What is collective enfranchisement?
Collective enfranchisement is the process by which leaseholders in a building obtain the freehold of their leasehold property by exercising their right to “collectively enfranchise” under the Leasehold Reform Housing and Urban Development Act 1993 (‘the 1993 Act’).
Why collectively enfranchise?
There are a number of benefits for the leaseholders, including:
- They can grant themselves extended leases of 999 years, with a peppercorn ground rent.
- They can gain control of the management of the building.
- They can put right any defects in their leases.
Checking Eligibility
The first step is to check that the premises will qualify for collective enfranchisement. There must be:
- At least two flats in the building.
- At least two-thirds of the flats are held on long leases (of 21 years or more).
- Not more than 25% of the building is for non-residential use.
- At least 50% of the flats in the property, must agree to collectively enfranchise.
- The building must be part of a building or a self-contained building
How much will the premium be?
Before you serve the initial notice, you should obtain a valuation from a qualified surveyor who specialises in providing collective enfranchisement valuations.
We would suggest that this should be your first step when you think about enfranchisement so that you know how much it is likely to cost and can make appropriate funding arrangements. It is also important because you have to offer to pay a realistic sum to purchase the freehold in your notice otherwise you could invalidate the notice.
Procedure
The Initial Notice
The right to collectively enfranchise may be exercised by no less than half of the qualifying tenants to long leases in a building acting together in serving an initial notice, under section 13 of the 1993 Act. If you don’t have enough support from your neighbours – the enfranchisement is not going to proceed and so it is important to establish this before you go ahead.
*TOP TIP – before you serve the initial notice, you should get all of the participating tenants to sign a ‘participation agreement’ which states that they are committed to the process and will share the costs involved.
The initial notice should identify and show on an accompanying plan:
(i) the building in which the flats are situated
(ii) any areas of property other than the building that the tenants use and want to acquire including the common parts (i.e. garages, gardens, parts of an estate, accessways etc).
(iii) any property over which the tenants want a right but don’t necessarily want to own – for example, a car park shared with other buildings on the same estate
This is worth thinking about before you instruct a solicitor – particularly where your block is part of a larger estate with shared areas.
The notice will also need to specify the ‘nominated purchaser’ of the property which is explained below.
One thing to note is that from the point that you serve the notice, you become liable for some of the Landlord’s costs for dealing with it. These costs can escalate quickly if you get your notice wrong.
You should instruct an experienced Leasehold Enfranchisement solicitor to draft the notice for you as the legislation is complex and there are a number of potential pitfalls.
Nominated Purchaser
The participating tenants are required to state in their notice who will own the property when it is transferred to them on completion. This is known as the ‘nominated purchaser’.
On completion, the nominated purchaser will be the owner of the freehold and responsible for all the landlord’s obligations to the tenants under the leases, and the management of the premises. It is up to the participating tenants as to who this nominated purchaser is. It can be an individual, one or more of the tenants, or another body.
Usually, the nominated purchaser is a company incorporated specifically for the purpose of holding the freehold, in which each participating tenant holds a share.
Landlord’ Counter Notice
The initial notice served by the tenants must specify a date, at least 2 calendar months after the notice has been served, by which the Landlord is required to have served a counter-notice.
The counter-notice will indicate whether or not the Landlord thinks that the leaseholders had the right to collectively enfranchise when they served their notice and which of the proposals in the initial notice the Landlord is willing to accept.
If the Landlord does not accept the terms proposed in the initial notice, they will set out their counter-proposals. The main point of contention between the parties is usually the price to be paid for the freehold interest, however, other issues can arise relating to the legal positions of the parties.
The Landlord could also serve a counter-notice not admitting the claim and this may mean that an application to the County Court is necessary to determine the outcome.
Negotiating the terms
Once the counter-notice has been served, the next step is to try to agree the terms of the acquisition of the freehold between the parties. The purchase price, and the terms of the transfer must be agreed, and a contract and transfer must be drafted and approved by the parties. This usually requires negotiation by your valuer in relation to the premium and by your solicitor in relation to the other terms of acquisition and the documentation.
Application to Tribunal
If the parties are unable to agree on the purchase price or the other terms of the transfer, then either party may apply to the First-Tier Tribunal (FTT) for a determination of the issue in dispute.
The application must be made within 6 months of the date that the counter-notice was served on the nominated purchaser. Otherwise the initial notice will be deemed to have been withdrawn by the participating tenants – but they will still have to pay the Landlord’s costs and they will be banned from serving another one for 12 months
Completion
Once the terms of the acquisition have been agreed (or ordered by the Tribunal), including the form of the contract and transfer, this matter will proceed as you would expect a normal purchase to.
The nominated purchaser will need to sign a contract and the deposit will need to be provided to the Landlord on exchange. A completion date will be agreed between the parties and on that day the transfer document signed by the nominated purchaser will be dated and completion funds will be transferred to the freeholder’s solicitor.
It is really important that you have funding in place from the offset because from the time that the terms of the purchase are agreed – you only have 4 months to transfer the money to the Landlord. This might sound like a long time but actually it goes very quickly!
Once the property has been transferred an application will be lodged to register that Transfer at the Land Registry and the nominated purchaser will be the new legal owner. You will then be able to manage the property as you see fit and grant 999-year lease extensions to the tenants that joined in.
If you are interested in collective enfranchisement, or you would like further advice in this matter, please contact one of our specialist Leasehold Enfranchisement team at Mayo Wynne Baxter. We are experts in the field and members of the Association of Lease Extension Practitioners (ALEP). Our team can provide advice you can rely on.