A Step-by-Step Guide to the Collective Enfranchisement Process
To provide a quick refresher – if you find yourself in one of these situations: You and/or other leaseholders are dissatisfied with your landlord’s management of your residential building; or you want to exercise your rights to ownership of your property; or you wish to increase the value of your property, you might be considering whether or not to enfranchise (buy the freehold) in order to take control of the property yourselves as part of a collective enfranchisement group.
Under the Leasehold Reform Housing and Urban Development Act 1993, leaseholders have the right to issue what is essentially a compulsory purchase order demanding their freeholder sell them the freehold, to which, in theory, the freeholder cannot oppose. This process is called collective enfranchisement and allows leaseholders to collectively buy the freehold of the entire property by following a precise enfranchisement process:
- Get organised as a group – a minimum of 50% of qualifying units (flats) in the building is required for collective enfranchisement, but you can start the process with less to begin with.
- Ensure both the building and the participating leaseholders qualify (more on this below.)
- Budget and collect funds – it is essential to ensure that you have commitment to fund the project throughout – a project manager is crucial for this purpose.
- Obtain a legal report on the freehold title and form of notice (due diligence.)
- Obtain a valuation report for the cost of the freehold (a range) per flat.
- Incorporate a limited company (Nominee Purchaser.)
- Make a formal claim of the freehold by issuing the Initial Notice of Claim (a “Section 13 Notice”) specifying what you are claiming and an offer price.
- On receipt of the claim, the freeholder will assess the following:
- Is your notice valid? A small error may invalidate your Initial Notice and it’s easy to fall in the trap where all your hard work is wasted. It is vital to have the right guidance. A project manager can assist in this regard.
- What is the value of the freehold? The freeholder will send in their own surveyor to assess the worth of the freehold and you will need to give them access into your flats. Their assessment almost always values the freehold far higher than you offered.
- Within two months of receiving your Initial Notice of Claim, the freeholder will submit a Counter Notice (a “Section 21 Notice”) specifying whether they agree that your claim is valid, specifying any terms they disagree with and specifying their counter offer price.
- You then have the opportunity to try and agree the terms and the premium.
- The deadline for agreeing the terms and premium for the sale is six months from the date of receiving the counter notice after which your claim is deemed to have been withdrawn (though if the freeholder does not ‘play ball’, there are other options).
Timeframe
It is important to be conscious of the statutory deadlines.
- Section 13 Notice served – the clock starts ticking
- The Freeholder has two months to serve his Counter Notice – Section 21
- The parties have a further two months’ grace – intended for negotiations
- The parties have up to additional four months to either agree or apply to the tribunal
- Not reached an agreement after this six month period? Oh dear! The notice is deemed withdrawn. (However, there are ways to protect from this situation by way of a Vesting Order application to the First Tier Tribunal).
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Ensure tenants and the building qualify
Leasehold enfranchisement covers a range of rights that are available to any qualifying tenant of flats and houses under the Leasehold Reform Act. Two main qualification criteria have to be considered: the tenants and their flats; and the building.
- Building: To qualify, the building must contain at least two residential flats, at least 66% of the residential units must be owned by “Qualifying tenants” and the property cannot contain more than 25% of commercial space (e.g. shops and offices).
- Tenants & flats: For each leaseholder (tenant) to qualify, (1) their existing lease must have had a term of at least 21 years when granted; and (2) they must not own more than 2 residential flats within this block of flats.
What to do if your lease was granted for less than 21 years and you are considered an “unqualifying tenant”?
In this case you will need to start an informal lease extension process before moving forward.
A leaseholder may contact the freeholder first and inquire whether they are interested in discussing a lease extension. There is no obligation on the part of the freeholder to respond or accept the request to extend the lease following such an inquiry. However, if both parties agree, they will need to negotiate. It’s worth getting started on an informal basis because it might save time and money in the long run. However, if negotiations fail, leaseholders who meet the requirements can use the formal procedure to try and extend their lease and go to the Tribunal if no agreement on price or terms may be reached.
What does the term “freeholder” mean? Find out here.
Preparation to serve the section 13
Estimating the value of the Freehold – The Premium
The premium refers to the purchase price of the freehold as a whole – this includes the building, the communal areas and any other land (e.g. parking, bin area etc). To arrive at this figure, a professional valuation must be conducted. The premium for each leaseholder will then be based largely on their ground rent and remaining length of their lease, but other factors, such as residual estate, non-participant leases, common parts, and assets like rooftops and car parks are also taken into consideration.
Running the legal checks –
The solicitor will check that the building as well as the tenants are qualifying and will check any legal matters.
Serve section 13 – Initial Notice – Collective Enfranchisement
So – you have run through your legal and surveyor checks, are sure that the building and the tenants qualify and are happy to proceed – Just saying “happy to proceed” is not good enough. We then recommend drawing up a “participation agreement” (agreement that binds all the leaseholders in the process and details the conditions in which they could pull out or not). Great! You are almost ready to move forward!
Your solicitor will carefully draft a Section 13 Notice and run it by you to review. It is highly important to check it carefully, otherwise the freeholder will be able to deem that the claim is invalid. The solicitor will then serve the Notice on the freeholder. And the clock starts ticking!
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The six month period & negotiations
You served the Notice – the freeholder has two months to respond and serve a Landlord’s Counter Notice. They will usually send their own surveyor to assess how much the freehold’s worth. And then they will serve their Counter Notice. A new clock starts ticking.
