Prepared by the Brady Solicitors Enfranchisement team. Brady Solicitors advises leaseholders, freeholders and freehold companies on collective enfranchisement, lease extensions and property management disputes.
Most leaseholders who contact us about collective enfranchisement want the same things: longer leases, greater control over how their building is managed, whilst possibly increasing the value of their property and improving the saleability of the property. Service charges they can scrutinise and approve, maintenance decisions they can influence directly, a building management arrangement that reflects the residents’ priorities, as well as the ability to extend their own leases, and remove their ground rent.
Collective enfranchisement is the statutory right that allows qualifying leaseholders to join together to purchase the freehold of their building. Once the freehold has been acquired the participating leaseholders, as the new freeholder landlord, have more input and control over the management of the building, as well as the ability to grant new extended leases of their flats.
Owning the freehold can give participating leaseholders substantially greater influence over the management of the building; this can include decisions about managing agents, maintenance programmes and expenditure.
What collective enfranchisement means
Collective enfranchisement is the legal mechanism under the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA) by which qualifying leaseholders in a block of flats can compel the freeholder to sell them the freehold of their building. It is not voluntary on the freeholder’s part: generally, provided the statutory requirements are met and the correct procedure is followed, the freeholder must sell.
The purchase price is called the enfranchisement premium. It is calculated using a statutory formula, and if the parties can’t agree on the figure, either party can apply to the Tribunal to determine the price payable.
After completion, the participating leaseholders collectively own the freehold; the lease structure continues, but the ‘landlord’ is now often a company the participating leaseholders’ control. In very small blocks the leaseholders may jointly own the freehold in their personal names, but ordinarily the preferred structure is a company which has formed specifically for this purpose.
Why leaseholders pursue collective enfranchisement
The same factors tend to drive collective enfranchisement claims: a desire for greater involvement in management decisions, concern about lease length, a desire or need to reduce or remove ground rent obligations, possible increase in property value and improved saleability of the property.
Owning the freehold can give greater control, the ability to appoint a preferred managing agent, or even self-manage. The lease extension benefit is separate but significant: once leaseholders own the freehold, they can grant themselves lease extensions to 999 years at nil premium. For a building where leases already need extending (particularly if the lease term is already below 80 years remaining) this alone can justify the cost of the enfranchisement claim for participants.
Does your building qualify?
The qualifying criteria are set out in the LRHUDA. Broadly, for a building to be eligible:
- It must be a self-contained building or a self-contained part of a building;
- It must contain at least two flats held by ‘qualifying tenants’ (which has a particular legal definition in this context); and
- At least two-thirds of the flats in the premises must be held by ‘qualifying tenants’; and
- It must not be an excluded premises
Certain premises may not qualify or may be excluded from the right to collective enfranchisement, these include:
- No more than 25% of the building’s internal floor area (excluding common parts) may be used for non-residential purposes. This is the current threshold, at the time of writing, and is the most common eligibility barrier for mixed-use buildings with non-residential elements, such as a shop on the ground floor.
- Premises with a resident landlord, where certain conditions are satisfied;
- Certain premises where the freehold includes the track of an operational railway; and
- Certain properties within a cathedral precinct, Crown properties, and National Trust owned properties.
The participating qualifying tenants must generally represent at least half of the total number of flats in the premises. Special rules apply to a building containing only two flats though, where both qualifying tenants must proceed.
Who is a qualifying tenant?
Broadly, a qualifying tenant is a leaseholder of a flat under a ‘long lease’ – which will most commonly mean a residential flat lease which was originally granted for more than 21 years. Most residential leases of flats are ‘long leases’, so most flat owners are likely to qualify.
There are exceptions both to the definition of ‘long lease’ and ‘qualifying tenant’ – some common ones being:
- Business leases: The most common exception to what amounts to a ‘long lease’ is that a ‘business lease’ does not qualify, however there are other exceptions which should be carefully assessed with your legal adviser.
- Shared Ownership Leases: The subject of whether a Shared Ownership (part buy, part rent) lease, that has not been staircased to 100% ownership, has been the subject of some considerable debate, so should also be considered with careful legal advice.
