Collective Enfranchisement
Articles:
Collective enfranchisement is the term given to the process when owners of flats in a building wish to purchase the freehold.
One of the main reasons why tenants are keen to acquire the freehold is to be able to vary their leases and particularly to extend the number of years remaining. Generally speaking, a lease with less than 80 years left remaining has a depreciatory effect on its market value. Potential buyers may be put off by the shortness of the term, or want to pay less for the property by reason of it. Lenders may be deterred from taking the property as security for a loan. When a freehold is acquired, tenants who have participated in the process can agree to vary their individual leases for nothing.
By acquiring the freehold tenants can take control over the way the building is managed. They can say what repairs are carried out, when they are done and at what cost.
Lessees in a large block of flats enjoy economies of scale if they work together. Often, the price for the freehold is less than the total price to extend each lease in the block. Tenants wishing only to apply for a new extended lease will have to bear the cost of the process by themselves. Expenses are shared when tenants join to buy the freehold.
The price paid for the freehold comprises three elements; the market value, one half of the marriage value, and compensation if applicable. It is recommended that, at the outset, tenants instruct a Valuer to report on the “lowest and highest” valuations. The tenants will also be obliged to pay the landlord’s “reasonable” legal costs in addition to their own. However, in the long term, tenants will benefit by being able to extend the length of their leases, thereby increasing the market value of their flats.
Buying the freehold through a management company has advantages compared with purchasing individually. Each flat will have a £1 share in the company and issued with a share certificate. Directors and a secretary of the company will be nominated amongst you. Officers can rotate. Meetings will be held at regular intervals to discuss management issues. Accounts must be prepared and filed at Companies House. Setting up a management company is the only practical way that tenants can manage a large block of flat. However setting up is simple. You approach a company that specialises in company formations and buy an “off the shelf” company. There is nothing to prevent the company appointing an outside agency to run the block on its behalf. When a company is set up and a tenant later sells their flat, they will hand over their share certificate to the buyer.
It is important at the outset to agree how the team works. A participating agreement can be prepared that deals with, amongst other things, how decisions are reached and costs shared, and what happens if tenants pull out of the process before it is completed because, for example, they sell up and move on.
Do you qualify to take part in the enfranchisement process?
You must be a qualifying tenant. You cannot be a qualifying tenant if:
- Your landlord is a charitable housing trust and the flat is provided by the charity as part of its charitable work.
- You own long leases of more than 2 flats in the block (although you may still qualify for a lease renewal).
- You have a business lease.
- You have a shared ownership lease where the total share owned is less than 100%.
Your building does not qualify if:-
- More than 25% of the internal floor area is in non-residential use or intended for such use (apart from the common parts such as stairs).
- It is a converted property of 4 or fewer flats, the same person has owned the freehold since before the conversion and the freeholder (or an adult member of their family) has lived in one of the flats as their only or main home for the last 12 months
- It is a property that has been given a conditional exemption from Inheritance Tax by the Board of the Inland Revenue. (Your landlord will tell you where this applies).
- The freehold of the premises includes track of an operational railway.
- It is within the precinct boundary of a cathedral.
- It is a converted property of four or fewer flats and the freehold of the premises is held on trust, and that same person had an interest under the trust since before the conversion (whether or not also a trustee) and they or an adult member of their family has occupied one of the flats as their only or main home for the last 12 months.
- It is built on certain land held by the National Trust; or
- It is owned by the Crown.
The enfranchisement process and the service we provide
- Suggest an experienced surveyor to report on the highest and lowest price for the freehold.
- Establish that you qualify to buy the freehold.
- Consider and advise about preparing a participation agreement.
- Consider and advise about setting up a management company.
- Prepare and serve a notice to the landlord that you wish to buy the freehold.
- Enter a notice on the freehold title held at the Land Registry that you have exercised your statutory right to purchase the freehold.
- Respond to freeholder’s request to substantiate claim.
- Respond to service of freeholder’s counter notice.
- If necessary, apply to the Land Valuation Tribunal to resolve the dispute.
- If necessary, apply to the County Court for a vesting order.
- Prepare the transfer the freehold title.
- Register the transfer at the Land Registry.
- Advise about amending terms of lease after purchase of freehold, if desired.
Buying your freehold-the traps for the unwary!
Trap 1 - failure by the tenant to complete the freehold purchase within 4 months of reaching an agreement after service of a notice and counter notice
If the terms are agreed and no binding contract has been entered in to by both parties, the lessee has 4 months from the date the terms were agreed to apply to the county court for a vesting order if the landlord delays completing on the agreed terms. If the landlord fails to complete on the agreed terms within 4 months from the date all the terms are agreed the lessee’s notice is deemed to be withdrawn, unless an application for a vesting order is made prior to the 4 months period.
Trap 2 - failure by the landlord to serve a valid counter notice within 2 months
Whilst the lessee can serve another notice if the first is invalid, the landlord does not have this protection so it is crucial that the counter notice is valid. Where the counter notice is invalid a lessee has a right to apply to the county court for a new lease extension on the terms set out in his section 42 notice or where an application to acquire the freehold was initiated by a section 13 notice apply to the court for an order determining the terms on which it is to acquire the freehold in accordance with the proposals contained in the initial notice. Following the case of Willingale v Globalgrange Limited the Court of Appeal has found that where a lessee can establish their statutory right be it for a lease extension or to collectively enfranchise the court must make an order in favour of the leaseholder. The effect of serving an invalid counter notice has serious consequences for the landlord, however the lessee must respond as the law provides if they want to take advantage of the position.
