What is Collective Enfranchisement?
Tenants of long leases of flats may have the legal right to collectively acquire the freehold of their building. This right is known as Collective Enfranchisement.
After completing the Collective Enfranchisement process the tenants will collectively own the freehold of the entire building.
There are certain requirements to be met before tenants can buy the freehold and these are governed by the Leasehold Reform, Housing and Urban Development Act 1993. To start with, the Collective Enfranchisement process is only available to Qualifying Tenants in Qualifying Buildings.
Am I a qualifying tenant?
You must own a long lease, that is a lease that was originally granted for more than 21 years.
Is my flat in a qualifying building?
- There must be at least 2 flats in the building
- The building must be self-contained, or it can be part of a building but there must be a vertical division
- No more than 25% of the building can be used for non-residential use
Are there any other criteria?
- At least two thirds of the flats in the building must be let to qualifying tenants i.e. tenants initially granted long leases of over 21 years
- The leaseholders participating in the claim must equal at least 50% of the total number of flats in the building.
How do I buy my freehold?
Organise the participating leaseholders:
At least 50% of qualifying leaseholders are required to make the claim, so firstly you should speak with the neighbouring flat owners to see which other tenants are willing to proceed with the claim. Once the qualifying number is achieved, other qualifying leaseholders do not have an automatic right to participate in the collective claim, although you may of course wish to include as many tenants as possible. It is advised to nominate an authorised person to speak on behalf of all the leaseholders involved.
Instruct a solicitor:
The collective enfranchisement process can be complex so legal advice is necessary. Your solicitor will assess your eligibility, provide advice on the claim, and prepare and serve the Initial Notice on the freeholder. Once the freehold has been acquired your solicitor will draft the necessary transfer deed, complete the purchase and register the transfer of the freehold at the land registry. Your solicitor can also assist with any lease extensions or lease variations which may be entered into upon completion of the purchase.
Enter into a participation agreement:
In most circumstances it is strongly advised that the leaseholders enter into a formal participation agreement which legally binds them to the claim. It sets out the steps and decisions to be taken throughout the enfranchisement process. Leaseholder responsibilities and rights will be incorporated into the agreement including financial obligations and what to do if a participating tenant wishes to sell their flat during the process. Your solicitor will help you draft and finalise the agreement.
Obtain a valuation:
Leaseholders should obtain a formal valuation from a professional surveyor as it is important to present a realistic offer in the Initial Notice. The price payable for the freehold will depend on various factors including the market value and length of the qualifying leases.
Choosing the Nominee Purchaser:
The Nominee Purchaser is the person or company named in the Initial Notice. They will acquire the freehold of the building and become the new landlord. Therefore, the Nominee Purchaser is usually a newly formed company set up and owned by the participating leaseholders.
Once the preliminary steps above have been taken, the basic procedure for purchasing the freehold is as follows:
- Serve an Information Notice on the Freeholder to assess the landlord’s interest and obtain any useful documents such as service charge or ground rent accounts. The Freeholder then has 28 days to respond. This is not a compulsory step but may prove beneficial throughout the claim process.
- The Nominee Purchaser will serve a Section 13 Notice, also known as an Initial Notice, on the Freeholder.
- The Freeholder has 2 months to respond to the Section 13 Notice and can request additional information within 21 days of the notice being served.
- The Freeholder will then serve a Counter-Notice within 2 months of receiving the Section 13 Notice.
- The Freeholder and Nominee Purchaser have 6 months to negotiate.
- If the Freeholder and Nominee Purchaser fail to reach an agreement, either party can apply to the Leasehold Valuation First Tier Tribunal within 6 months of the Counter-Notice being received.
- The premium is agreed, and the freehold purchased.
What if the Freeholder doesn’t accept our offer?
The freeholder is not obliged to accept the offer in the Initial Notice and may reply with a counter offer (or indeed reject the claim all together). You may wish to instruct your valuer to negotiate the premium with the freeholder if the freeholder’s counter offer is too high.
What are the costs associated with buying the freehold?
The largest cost of the claim will of course be the purchase price of the freehold. There will also be the associated costs of your surveyor and solicitor’s fees. The qualifying leaseholders are also responsible for paying the landlord’s legal and valuation fees. In addition, there are Land Registry fees to register the freehold transfer and you may have to pay Stamp Duty Land Tax depending on the amount of the premium. It is therefore crucial that an assessment of costs is established before the Initial Notice is served so that leaseholders are aware of their continued financial responsibility throughout the claim.
What are the benefits of collective enfranchisement?
One of the biggest appeals of collective enfranchisement is the ability to grant lease extensions or variations to yourselves through the Nominee Purchaser.
Another benefit is the increased control over your property. The Nominee Purchaser will be responsible for overseeing the service charges, ground rents, expenditures, and day to day management of the building.
Owning a share of the freehold will likely increase the value and future saleability of the property.
Please get in touch with Hanne & Co’s property lawyers who would be happy to assist you with the Collective Enfranchisement process.