- Leaseholders of multiple flats: a leaseholder who owns 3 or more flats in the premises will not be a ‘qualifying tenant’ of any of those flats. Where the leaseholder is a company, this exception will apply if those flats are held by that company or an associated company, which affects whether the 50% participation threshold (discussed below) is achievable.
Participating Leaseholders
For a collective enfranchisement claim to be made, a group of qualifying tenants that make up at least half of all the flats in the building, must participate in the claim (subject as mentioned previously that if there are only two flats in the premises, both must participate). This is the minimum participation threshold for the section 13 notice to be valid.
Note however this is half of all flats, not half of those held by qualifying tenants, so the practical threshold can be more difficult in buildings where some flats or leaseholders are excluded.
We recommend securing participation from well over half the building before serving the notice to give the claim a stable foundation, together with careful legal advice about the number of qualifying tenants.
There are some limited circumstances in which a qualifying tenant is not permitted to participate in a collective enfranchisement claim, which can include where steps have been taken to terminate their lease under forfeiture proceedings. Again, specialist legal advice is a must when considering the qualifying criteria for a collective enfranchisement claim.
How the process works
The statutory process can be considered as 7 main stages:
- Instruct solicitors and commission a preliminary valuation from a specialist enfranchisement valuer. The solicitor advises on qualification, and the valuation gives leaseholders a realistic figure for the enfranchisement premium, as well as the figures to be inserted in any eventual claim notice, before any formal steps are taken. This enables the participants to establish an anticipated likely overall budget and establish and agree how the premium and costs will be funded.
For larger claims, a Participation Agreement is commonly used to record the participants’ respective contributions, obligations and other practical considerations. - Form a nominee purchaser. This is usually a company, formed by the participating leaseholders, to be the registered owner of the freehold.
- Serve the section 13 claim notice on the freeholder (and any other relevant landlord). This is the formal claim under the 1993 Act which starts the formal statutory process. The section 13 notice specifies the date by which the freeholder must serve its counter-notice; that date must be at least two months after the service of the section 13 notice.
- Counter-Notice. The counter-notice will do one of three main things:
- Admit the claim
- Not admit the claim or right to enfranchise
- Either admit or not admit the claim, but oppose it on the grounds of redevelopment of the building;
Assuming a counter-notice admitting the claim, the counter-notice would also include:
- Details of which proposals in the section 13 claim notice were accepted or agreed, and which are not;
- For any proposals not accepted, the counter-notice must specify counter-proposals (typically, this will include a counter-proposed premium);
- Details of any leaseback proposals;
- Details of any other property that they require the nominee purchaser to acquire;
- Any rights the freeholder or other relevant landlord seek to retain;
- Any terms they consider should be included in the conveyance (such as easements or restrictive covenants)
There are other requirements for a valid counter-notice, and counter-notices not admitting the right or opposing a claim on the grounds of redevelopment are outside the scope of this article; your legal adviser will consider the validity and terms of any counter-notice with you.
If no valid counter-notice is served by the relevant deadline, the nominee purchaser will have up to six months, beginning on the date by which the counter-notice ought to have been served, within which to apply to court for an Order determining the terms of acquisition to be those proposed in the initial s13 notice. The grant of such an order would mean the freeholder (and any other relevant landlord) are bound to sell on the terms of the s13 claim notice. Failure to make the application to court within that period will mean the claim is deemed withdrawn.
5. Negotiation. Assuming a valid-counter-notice admitting the claim is given, the parties will then negotiate and attempt to agree the terms of the acquisition, including the premium payable. Once all the ‘terms of acquisition’ have been agreed, a timetable for agreeing a draft contract and proceeding to exchange of contracts will apply.
If the parties can’t reach agreement after two months, either party can apply to the Tribunal to determine the terms. This application must be made within 6 months of the date of the counter-notice (but no earlier than 2 months from the date of the counter-notice).