Both sides have two months to (1) exchange information & start negotiations; (2) try to reach an agreement. Didn’t reach an agreement?
Both sides have four months to (1) continue negotiating; (2) try to reach an agreement; (3) apply to the First-Tier Tribunal (FTT).
To summarise, within six months you both should have reached an agreement, but if you haven’t, the claim expires and you are not allowed to serve a notice again for a period of 1 year from when your initial Section 13 Notice was served.
Option to go via the informal collective enfranchisement route
Just a note, you may of course try and complete a freehold purchase in an informal manner – simply by approaching the freeholder and asking him if he wish to sell etc
If your landlord agrees to move forward with an informal lease enfranchisement, they will obtain their own valuation, after which they will make you an offer for the freehold in terms of the sale.
However, before you accept anything, it’s critical that you get a valuation and seek expert advice to ensure you receive the finest possible terms. Because this type of enfranchisement procedure is informal, and you are not required to agree to the landlord‘s offer, ultimately, they have an advantage. They can choose to advance a premium that is unreasonable under certain circumstances.
What are unfair terms?
Things that would be judged as unfair in a premium include onerous ground rents and unclear, or misleading rates used to calculate the exact price of the cost of enfranchisement. For an easy and accurate estimation of the value of your freehold, check out our Freehold Purchase Calculator.
Prepare for a potential First-Tier Tribunal
A First-Tier Tribunal (FTT) is part of the courts and tribunals service of the United Kingdom. It differs from formal legal proceedings in that it can actually feel relatively informal, but still carries the weight of the law.
Though it may sound daunting, having the right professional sources of advice around you – such as freehold project managers – can make all the difference. It’s also important to note that matters only proceed to a FTT if premium terms, or a premium price, cannot be agreed; this can be for example if the Freeholder keeps silent and does not communicate or if simply the surveyors cannot agree on a price.
If agreement has been reached for the terms and the premium, the contract can be completed in its entirety; but if not, then it may be passed on to a FTT. It is more important to note that the leaseholders must refer any issues to a FTT within six months of receiving the counter notice, or their notice will be deemed withdrawn and they will have to restart the procedure.
Undertake legal proceedings
If terms for the freehold cannot be agreed and the matter is referred to a First-Tier Tribunal, the Tribunal will be able to evaluate the premium paid, any transfer document content, and the money spent by you on the leased property. You must reimburse all expenses incurred by the landlord as a result of your enfranchisement, save for those charges incurred in connection with any negotiating and costs incurred in Tribunal proceedings. The majority of freeholder fees will be recoverable from you.
A tribunal process can take approximately 3 to 5 months, but can also run longer in particularly complex cases. The tribunal and negotiation stage of the enfranchisement process is complex, and is often where the expertise of a freehold project management company can come in. They can reassure leaseholders through this stage, negotiate counter offers using their network of solicitors, valuers and other professional experts and can help to keep everyone up to speed with exactly what is happening so that risk or fear are mitigated.
Sign the contract
Once terms of the freehold and its premium have been agreed, or the Tribunal has made a determination, there is a period of two months to enter into a contract for the completion of the collective enfranchisement.
If a contract is not agreed within two months, you have the option of making an application to the Court for it to force the other party to enter into that agreement. If you do not file an application within this time, your notice will be deemed withdrawn, and you will need to restart the procedure from scratch.
If you have an agreement with your landlord for a lease, the legal fees must be paid in addition to any remaining costs due to your own solicitor, the landlord’s solicitors and surveyors fees, and any apportionments of ground rent that may be owing at settlement. You must pay ground rent and other fees whether or not the issue is resolved through a formal procedure or a more informal process.
This is because the costs are due at settlement no matter how they are paid for, so if you have paid your own legal fees to date but have an agreement with the landlord to pay their costs eventually then your solicitor will need to receive the payment for any agreed landlord costs.
Once completed, the freehold is then registered at HM Land Registry, to ensure that your title reflects your ownership.
What happens when you own your freehold?
You and your fellow leaseholders who participated in the Collective Enfranchisement now own the freehold. No more external freeholders!
After you’ve completed the purchase process of the freehold, the Nominee Purchaser (the company that you set up together with your fellow leaseholders) are in control of the management of the freehold. You might want to think about varying your lease and removing any unfavourable terms – to remove a clause of “dogs are not allowed”, or introduce modern information such as “wooden floor is allowed, but must have xxx soundproofing underneath”.
Great news! You will never need to extend your lease and pay a premium to an external freeholder again and you may choose to extend the lease to a 999-years with zero ground rent. This is the closest you can get to owning the freehold of a flat in the United Kingdom!
Read up on the full responsibilities of a freeholder
In addition, together with other participating tenants you can make decisions that you feel will be beneficial and cost-effective for the building, including a change of insurer, different managing agent, or other third-party contractors like cleaners or maintenance companies. This could lower service charges, making the cost of living much more affordable for other residential leaseholders.
In conclusion
Collective enfranchisement involves collaboration between leasehold owners to join together and purchase their freehold. The process can take between 1 and 2 years, and the benefits of owning the freehold are plentiful and more can be viewed here.
If you’re looking to get started with your own collective enfranchisement, we’ve got years of experience helping flat owners do just that at The Freehold Collective.
