Freehold Sales under the 1987 Act – Is this a growing trend as Freeholders de-risk?
Mark Chick, Senior Partner and Joint Head of Landlord & Tenant at Bishop & Sewell considers the increase in disposals.
The Leasehold and Freehold Reform Act 2024 may have been passed into law by Parliament, but a considerable part of the Act is still awaiting commencement and will require secondary legislation before it can take effect. As such, the law with regards to leasehold enfranchisement is due to change, but hasn’t changed yet.
In anticipation of the new legislation, Bishop & Sewell has seen an increasing number of freeholders take steps to reduce their exposure to risk by divesting themselves of their freehold assets.
Ground rent reform is a real possibility, and its spectre has cast a shadow over the ground rent market. Larger portfolio owners of ground rents have been divesting themselves of some of their assets over the last few years as reform has become a real possibility, and we have seen increased use of the Landlord and Tenant Act 1987 (‘the 1987 Act’) to provide clearance prior to sale of freeholds, be that at auction or via a fixed price route.
A recent trend in disposals
Since the summer, we have seen a particular increase in the number of enquiries not only from flat owners who have been served with notices, but also from freeholders who want to take steps to sell now, before any changes take effect. In some cases, we have seen very significant reductions in price against values that we have seen quoted previously. Clearly, this is good news for tenants but less so for landlords.
Section 5A offer notices
Often, if a fixed price Section 5A offer notice is served, this is because a deal has been agreed with a third -party buyer. Therefore, if you are a flat owner and receive one of these notices (with a fixed price) then this is likely to mean that the freeholder wants to sell and has a buyer lined up. If you and others in your building wish to consider accepting this, then prompt action is needed as a majority (more than half) of the flat owners need to accept in two months, a time frame that can pass very quickly when you need to contact overseas and remote owners.
Section 5B offer notices
A Section 5B offer notice means that the property is going to auction. There are various hoops to jump through but if a majority act promptly and serve the relevant notices (acceptance, nomination and an election notice) then the flat owners will have the same rights as any successful bidder at auction. This means completing the purchase in 28 days, which can be no mean feat if there is a large number of flats.
What do offers like this mean?
Whilst each case is fact specific, a Section 5 disposal (auction or fixed price) represents a good opportunity to buy your freehold and will generally be much quicker (and usually cheaper) than using other enfranchisement rights under the Leasehold Reform Housing and Urban Development Act 1993. It also goes without saying that in larger cases, having a team that is experienced in dealing with the issues that arise in this sort of project is key to success.
There are other points to consider such as how the contributions will be structured and how the cost of those not taking part will be dealt with, along with tax issues and the corporate structure of the holding company used to buy the freehold. Our Corporate and Landlord & Tenant team is well versed in working together to help participants achieve what is needed in a short space of time.
Where are we now with the reforms?
In the world of leasehold reform, we have some further uncertainty as there are now at least two challenges to the legislation, and we also have the argument to be explored as to what a total ban on ground rent might mean – there was discussion that the compensation bill in such circumstances could run to £30BN. The new government is clearly looking to raise revenues and, we expect, might want to avoid an unexpected expense such as this.
A new leasehold bill
We also know that the government plans to introduce a new Commonhold and Freehold Reform Bill, which we do not have sight of. It is possible that this might have some aspects of ground rent reform rolled into it; a wider programme of reform to process and procedure may be introduced, however, we have no draft bill in sight. All of this means further delay and uncertainty.
The one thing that is certain is that if you are a flat owner and you receive a Section 5 notice, this probably represents an opportunity to buy your freehold (together with others) at what may well be a keen price. Likewise, if you are a freeholder and want to consider a disposal, now may be a good time, before we see a more definitive shift in values.
What next?
The government may well have decided that leasehold reform can wait while these tests play out in the courts and whilst it formulates its wider plans to rejuvenate Commonhold. We will watch how they react with interest, but in the meantime the market is making its own preparations, and we remain ready to advise.
Contact the experts at Bishop & Sewell
If you have a query concerning leasehold property, then please contact our expert Landlord & Tenant team.
Email: [email protected]
Call: 0207 7631 4141
The content of this article should not be considered legal advice, and each matter should be considered on a case-by-case basis.
