itself may not be that significant (comparative to other property values), the cost of buying in a flat will naturally run into hundreds of thousands of pounds. This might otherwise be a possible barrier to the flat owners buying the freehold.

There are a number of solutions that can be deployed if this issue arises. For instance, one or more of the flat owners might choose to invest in purchasing the flat or unit in question. Another option might be that an outside investor can be found who will purchase the interest.

A third option is that (if as described above) the freeholder chooses to take up their right to a ‘leaseback.’ Whilst the freeholder may not be happy to lose their freehold, at least under this route they keep their rental (or other) investment and the enfranchising flat owners get the advantage of having the price reduced by the exclusion of this area.

In practice, these arrangements can be complex and there may well be a number of other considerations to be gone through (not least of which is whether the building qualifies). To qualify, the building must be at least two thirds let out on long leases. In addition, not more than 25% must be used for non-residential purposes. The right of leaseback can therefore also be used where there is a commercial element that is not already let out on a long lease.

The possibility of using the leaseback provisions in the 1993 Act therefore represents a real opportunity for those seeking to buy their freehold in circumstances where this might not be otherwise possible.

Should we go for the freehold or exercise the Right to Manage ?

This can be a potentially confusing choice for a collective of flat owners and depends on what exactly the likely participants want to get out of the process. It is important to get this right at an early stage in a collective action so as to avoid a lot of wasted time and effort in the early part of the process.

In short, the answer depends on what you want to get out of the process and what the key motivating factor(s) for pursing some sort of collective action are.

Do you have only management issues?

If your main objective is to deal with only the issues arising out of the management of the block, then the ’Right to Manage’ may be more appropriate.

How long are your leases?

If some or all of the leases in your block are short then there is likely to be a higher capital cost to buying the freehold and also funding non-participating flat owners. This is can be a potential ‘deal breaker’ for a freehold purchase if those taking part cannot (or do not want to) fund the non-participating flat owners and outside funding cannot be found (or is not wanted).

If there are a variety of lease lengths then there may also be issues as those with shorter leases will have to pay more to take part and this disparity may be a barrier to getting a freehold purchase started.

In such a case, then Right to Manage, (possibly followed by lease extensions for those that are interested) could well be the best way forward.

Longer leases, but management an issue?

Normally, if the leases are ‘long’ then there may be less of an incentive to pursue the freehold. However, if the building’s management is an issue then provided that there is a good level of participation and that the capital cost per participant is not too high, then buying the freehold may well be the better option.

This is because the transactional process in terms of cost and timescale may well be similar for freehold purchase and the right to manage. As such, freehold may be a better result as the ownership (as well as control of the landlord functions under the leases will change).

As always these sorts of decisions need to be made on a ‘case by case’ basis however, the above may well prove a useful starting point for discussion. Appropriate advice from a suitably qualified professional should be sought when making any group decision about the relative merits of freehold purchase or right to manage.