Collective Enfranchisements (buying the freehold) FAQs
Since 1993 the tenants of blocks of flats, have enjoyed the right to collectively acquire the freehold of their building. Various legislative changes were made culminating in the Commonhold and Leasehold Reform Act 2002 which has simplified the qualifying criteria and introduced various other measures which, on the whole, improve the position of leaseholders. Below are some answers to frequently asked questions.
Q: Why should we enfranchise?
A: There are a number of reasons.
The residents who participate to grant themselves long leases for no or for a nominal price with a removal of ground rent.
The control of the management will be taken over by the tenants.
Buyers of flats tend to like the idea of owning a share in the freehold rather than a separate landlord.
Q: What are the qualifying criteria?
A: The main criteria are that:-
The building must be a self contained block of flats (which includes a converted building as well as a purpose built one)
The building must have no more than 25% non residential use
Two thirds of the flats must be let to qualifying tenants
A qualifying tenant is one who holds the flat under a long lease, namely one which, is for a term of more than 21 years.
The qualifying tenants of flats comprising 50% of the flats in the building must participate
Q: Do we need a formal valuation?
A: Not necessarily, but this is usually highly desirable . You need to know how much you are likely to have to pay even if only for the purposes of negotiating with the freeholder. The notice served on the freeholder must state the proposed price. If it is unrealistic it could invalidate the notice. It is likely that the freeholder will employ a specialist valuer and the tenants will need one to negotiate on their behalf.
Q: How much do we have to pay?
A: This should be dealt with by your surveyor at an early stage and is partly dependent on ground rent levels, and the remaining length of the leases. It is not necessarily the case that each leaseholder will contribute equally since all the leases may not be the same.
Q: Do we have to pay the freeholder's costs?
A: Yes. The legislation requires that the leaseholders pay the reasonable costs of the freeholder of assessing the right of the tenants to enfranchise, dealing with the tenants notice and statutory procedure and handling the valuation and conveyancing work. Costs will normally comprise solicitors and surveyors fees. There is still a liability to pay the costs to date if the tenants withdraw from the process.
Q: Do we need to form a company?
A: This is usually best practice and will soon be a statutory requirement in any event.
Q: How do we get ourselves organised?
A: The normal process is for one or two of the key people to drive the matter forward. Opinions of other residents should be canvassed.
Q: Do we need a binding commitment from participating tenants?
A: This is often a good idea. It can be dealt with by way of participation agreement.
Q: What are the other costs?
A: The main costs will be the professional fees, namely solicitors and surveyors/valuer as well as the landlord's costs, and company formation costs. There will also be payments in respect of the conveyancing for example Stamp Duty Land Tax, Land Registry fees and incidental searches. You should bear in mind that there are a number of variables for example whether or not is it necessary for the claim to be referred to the leasehold valuation Tribunal and whether the claim is dealt with fairly speedily by way of negotiation with the freeholder. Clearly there are economies of scale which can benefit large groups of participators. In our experience the overall cost per tenant usually works out to be reasonable when compared with the benefit obtained. Nevertheless before proceeding it is recommended that a costs benefit analysis be made once the initial investigative work has been undertaken.
Q: How long will it take?
A: You will probably need about 2 to 3 months to obtain detailed legal advice, obtain a valuation, report back to the other residents and generally organise yourselves to be in a position to go forward with the formal process. As to the statutory procedure itself this is initiated by a notice served on the freeholder. From there the timescale could be one of a few months if the freeholder accepts the claim in principle and the negotiations over the price are concluded reasonable quickly to a year to 18 months if the freeholder disputes the claim or it is not possible to agree the price and other terms without reference to the Leasehold Valuation Tribunal. Assuming the acquisition is successfully negotiated or awarded by the LVT you must allow a short period for the conveyancing of the freehold to the nominee company.
Q: What are the most important elements?
Getting enough qualifying leaseholders to support the application.
Ensuring that those leaseholders commit themselves financially at an early stage and then regularly throughout the process.
Ensuring that the initial notice is properly prepared since certain statutory requirements apply together with strict time limits and costly penalties can apply if things go wrong. Landlords will often try to resist your application in any that they can and it is therefore vital that it is dealt with properly.