Last week's article looked at the topic of freehold and leasehold estate which appears in the syllabus of every one of the CeMAP papers. This week's article completes the look at this topic by considering the legislation that the government has introduced to bring about leasehold reform.
The first of the two Acts to consider within the context of CeMAP is the Leasehold Reform, Housing and Urban Development Act 1993. Under this Act, a residential leaseholder has a statutory right to either extend their lease by up to 90 years or to buy the freehold interest. The amount that a freeholder is able to charge a leaseholder for the freehold interest is limited. The details are set out in the legislation but these go beyond the CeMAP syllabuses and so will not be covered here. Students should note that the Act allows the extension of leases by up to 90 years and not 99 years which is a common mistake made when answering questions on this topic.
In order for the above to apply the lease in question must be a residential lease that was originally granted for a term of more that 21 years. Again, students should note the precise terms of the legislation – that the lease should have been granted originally for a term of more than 21 years. Common mistakes when answering questions on this topic include suggesting that there must be at least 21 years remaining on the lease. This is not correct.
Two other points contained within the 1993 Act were amended by The Commonhold and Leasehold Reform Act 2002 which will be considered shortly. As these points have now been changed it is less likely, but certainly not impossible, that questions on them will be included in the examinations. However, for completeness, and because they are mentioned in the IFS's CeMAP study manuals for papers two and three and the bridge paper, these two further points are mentioned here.
The first is that if the lease applies to a development of flats there must be no more than 10% of the floor space used for commercial purposes. This applied, for example, to leasehold flats above a row of shops. Also, again in respect of flats, if the owner of the lease of a flat wished to buy the freehold then two-thirds of the other qualifying tenants in the same development must have agreed to do so.
In general terms, a 'qualifying tenant' is defined as a tenant who has occupied the flat as their principal residence for the past 12 months or for three out of the past 10 years, and where the lease was originally granted for a term of more than 21 years.
The Commonhold and Leasehold Reform Act 2002 made changes to some of the provisions contained within the Leasehold Reform, Housing and Urban Development Act 1993. These changes were designed to make it easier for leaseholders of flats to collectively purchase the freehold of their building.
First of all, the qualifying tenant requirement, mentioned above no longer applies. Neither is it any longer necessary for at least two-thirds of tenants to agree to the purchase of the freehold. However, it is a requirement that at least two-thirds of the flats must be held on a long lease i.e. a lease that was originally created for more than 21 years. Furthermore, the building must contain two or more flats and no more than 25% of the internal floor area of the building (excluding common areas such as stairs and hallways) must be for non-residential use.
Finally, leaseholders cannot purchase the freehold of their building if it is a converted property with four or fewer flats or if the lease is for commercial purposes, or if flats have been sub-let on a long lease, or if the leaseholder(s) own the lease of more than two flats in the building.
All of the above may be rather a lot to digest at one read and, like so many areas of the CeMAP syllabus, students will need to re-read and revise the subject matter a number of times to ensure good knowledge and understanding.
As mentioned at the beginning of this article, students would be well advised to master the main points regarding these two pieces of legislation so far as they relate to the rights of leaseholders, as the subject could arise in the examinations for any of the CeMAP papers.
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