Collective Enfranchisement was created by the Leasehold Reform, Housing and Urban Development Act 1993. It is the legal right for leaseholders to compel the Freeholder to sell them the freehold. Leasehold Enfranchisement is the right to extend long residential leases.
1. Why would you want to join together with your fellow leaseholders to buy a share of the freehold?
a) Your will find that your property stops deteriorating in value.
Your lease is a diminishing asset. As your lease term gets shorter your property value decreases. For properties with 80 years or less left on the lease you will considerably increase the value of your flat by jointly buying the freehold of your block.
b) You will be able to extend your lease with NO CHARGE:
After collective enfranchisement (other than solicitors fees) and can grant yourself a long lease extension of 999 years.
c) You will no longer have to pay ground rent:
As part of the collective enfranchisement process, your new lease will be at a ‘peppercorn rent’ (i.e. ground rent free)
d) You will find your home will increase in value:
In addition to a 999 year lease extension and paying no ground rent, prospective buyers are usually more attracted to flats where they will own the freehold partly because it becomes increasingly difficult to mortgage property with less than 60 years left on the lease.
e) You will find it easier to re-mortgage:
It will be easier to re-mortgage as most lenders require the additional security of leasehold properties with long leases of at least 60 years left on the lease.
f) You will have control the management of your block:
Buying the freehold ensures that that the leaseholders are able to engage a managing agent their choice and removes the possibility of an external freeholder levying excessive service charges.
Service charge disputes are often one of the reasons why leaseholders enter into leasehold enfranchisement if they have not exercised The Right To Manage themselves.
g) You will be able to update your lease:
As a leaseholder you are bound by the terms of your lease which may be poorly written. As both freeholder and leaseholder you can update unfair or badly drafted leases.
h) You may have future income from non-participating leaseholders
Should any of the leaseholders decide not to participate they will continue to pay ground rent to the participating leaseholders and will eventually need to pay them a premium to increase the term of their lease.
i) You may be able to develop the site in future
As the freeholder of their own site leaseholders may have the opportunity to develop the site e.g. add extensions, buildings etc
To exercise this right the following criteria have to be met:
• At least 50% of the leaseholders in a block must participate and
• each block must have at least two flats in it and
• two thirds or more of the leaseholders must have leases on their property that were originally of 21 years or longer and
• less than 25% of the floor area must be used for commercial (as opposed to residential) purposes and
• not be a building that has been converted into four or less flats where the same freeholder has owned the building since conversion and (s)/he or an family member over 18 has lived there for over 12 months.
It is a good idea to informally find who the fellow leaseholders are in advance and if they are interested in collectively purchasing the freehold. If you believe there is sufficient support we suggest arranging a meeting of all the leaseholders. The freehold purchase must be made through a nominee purchaser. As the law stands at present the nominee purchaser may be any person or a company formed by the participators. We suggest this is best undertaken via a Limited Company formed specifically for this purpose. It should be noted that unlike the Right To Manage provisions each leaseholder is not be entitled to become a member of the Company and participate in the freehold purchase although participating leaseholders may find it useful to ensure that all leaseholders are aware of their proposals.
3. Agree who will be the supporters and the first Directors and Secretary.
Leaseholders are recommended to set up a “fighting fund” to cover the initial steps in setting up a company and valuation.
Company directors have legal responsibilities and we recommend that all potential directors seek legal advice prior to agreeing to be a Director. The Company Secretary has specific duties such as maintaining registers of members and issuing membership certificates (maintaining the statutory books). Whilst the Company Secretary can be a leaseholder this role is usually filled by a professional person. Once the company is established the directors will need to be elected or re-elected by the leaseholders in accordance with the provisions of the companies Act 2006 and the Articles of the company.
4. Set up the Limited Company to own the freehold
As stated above we recommend that the leaseholders form a limited company jointly owned by them to purchase the freehold. We are able to register a limited company for clients for a small fee.
Unless all participants are able to pay their share upfront it is strongly recommended that a “Participation Agreement” is entered into by all participating leaseholders. This will set out individual leaseholder’s financial contributions, procedures and voting rights etc and what will happen after the freehold is acquired. Usually the new freeholder will grant new leases to all those who have participated in the purchase. Any leaseholder who has not participated will continue to pay ground rent to the new freeholder through to the end of the lease which will then revert to the new freeholder.
5. Instructing Professional Advisers
A valuer a specialist surveyor should advise on the potential best and worst price expected to be paid in relation to the enfranchisement. This will help assess a realistic value to include within the Initial Notice which will prevent unnecessary delays and cost. The valuer may also respond to any Counter notice and negotiate the price. Valuation is far from an exact science and it will be virtually impossible for the valuer to provide an accurate estimation of the eventual settlement figure. The total cost will be the freehold price plus professional fees and incidental costs of both the leaseholders and the freeholder.
A solicitor should be engaged to serve the claim, respond to any requests from the freeholder, conveyance of title and subsequent amendment of the terms of the lease after enfranchisement.