Failure to either agree all the terms or have applied to the Tribunal within that 6-month period, will mean the claim is deemed withdrawn.
6. Exchange Contracts or make Court application. Once all the terms of acquisition have been agreed, or determined by the Tribunal, the legislation envisages the parties will exchange contracts within two months of the date all terms were agreed or determined. If the parties have not entered into a binding contract by the end of this period, either party can make an application to the County Court during a further two-month period. If, after this further two-month period, the parties have not exchanged contracts nor applied to Court, the enfranchisement claim will be deemed withdrawn.
7. Complete the purchase. Exchange of contracts will set a date for completion of the purchase.
A straightforward claim for a small to moderately sized block may take around 12-18 months from initial preparation to completion, although timescales vary considerately depending on the circumstances. Court or Tribunal involvement at any stage will mean a claim takes considerably longer.
What it costs
The principal costs of enfranchisement are: the purchase price (premium), the participating leaseholders’ own legal and valuation costs, together with transactional costs and expenses, such as Land Registry fees and, where applicable, Stamp Duty Land Tax (SDLT), plus (currently) the freeholder’s recoverable statutory costs.
Under the law in force at the time of writing, the nominee purchaser is liable for the freeholder/landlord’s reasonable legal and valuation costs, insofar as they fall within the categories currently permitted by the 1993 Act. This does not mean every cost of the freeholder is recoverable, and costs relating to Court or Tribunal proceedings are subject to different rules.
Advice about the likely premium payable requires specialist valuation advice from a suitably experienced enfranchisement valuer.
What changes when leaseholders own the freehold
Following completion, the nominee purchaser becomes the freeholder/landlord and therefore assumes the rights and obligations of the landlord under the existing leases.
The freehold company will generally appoint its own managing agent, or may decide to manage the building directly, taking into account the terms of the leases and relevant landlord and tenant legislation, which continue to apply.
It is important to distinguish that service charges and maintenance costs will continue to be payable.
However, Gound Rent in the leases of participating leaseholders can be removed altogether, if or when participating leaseholders subsequently grant themselves extended leases with a ‘peppercorn’ rent.
Participating leaseholders commonly decide to extend their leases at nil or nominal premium and reduce ground rent, typically to a peppercorn, without the statutory process. This is often the most immediate practical benefit for participating leaseholders, particularly those with a remaining lease term under 90 years, where remaining lease length starts to be a consideration for mortgage companies or buyers.
If extending leases and/or reducing ground rent is an important factor for participants following completion, this should be considered at the outset and can be documented in the Participation Agreement in the early stages, ahead of making the claim.
Non-participating leaseholders’ leases remain unchanged. If they otherwise qualify, they can exercise their rights for lease extensions through the statutory route under the 1993 Act, or may request a lease extension by negotiation (a non-statutory lease extension) where possible, paying a premium to the new freehold company.
What we see in practice
Leaseholders increasingly want more direct control over how the building is run, as well as the ability to vary the term and ground rent in their leases. By the time they contact us, they have usually spent some time exploring whether collective enfranchisement is the right route for their building.
Leaseholders should obtain a preliminary valuation early in the process, and in any event before the section 13 notice is served. This preliminary valuation advice from a specialist enfranchisement valuer (which is quite different from an estate agents’ market appraisal) is important, because the statutory premium can be significantly different to a figure leaseholders may have assumed without proper valuation advice, and is a vital element to preparing a valid claim.
Establishing funding arrangements and participant commitments at the outset can reduce the risk of delay or difficulty later in the claim.
Taking the next step
Collective enfranchisement can be an effective option where leaseholders want to acquire control of their building and address issues associated with shortening lease terms or high ground rents. It is, however, a significant legal and financial undertaking, and alternatives such as Right to Manage may be appropriate where management control only, as opposed to ownership of the freehold, is the principal objective.
For those wanting to explore a collective enfranchisement claim, where the building appears to meet the qualifying criteria and there is sufficient interest in participation to meet the threshold for making a claim, the next step is usually to obtain legal advice on eligibility and a specialist enfranchisement valuation.
