We advise in the areas of enfranchisement, pre-emption rights, party walls and Land Compensation Act issues, and also handle disputes concerning professional negligence and breach of contract arising in the property sector. This blog post and guide however, is all about Collective Enfranchisement!
The government is trying to make it easier and cheaper for leaseholders to go about buying their freehold property. At the moment, it’s sadly easy for unscrupulous lawyers and landlords to frustrate claims on technicalities and rack up fees. At the time of writing, the government consultation is still under way. If you’d like to read where Parliament currently is with the reforms, please read here.
Collective Enfranchisement gives the right for a collective of tenants in a block of flats who act together to buy the freehold property, and any headleases* of that building. In order for the building to qualify under the Leasehold Reform and Urban Development Act 1993, it must:
- be an independent building or be a part of a building which is capable of independent development; and
- contain two or more flats held by qualifying tenants; and
- have at least two thirds of the flats held by qualifying tenants.
In order to be a qualifying tenant, you must have a long lease which means a lease which, when originally granted, was for a term of more than 21 years. However, you must not own three or more flats in the building.
- they hold a long lease, i.e., a lease with an unexpired term of at least 21 years (when granted); or
- a shorter lease which contains a clause providing a right of perpetual renewal; or
- a lease terminable on death or marriage or an unknown date; or
- the continuation of a long lease under the Local Government Housing Act 1989 following the expiry of the original term; or
- a shared ownership lease where the tenant’s share is 100%.
You cannot be a qualifying tenant if you hold a business lease. Aside from the above, the building will not qualify if:
- it comprises four or less units and has a “resident freeholder”;
- more than 25% of the internal floor space (excluding common parts) is used for non-residential purposes;
- the building is part of an operational railway.
*Headleases are leases held directly from the freeholder and subject to one or more underleases.
Any qualifying tenant can give a notice to his landlord or the managing agent asking for details of the various legal interests in the block. This notice places no commitment on the tenant to actually do anything, but the response to the notice should provide that tenant with the information necessary for them to ascertain whether the building contains a sufficient number of qualifying tenants for it to qualify. It’s the small questions that offer the big answers often!
Having established that the building qualifies, it is then advisable to work out whether you have a sufficient number of tenants who actually want to participate in the process, both for the purpose of qualifying for enfranchisement and for the purpose of being able to finance the acquisition. In order to qualify for enfranchisement, you need to establish that the number of participating tenants comprises not less than one half of all the flats in the building. However, if there are only two flats in the building then both must participate.
Next tick box is when you have established that the building qualifies and that there are a sufficient number of qualifying tenants who want to get involved, then… there are five further practical steps which should be taken before embarking on the enfranchisement procedure!
First, you need to establish what the process is going to cost by obtaining a valuation. In simple terms, the price to be paid by the participating tenants to purchase the freehold of the building is the aggregate of:
- the building’s investment value to the freeholder – the capitalised value of their ground rents and the value of their reversion (being the present freehold vacant possession value deferred for the unexpired term of the leases);
- one half of the marriage value – the increased value attributable to the freehold by virtue of the participating tenants being able to grant themselves extended leases at nil premium and a peppercorn rent; the marriage value attributable to a lease held by a participating tenant will be deemed to be nil if that lease has an unexpired term of more than 80 years at the date that the initial notice is given;
- compensation for loss in value of other property owned by the freeholder, including development value consequent to the severance of the building from that other property.
The valuation date is the date that the claim notice is given. Value added to the flat of a participating tenant by tenant’s improvements is disregarded in the valuation.
For the purposes of calculating a price, the tenants should take the advice of a properly qualified surveyor or valuer with experience in the field of enfranchisement and knowledge of the market. If you’d like us to recommend someone in your area, please don’t hesitate to ask us!
In addition to the price and the participating tenants’ own legal costs and valuation fees, the claimants will be required to reimburse the freeholder his legal costs and valuation fees.
Secondly, the participators will need to establish how to finance the cost of acquisition. It may, for example, be necessary for a number of participating tenants to seek a further advance from a Building Society or Bank. In particular, the participators will want to decide who is to finance the purchase of the non-participators’ flats and on what basis.
Thirdly, it will be necessary to establish what way the participating tenants should use in order to buy the freehold and how they will establish and regulate the relationship between themselves. In most cases, this is likely to be through a company structure, although in some circumstances a trust might be more appropriate. It should be noted that the participating tenants do not all have to have equal shares, so that the proportion of the shareholdings will be a matter for negotiation between them. We’ve worked with groups that enter into a formal participation agreement amongst themselves covering issues such as; rights of voting, the negotiation and agreement of terms, individual tenants’ financial contributions and the right for the leaseholders to obtain new long leases from the freeholder after the purchase.
