What is Collective Enfranchisement?
Collective Enfranchisement is the legal term for long leaseholders collectively acquiring their freehold under the provisions of the Leasehold Reform Housing and Urban Development Act 1993 (“the Act”).
Why might I want to exercise my right to Collective Enfranchisement?
There are many reasons why lessees should consider exercising their right to enfranchise. Leases are diminishing assets. As the lease term reduces the value of the lease reduces. Ultimately your flat may become difficult or impossible to sell or re-mortgage or diminish in its market value. Whilst you may be considering extending your lease there may be financial savings in both the short and long term by exercising the right to enfranchise instead, which will still achieve the same end result of an extended lease. In a collective enfranchisement, the legal and valuation costs are shared by all participating lessees, unlike in a claim for a lease extension. Once the purchase has completed, your new freehold company can grant a lease extension to all those lessees that participated in the claim. This is also the perfect opportunity to make changes to the existing leases to make them more modern and potentially more saleable and to correct any defects.
You may be unhappy with the way the freeholder or their managing agent are managing, maintaining and/or repairing the building, or you may be unhappy about the level of service charges you are paying. You may want a greater say in the way your service charge money is spent. In most cases, the lessees will automatically take over the managing, repairing and maintenance obligations of the freeholder at completion of the transaction. The lessees freehold company can manage the building themselves or appoint a professional manager of their choice and have a much greater say in the spending of service charges and the contractors used in the repair and maintenance of the building.
Usually, your new freehold company will be able to grant lease extensions to the lessees that do not participate in the collective enfranchisement claim. This usually results in a future premium in excess of the premium paid for that lessee at the time collective enfranchisement takes place.
How do I exercise my right to Collective Enfranchisement?
Most purpose built and converted blocks of flats are eligible to be enfranchised under the Act, however, there are strict qualification criteria for mixed use buildings, buildings in which the freeholder resides or buildings where one lessee owns multiple flats. It is important that you obtain early advice as to whether the building and the lessees qualify. Importantly, there must be at least 2 flats in the building, and at least two-thirds of the lessees must be qualifying lessees.
The Act provides for a majority of qualifying lessees (at least 50% of the number of flats in the building) to acquire their freehold. Any intermediate interest is also acquired at the same time. The lessees usually incorporate a limited company to acquire the freehold in which each of the participating lessees will hold a share/membership.
The process is fixed by the Act and involves the service of a formal claim notice upon your landlord(s). Your landlord(s) will have the opportunity to serve a counter-notice. In the majority of cases your advisors will be able to negotiate a suitable settlement as to the premium payable and the terms of the transfer. If negotiations fail the First Tier Tribunal (Property Chamber) has jurisdiction to determine the premium and any other terms not agreed.
What costs are involved?
A premium is payable to the landlord(s). You will need to obtain, at the outset, a professional valuation from a qualified valuer surveyor. The premium payable depends on many variables including length of the leases, market value of the flats, ground rents payable and whether there is any development potential for the building or its grounds.
In addition to the premium, you will be responsible for paying your own legal and valuation fees and any disbursements, such as Land Registry fees and any SDLT. You will also be responsible for paying the landlords(s) reasonable legal and valuation fees, however, this does not extend to paying for any fees the landlord(s) incur in negotiations with you or in connection with a Tribunal application.
Are there any alternatives?
There is the possibility that the building does not qualify for a collective claim, or you cannot achieve interest from a sufficient number of lessees or the freehold may be too expensive (which is sometimes the case if the freeholder owns one or more flats in the building).
Instead you may be able to extend your individual lease. You should still speak to your fellow lessees as soon as possible. You may be able to make your claim for a lease extension at the same time as one or more of your fellow lessees. This is likely to save some costs if you instruct the same solicitor and valuer. Please refer to our guide on Lease Extensions.
If management is the problem then you should also discuss with your fellow lessees whether Right to Manage is of interest. The Commonhold and Leasehold Reform Act 2002 provides a no fault based right for a majority of long lessees who own flats in a building to take over the management obligations in respect of their building. There is no premium to pay. There are strict qualification criteria so legal advice is essential. Please refer to our guide on exercising the Right to Manage.
In some strict circumstances, a majority of lessees may be eligible to acquire their freehold at market value (which is usually less than enfranchisement value) under the provisions of the Landlord and Tenant Act 1987. This is usually appropriate where the freeholder has failed to manage the building and is in breach of covenant. There is much more scope for dispute with the freeholder under this procedure but it is worth consideration with your specialist advisors.
How can Hart Brown Solicitors help me?
Our award winning Leasehold Enfranchisement team have the specialist knowledge, expertise and experience to advise you in respect of collective enfranchisement. They can assist you in determining whether you and your building qualify, guide you through the procedure and likely costs involved in more detail and of course act for you in connection with the claim itself.