Trap 3 - failure by the tenant to apply to the Lease Valuation Tribunal to determine the terms of the acquisition within six months of the counter notice
Where a counter notice is served by the landlord admitting the tenant’s right to the freehold but disputing the terms, the tenant must apply to the Lease Valuation Tribunal to determine the terms of the acquisition within six months of receipt of the counter notice. Failure to make an application will result in the tenant’s notice of claim being deemed as withdrawn. The consequence of deemed withdrawal for a lessees are that not only will they be responsible for their own legal and third party costs but also the reasonable legal and third party costs of the landlord and will have to wait 12 months before they can start the process again.
Trap 4 - failure by the tenants to apply to the court for a vesting order
Where no counter notice is served by the landlord or he serves an invalid notice, an application to the court must be made by the lessee no later than six months after the date by which the counter notice should have been served. Failing which the lessee’s notice is deemed to be withdrawn, unless the parties agree the terms and complete the transaction without having to go to court.
Options for leasehold extension or collective enfranchisement of property
Case study
I am buying a flat on the ground floor of a period conversion property. There is a flat upstairs that is also being sold. The lease on my flat has 80 years to run. I am concerned that when I come to sell the flat, I will have difficulty in doing so as the lease may be on the short side.
I would like to make an alteration to the flat – build a conservatory. To do this I need either the permission of the freeholder or to own the freehold.
7 Options
1. Negotiate a voluntary purchase of the freehold with the landlord.
2. Negotiate a voluntary leasehold extension with the landlord.
3. Serve notice to buy freehold.
4. Serve notice to extend leasehold.
5. Ask vendor to serve notice to extend lease and transfer into my name.
6. Ask vendor to jointly (with owner of upstairs) serve notice to buy the freehold.
7. Do not extend lease or buy freehold.
Option 1 - Negotiate a voluntary purchase of the freehold with the landlord
Plus
- It does not matter whether the flat downstairs is interested or not in buying the freehold. The freeholder must offer it to both of you. If they refuse, I could buy the freehold of the whole building.
- Low costs.
Minus
- So far the landlord has not responded to my enquiries and so appears reluctant to sell.
- Landlord can set price of purchase.
- Cost to set up a management company.
Option 2 - Negotiate a voluntary leasehold extension with the landlord
Plus
- Longer lease, so no problem with selling flat on.
- Stay on good terms with freeholder so may grant permission to install conservatory.
Minus
- So far the landlord has not responded to my enquiries so appears reluctant to extend the lease.
- Landlord can set price of lease extension.
Option 3 - Serve notice to buy freehold
Plus
- Would own freehold so could reissue leases, put in conservatory and find own building insurance.
Minus
- Is the flat above interested? If they are not, then cannot serve a notice alone.
- Costs – your solicitor, negotiator and valuer and landlord’s solicitor and valuer. Possible costs of LVT (Leasehold Valuation Tribunal).
- Could be long drawn out process – waiting list up to 2 years if it goes to LVT.
- Cost to set up management company.
Option 4 – Serve notice to extend leasehold
Plus
- Would have longer lease, so easier to sell.
Minus
- Relationship with landlord would deteriorate and he may be unlikely to grant permission to install conservatory.
- Costs – your solicitor, negotiator and valuer and landlord’s solicitor and valuer. Possible costs of LVT (Leasehold, valuation tribunal).
- Need residence of min. 2 years before can apply.
- Process would take up to 1 year should it go to LVT.
- By the time I come to do this, the lease may be below 80 years and therefore ‘marriage value’ would need to be taken into account. This may cost significantly more than if renewed the lease now.
Option 5 – Ask vendor to serve notice to extend lease and transfer into your name.
Plus
- Timescale brought forward so do not need to wait 2 years to pass the residence test.
- Easier to buy freehold with longer lease.
Minus
- Relationship with landlord would deteriorate and he may be unlikely to grant permission to install bathroom.
- Costs – your solicitor, negotiator and valuer and landlord’s solicitor and valuer. Possible costs of LVT (Leasehold Valuation Tribunal).
- If decide to go ahead and get collective enfranchisement in approx. 1 year, will need to pay costs (solicitor, valuer, and LVT) again.
- Seller may not want to be bothered with this.
Option 6 – Ask seller to jointly (with owner of upstairs flat) to serve notice to buy the freehold. This would be transferred to you and the owner of the upstairs flat.
Plus
- Can buy the freehold faster. Will then be in position to install conservatory and choose own insurance company.
Minus
- Seller may not want to bother with this.
- Owner of upstairs flat may not want to buy the freehold and may withdraw notice. Shall need to wait for period of time before can apply again.
- Costs – your solicitor, negotiator and valuer and landlord’s solicitor and valuer. Possible costs of LVT (Leasehold, valuation tribunal).
Option 7 – Do not extend lease or buy freehold. When you come to sell the flat, serve notice on freeholder for lease extension or negotiate voluntarily, so that buyers know that there will be a long lease.
Plus
- No costs.
- No hassle.
Minus
- Will you be able to sell the flat for a good price?