How do leasebacks work?

When the freehold of the building is being acquired by the Nominee Purchaser, the existing Freeholder can insist that a leaseback of a flat or other unit within the building is granted in certain scenarios. This process is known as mandatory leaseback and can occur in the following situations as set out in the LRHUDA:

1. Flats let under a secure tenancy where the Freeholder is the tenant’s immediate landlord, or where the Freeholder and every intermediate landlord is a public sector landlord;

2. Flats let under a non-secure tenancy by a housing association.

If the scenario does not warrant a mandatory leaseback the existing Freeholder can, under the LRHUDA, request under a leaseback (i.e. an optional leaseback) of any unit within the building not being a flat let to a qualifying tenant and where the freehold of it is owned by the same person.

This request must appear in the Freeholder’s counter-notice to the Nominee Purchaser’s initial notice for collective enfranchisement. This scenario commonly occurs where the existing Freeholder lets a flat on an Assured Shorthold Tenancy and no long lease of the flat has ever been granted.

Optional leasebacks relate to the leaseback of ‘units’ as defined by s38 LRHUDA. The statute defines ‘units’ as either a flat, any other separate set of premises which is constructed or adapted for use for the purposes of a dwelling, or a separate set of premises let, or intended for letting, on a business lease.

In Merie Bin Mahfouz Company (UK) Limited v Barrie House (Freehold) Limited [2014], the Upper Tribunal (Lands Chamber) confirmed the following:

1. The ‘unit’ that the existing Freeholder is claiming a leaseback of must exist at the date of the nominee purchaser’s notice;

2. The existing Freeholder may not claim a leaseback of a ‘unit’ that was, or was included in, an area that was a common part of the building at the date of the Nominee Purchaser’s notice.

The terms of mandatory leasebacks are set out in the LRHUDA. Among other provisions they confirm that the term will be for 999 years at a peppercorn rent. However, an application can be made to the First-tier Tribunal (Property Chamber) to amend the terms if so required.

The terms of optional leasebacks are to be similarly construction but the provisions can be amended if agreed by the parties.