This case study is based on a real instruction. Names, addresses and identifying details have been changed, and figures rounded, to protect client confidentiality.
The building
A four-storey parade building in Surbiton: a retail unit at ground floor let on a commercial lease with around nine years unexpired, and five residential flats above, each held on a long lease with 81 to 84 years unexpired.
Four of the five leaseholders wanted to buy the freehold. They had approached another firm first and been told the building probably did not qualify.
The qualification problem
Under section 4 of the Leasehold Reform, Housing and Urban Development Act 1993, a building is excluded from collective enfranchisement if the internal floor area of the non-residential parts exceeds 25% of the internal floor area of the whole building, disregarding common parts.
The freeholder’s agent asserted 27.3% and refused to engage. That single percentage point of margin was the difference between a valid claim and no claim at all.
Where the measurement went wrong
We carried out a full measured survey of every floor, including the flats, the retail unit, the basement and the circulation areas. Three errors emerged in the freeholder’s figure:
- The basement. The agent had included the whole basement as commercial. In fact, roughly a third of it comprised a bin store, meter cupboards and a boarded storage area accessible from the residential stair and used by the flats. That part was either residential or common parts, not commercial.
- The common parts. The entrance lobby and stairwell serving the flats had been counted into the total building area rather than disregarded. Section 4(1) requires common parts to be excluded from the calculation entirely, which changes the denominator.
- The measurement basis. Areas had been scaled from an old marketing plan rather than measured, with an external rather than internal basis applied to the retail unit.
Measured properly, on a consistent internal basis and with common parts disregarded, the non-residential proportion was 22.4%. The building qualified.
Valuing a mixed-use freehold
The premium calculation for a mixed-use building has an extra layer. Alongside the residential elements — capitalised ground rents, deferred reversions and, where leases are under 80 years, marriage value — the freeholder is also being deprived of a commercial investment.
That commercial interest is valued as an investment in its own right: the passing rent capitalised at an appropriate yield, with regard to the covenant strength of the tenant, the unexpired term, the review pattern and the reversionary prospects. Here the shop was let at £24,500 per annum on a full repairing and insuring lease with nine years unexpired to a regional operator with accounts we could examine.
| Element | Freeholder’s claim | Settled |
|---|---|---|
| Commercial investment value | £286,000 (8.0% yield) | £258,000 (9.0% yield) |
| Capitalised residential ground rents | £7,900 | £7,100 |
| Deferred reversions (5 flats) | £51,000 | £44,800 |
| Marriage value | Nil — all leases over 80 years | Nil |
| Total premium | £344,900 | £309,900 |
The yield was the main battleground. A secondary suburban retail unit with under ten years unexpired, in a parade with two vacant units at the time of valuation, does not trade at a prime yield. We evidenced the point with local investment transactions rather than published indices.
The outcome
The claim completed at £309,900. The participants now own a freehold that includes an income-producing shop — which, handled properly, contributes towards the building’s running costs and gives them control over an asset that had previously been a source of friction over service charges and repairs.
A note on the coming reforms
The Leasehold and Freehold Reform Act 2024 will raise the non-residential limit from 25% to 50%, which would bring a very large number of shop-and-flats parade buildings into scope for the first time. That provision is not yet in force. Buildings that fail the current test may qualify in future; buildings that pass it today can proceed now.
Frequently asked questions
Can leaseholders above a shop buy the freehold?
Yes, provided the non-residential internal floor area does not exceed 25% of the building, disregarding common parts, and the other qualifying conditions are met. Many mixed-use buildings that appear borderline do in fact qualify once measured properly.
How is the 25% non-residential test calculated?
It compares the internal floor area of the non-residential parts with the internal floor area of the whole building, with common parts left out of both figures. Areas should be measured on a consistent basis, not scaled from marketing plans. Storage, plant and bin areas serving the flats are not commercial space.
Does the shop tenant have to agree?
No. A commercial tenant has no right to participate in or object to a collective claim. Their lease continues on the same terms, with the new freehold company becoming their landlord.
Not sure whether your building qualifies?
Qualification is worth checking properly before you accept a “no”. Blakes Chartered Surveyors carry out measured surveys and qualification assessments for mixed-use buildings across London and the South East, and act for freeholders as well as leaseholders.
Call 020 7373 7373 or email info@blakessurveyors.com.
