23 March 2023 by Alisha Patten

Development value in enfranchisement claims – what of hope…

Block of flats which leaseholders may acquire the freehold to through collective enfranchisment

Collective Enfranchisement is the right granted to leaseholders to acquire the freehold of their block.  The legislation capturing this is the Leasehold Reform Housing & Urban Development Act 1993.  The Act sets out rights subject to qualification and is not ‘fault based’.  This means that a group of leaseholders will have a right to acquire the freehold from their landlord where they satisfy the qualifying criteria.  There is no need to establish fault on the part of the landlord in the discharge of their obligations under the lease.

To qualify under the Act, the following conditions must be met:

  1. The claim must be made in respect of a self-contained building or a self-contained part of a building, with a minimum of two flats.
  2. At least two thirds of the flats must be let to qualifying tenants (which are essentially tenants holding long leases, originally granted for a term of at least 21 years with some exceptions).
  3. Any parts of the building used for non-residential purposes must not exceed 25% of the total internal floor area of the building.
  4. At least 50% of the flats in the building must participate in the claim, save that if there are only two flats in the building, they must both participate.

There are a number of factors which typically influence the price payable for the freehold, one of which being development value, or ‘hope value’.  This captures the ability on the part of the landlord to further develop the site and the compensation payable to them when a building is subject to enfranchisement.  This is a hugely contentious subject and one that impacts many of the claims that we deal with – not helped by the acute housing crisis and the need to encourage further development in whatever guise that might take.

The Law Commission published a report in January 2020 in which they set out options to reduce the cost leaseholders may have to pay when acquiring the freehold of their building.  These proposed reforms look to make the process of enfranchisement easier and more affordable, whilst ensuring sufficient compensation is paid to the landlord to reflect their legitimate property interests.  As a part of their wider proposals, the Commission looked at the question of development and hope value and how this might still be protected in the event of law change.  A potential solution would be for lessees to elect (at completion) for the registration of a restriction on the future development of their block.  Instead of paying development value should they wish to develop in the future, the leaseholders could then negotiate a release of the restriction with their former landlord at a premium.  It is difficult to envisage how this restriction might work, especially when you consider capital value, inflation, and the like.  It is likely that a mechanism to challenge would still be included in the legislation.

Despite the above, no substantive move toward primary legislation is evident.  It is important for leaseholders to consider development value ahead of making any claim since it is likely that, where evident, this could impact the price payable by many thousands of pounds.

If you have any questions about the Collective Enfranchisement process, please contact our specialist team.

 

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