6. The S13 Initial Notice
The Initial Notice triggers the statutory procedures for acquiring the freehold and the participating tenants are jointly and individually liable for the landlord’s reasonable costs as from the date he receives the Notice. It is therefore important that the Notice is complete and contains no inaccuracies or misdescriptions, because, although these may in some cases be corrected by application to the county court, it is an area of expense to be avoided. An incomplete Notice can be rejected as invalid.
The service of the Initial Notice o fixes the ‘valuation date’ at the date that the Initial Notice is served. The valuation date is the date on which the variables affecting the price of the freehold are set, for example, the remaining number of years left on the leases, the present values of the flats and their assumed future value. Therefore, however long the negotiation or determination of the price takes, it will be based on the factors applying on the date of the service of the Initial Notice.
The Notice must include the following:
• details of the property to be acquired, including a plan. Without a plan the notice can be declared invalid. This must include details of any additional land the tenants wish and have a right to acquire, e.g. garages, and any proposed rights of way over land not acquired;
• a statement of the grounds on which it is claimed that the specified premises qualify for the right of collective enfranchisement on the relevant date (date of the Initial Notice);
• details of any leasehold interests to be acquired, e.g. an intervening headlease, and any flats subject to mandatory leaseback to the freeholder;
• the price proposed;
• the full names and addresses of all the qualifying tenants in the property and details of their leases showing the date the lease was entered into, the date of commencement and the term;
• the name and address of the Nominee Purchaser;
• the date by which the freeholder is to provide the Counter-Notice (at least two months after service of the Initial Notice is given).
The Notice must be signed by all the participating tenants; no one can sign on their behalf.
7. The Freeholder’s Counter-Notice
The landlord must serve his Counter-Notice by the date specified in the Initial Notice; this must:
• agree and accept the terms in which case the freehold purchase can proceed and will proceed to transfer within 21 days. This will involve a transfer document being signed by the Freeholder and the purchase price being paid or
• agree and propose alternative terms in which case both parties will have a period of two months from the date of the counter notice to attempt to reach an agreement. If terms remain in dispute either party may apply to a First-Tier Tribunal (Property Chamber) for determination; or
• not agree and give reasons why not (which will then need to be determined by the county court); or
• neither admit nor deny entitlement, but state that an application is to be made to court for an order that the right to enfranchise cannot be exercised on the grounds the landlord intends to redevelop the whole or a substantial part of the premises;
• any leaseback proposals must be specified.
Where, after service of the freeholder’s Counter-Notice, the Nominee Purchaser and the freeholder cannot agree on the price or some other aspects of the conveyance, then after the initial two months, following service of the Counter-Notice, either party can apply to a First-Tier Tribunal (Property Chamber) for an independent determination on the issue. Clearly, the tenants’ professional advisers must have all relevant documents at hand to deal with such an application.
In cases where the landlord fails to serve a Counter-Notice by the date specified in the Initial Notice, the participating tenants may apply to the county court for a Vesting Order. This is an order allowing them to acquire the freehold on the terms of the Initial Notice (including the premium proposed). The court, if satisfied of the right to enfranchise, will grant the Order. The application must be made to the court within six months of the date on which the Counter-Notice should have been received.
8. Determination of Value
The price of the freehold is usually made up of two values:-
The Open Market Value – this is the amount at which, on the valuation date, the freehold might have expected to be sold at if being sold by a willing seller. In simple terms: how much would the freeholder need to place in a bank account to earn interest equivalent to the ground rent received. At an expected average interest rate of 5% this would equate to 20 times the annual ground rent.
Marriage Value – this amount depends on the terms of the leases currently affecting the freehold title. No marriage value is payable on leases that have over 80 years to run. Leases with less than 80 years, will attract a greater premium the shorter the term of the remaining lease. This is due to the fact that when the lease expires the freeholder will eventually be able to grant (sell) a new lease. This value is discounted by the number of years the lease has still to run. For example if the lease were due to expire in 1 year and could be sold for £100,000 it is clearly worth close to £100,000 now but if the lease has 50 years left to run then the value is much lower. With leases that have over 80 years remaining the marriage value is deemed to be zero.
Both of these values are subject to variations and considerations which can vary from time to time.
We have produced an on-line calculator as a guide to valuations. This calculator is only intended as a guide and no warranty is provided to its accuracy. Professional advice should always be obtained before considering a purchase.
9. How long will it take?
Following service of the Initial Notice it could take between a few months (if the Freeholder accepts the claim) to two years if there is a dispute in relation to the claim. Additional time may be required if applications to a First-Tier Tribunal (Property Chamber) or County Court are necessary.
Once all of the terms of the contract are agreed, it should take one or two months for the freehold registration.
How can we help?
We can set-up a limited company for clients anywhere in England or Wales (in English only)
We can act as a Block Managing Agent for sites in and around Swindon and introduce you to solicitors and valuers.
Further advice and guidance on the law is available from the Leasehold Advisory Service