As a freeholder, it is important to be aware of your legal responsibilities to your tenants, particularly when it comes to statutory processes such lease extension or collective enfranchisement. The law lays out strict steps that must be followed, while recent legislative change has introduced new rules that freeholders must abide by.

At Attwaters, our leasehold enfranchisement specialists are here to advise freeholders who are approached by tenants seeking to extend their lease or purchase the collective freehold of their building.

Lease extension

There are two ways a leaseholder might approach you to request a lease extension. The first is the formal, statutory route set out in the current leasehold legislation, which starts out with the leaseholder serving you with a Section 42 notice. The second is the more informal route, where the leaseholder gets in touch on an informal basis to see whether you’d be willing to offer them a lease extension.

The formal route

As mentioned above, the leaseholder will start the formal process by serving you with a Section 42 notice. When you receive one, you should instruct a solicitor to advise on the implications and validity of the notice. At Attwaters, we can also recommend a professional surveyor to assist in valuing the freehold and ensure that the leaseholder’s proposed premium is realistic and sufficient.

The next step will be to serve your counter notice on the tenant, proposing your suggested premium based on your surveyor’s advice. This may be higher than the leaseholder’s initial proposal, as they will often offer a lower amount to commence negotiations.

Your solicitor will then negotiate with your tenant’s solicitor in order to reach a premium that is acceptable to you both. They will then assist you in drafting the new lease, ensuring that the terms protect the freehold and that it includes all matters that are required under the lease extension process. There might be some back and forth with the tenant’s solicitor with proposed amends, but once agreed the lease extension will be completed. Your solicitor will then collect the premium and legal fees owed to you by the tenant, as the tenant is required to pay your legal and surveyor’s fees under the statutory process.

The informal route

Your tenant may also approach you more informally, to see whether you would be willing to give them a lease extension. As they are not taking the statutory route, whether or not you grant it is entirely up to you. There are several options for freeholders in this situation; they could:

• Grant a statutory lease extension – i.e., an extension of 90 years at zero ground rent – but on an informal basis. In this case, your solicitor would obtain surveyor’s advice on your behalf to suggest a realistic premium for the tenant to pay. Please note that the law does not require you to grant your tenant these terms, as they have chosen not to take the statutory route.
• Grant a lease extension for a duration of your choosing – if the lease extension is granted, then the ground rent you’re currently charging would apply for the remainder of the original term, after which the ground rent must be set to a ‘peppercorn’ – i.e., zero, by law. So, if you extend a lease with 82 years remaining, you can continue to charge ground rent for that 82 years. Only after this will zero ground rent apply.
• Not grant a lease extension at all – you could offer the leaseholder a deed of variation instead. This can be used to vary the years remaining on the lease, the ground rent amount, or both. The key advantage to a deed of variation is that, unlike a lease extension, it allows you to continue charging ground rent for both the existing and extended term.

Selling your freehold interest

There are two main ways of selling your interest in a building’s freehold to your tenants. The first is a statutory process called collective enfranchisement, which must be initiated by a group of flat owners. The second is simply a case of you deciding to sell up – in which event, you must be aware of the right of first refusal.

Collective enfranchisement

The first you will likely know of the collective enfranchisement process is when you are served with an Initial Notice, otherwise known as a Section 13 notice. It will tell you, among other details:

• The names of the tenants involved in the collective enfranchisement process
• Details of the building they would like to purchase the freehold of
• Their grounds for the claim (i.e., evidence that they fulfil the eligibility criteria)
• How much they are proposing to pay
• The date by which you must serve your counter notice.

It is advisable to instruct a solicitor as soon as possible after receiving the notice, as you will have two months to respond to the tenants’ Initial Notice. Your counter notice will detail whether or not you accept the claim and, if you do not, why you believe it to be invalid. If you do accept, you may or may not dispute the premium and terms of the claim. Your solicitor will be able to advise you of the validity (or otherwise) of your tenants’ claim and provide guidance on how to proceed.

The right of first refusal

If you decide to sell your interest in the freehold of a building, the law states that you must offer to sell it to your tenants before you can sell it on the open market. This is called the right of first refusal, or RFR. For the building to qualify, it must contain at least two flats, at least 50% of the flats must be owned by ‘qualifying tenants’ – i.e., those who bought their properties on a long lease of at least 21 years – and no more than 50% of the block must be given over to commercial use.

To kick off the RFR process, you must serve a notice on the tenants to notify them that you are planning to sell your interest in the freehold and the price you are willing to accept. Or, you may sell the property via an auction process, which you must invite the tenants to attend.

Your tenants may not be interested in purchasing the freehold, in which case you can go ahead and sell it on the open market. By law, however, you are not permitted to sell it for less than the premium you offered your tenants for at least 12 months.

As opposed to the collective enfranchisement process, your tenants won’t be able to dispute the premium you have put on the table – they must either accept or reject. If they do accept, your solicitor will assist you in drawing up a contract for your tenants to sign, and collect the premium on your behalf.

Working with freeholders for over a decade

Our leasehold enfranchisement specialists have been working with local freeholders and management companies for many years and have vast experience in all matters relating to this area of the law. For assistance with your legal matter, please call our lawyers on 0203 871 0039 or email leasehold@attwaters.co.uk.