The Commonhold and Leasehold Reform 2002 Act provides for collective claims to be made through the mechanism of a Right to Enfranchise (RTE) company. However, those provisions have never been brought into force and it is unlikely that they will be. You never know!
Fourthly, the participating tenants should seek advice to establish whether there are tax implications to the transaction, both in relation to their individual positions and in relation to the way they have chosen to buy the freehold.
Finally, the collective enfranchisement legislation provides no guidance or controls on the way in which the participating tenants should work together in order to acquire the freehold. Since the purchase may well involve substantial sums of money and is likely to take time to complete and, during this time, the participating tenants will be heavily reliant on each other for the performance of tasks within strict limits, it is strongly advised that, before embarking on a claim, the participating tenants should enter into a formal agreement (called a participation agreement) in order to regulate the relationship between them during the course of the claim.
It is important to be aware that most of the time limits imposed on the procedural stages of the claim are strict and a failure to do something within the required time frame can have dire consequences for the defaulter. We would always recommend that by the time you reach the next stage of the procedure, you are well organised and backed by expert professional advice. Why? Because the next procedural step is the service on the landlord (by the participating tenants) of what the Act calls the “initial notice”; the notice which claims the right to collective enfranchisement. Costs start to run against the tenants from the time they serve the initial notice, so be warned!
Amongst other things this notice must specify:
- the extent of the property to be acquired – supported by a plan;
- full particulars of all the qualifying tenants in the building – not just the participating tenants;
- the price being offered for the freehold – the offer should be genuine;
- the name and address of the nominee purchaser – the person or
company nominated by the participating tenants to conduct the
negotiations and to buy the freehold on their behalf;
- the date by which the freeholder must give his counter-notice,
being a date not less than two months from the date of the service of the initial notice.
The freeholder is likely to respond with a procedural notice requiring the participating tenants to deduce title. The freeholder’s valuer is also likely to inspect the building for the purpose of carrying out a valuation.
Within the period specified in the initial notice, the freeholder must serve his counter-notice. First and foremost, this must state whether or not the claim is admitted. If it is not, then the participating tenants must decide if they wish to dispute the rejection through the courts.
There are circumstances where the freeholder can resist a claim on the ground of redevelopment.
If the claim is admitted, then the counter-notice must state, amongst other things:
- which of the proposals contained in the initial notice are acceptable;
- which of the proposals contained in the initial notice are not acceptable and what are the freeholder’s counter-proposals – particularly on price;
- whether the freeholder wants a leaseback on any units in the building not held by a qualifying tenant (for example, a flat subject to a short-term tenancy or a commercial unit).
If any terms of acquisition (including the price) remain in dispute after two months following the date of the counter-notice, then either party can apply to the First-tier Tribunal (FtT) for the matter in dispute to be determined.
This application must be made within six months following the date of the counter-notice or the claim is lost. Most claims are settled by negotiation. If a FtT is required to make a determination, then there is a right to appeal that decision to the Upper Tribunal (Property Chamber) if permission is given to do so.
Once the terms of acquisition have been agreed or determined by the FtT, then the matter reverts to a conveyancing transaction with the parties entering into a sale contract on the terms agreed or determined and thence to completion.
If the matter proceeds to completion, then the participating tenants, through their nominee purchaser, will become the freeholder of the building, subject to the various flat leases. In effect, the participating tenants will replace the existing freeholder. This will put them in a position to grant themselves extended leases.
There may be taxation consequences on granting an extended lease, particularly for second home owners. That’s a whole other conversation!
There will also be responsibilities. The participating tenants will become responsible for the management of the building and the administration of the service charge account in accordance with the covenants in the original leases. It might seem convoluted, which is why we’d urge you to either speak to us as we truly want what’s best for all parties. If we continue with the theme of other responsibilities, If the nominee purchaser is a company, all participators will be shareholders and some will be officers of that company; yep, complex law but effective!
It is important to note that an individual tenant has no right to become a participating tenant – even if he is a qualifying tenant. Collective Enfranchisement means just that, it’s a “collective” and is a matter for the tenants to resolve between themselves regarding coming together. You can always ask to be allowed to join in, but you will have no legal comeback if refused. If a group does form without you – and does not need you – you may well find yourself left out.
As with many cases we work on, the team here at LMP law really recommend always communicating and being transparent in any situation.
Please do gather legal professional expertise if you are thinking of going through the process of Collective Enfranchisement. Do get in touch or with the one of my colleagues or myself if you’d like to learn a bit more, our door is always open.