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Collective Enfranchisement and Leasehold

Collective Enfranchisement and Leasehold Valuation Tribunals

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 collective 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 two 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 four 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 twelve months
  • It is a property that has been given a conditional exemption from Inheritance Tax by the Board of HM Revenue and Customs. (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 twelve months.
  • It is built on certain land held by the National Trust; or
  • It is owned by the Crown.  However, you may find that the Crown authorities will agree to let you enfranchise.

If you are a qualifying tenant, you can only buy the freehold with a group of other qualifying tenants if your building satisfies the following criteria:

  • There must be two or more flats in your building.  If there are only two flats in the block, both must participate.
  • At least two thirds of all the flats in your building must be held on long leases.
  • Not more than 25% of the internal floor area (apart from common parts, such as stairs) of the building is in non residential use or intended for non residential use. e.g. as a shop or an office.
  • The number of tenants participating must also equal at least half the flats in the block.  For example, in a block of twelve flats, at least eight flats must be held on long leases and at least six long leaseholders would need to participate in the enfranchisement process.

The Collective 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 H M 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 Leasehold Valuation Tribunal to resolve the dispute.
  • If necessary, apply to the County Court for a vesting order.
  • Transfer the freehold title.
  • Register the transfer at the Land Registry.
  • Pay stamp duty land tax to H M Revenue and Customs.
  • 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 four 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 four 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 four 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 four months period.

Trap 2 - failure by the landlord to serve a valid counter notice within two 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 Leasehold 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 Leasehold 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 twelve 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.

Collective enfranchisement what should you do now?

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