What is enfranchisement?
The collective right to buy the freehold, known as enfranchisement, was introduced by the Leasehold Reform Housing and Urban Development Act 1993 and later amended by the Commonhold and Leasehold Reform Act (CLRA) 2002. However, it should be noted that sections 121 to 124 of the CLRA, which refer to right to enfranchise companies, were not implemented and it would now appear that these provisions might never be introduced.
The above legislation gives leaseholders, if they qualify, the collective right to force the sale of the freehold of the building or the appropriate part of the building. Where there is another party with an interest in the building, like a head-lease, this will need to be included as part of the purchase by the leaseholders.
What does the freehold purchase cover?
The freehold purchase covers the entire building in which the flats are situated and, in most circumstances, any communal grounds and buildings within the grounds that are part of the freehold title. This would only be the case if the lease clarifies that the leaseholders have a contractual right provided to use these grounds and buildings.
Can all leaseholders buy the freehold of their property?
Most leaseholders of flats have the collective right to buy the freehold if they and the building qualifies. This means the freehold purchase can take place regardless of whether the freeholder wishes to part with it. Leaseholders do not have the right to buy the freehold of their individual flat and unlike leasehold houses, individual leasehold flats cannot be converted to freehold; they can only be leasehold with a share of the collective freehold. There is also the possibility of commonhold but, as this was not made compulsory for new developments, it is relatively rare. (Please see the LA information sheet 116 Commonhold).
What are the advantages of buying the freehold?
After acquiring the freehold, the leaseholders who participate in enfranchisement can grant new leases, subject to some restrictions. The drafting of new leases provides an opportunity for clauses to be removed or for new ones to be inserted that benefit the leaseholders, especially as some terms in existing leases do not satisfy mortgage lenders' current requirements. It should be clarified that the leases of any leaseholders who did not participate in the enfranchisement process will not change unless they agree to any proposed variations. There is also the issue of whether all of the leases must be in common which means have the same significant terms. However, most leaseholders who now jointly own the freehold are in a position to vary their leases to their advantage so are likely to abolish ground rents and significantly increase the length of their leases. Other aspects of varying leases may still apply. (Please see the LA Information Sheet 110 Lease Variations).
The collective purchase of the freehold would bring to an end the involvement of the freeholder and any managers they have appointed which means that the leaseholders gain control of the entire property.
What do leaseholders need to consider at an early stage?
Before enfranchisement is considered, the leaseholders who are the most interested in this should arrange a meeting and invite all leaseholders eligible to participate. Unlike Right To Manage, there are significant costs for those who agree to take part unless a nominee purchaser is chosen to buy the freehold and to finance this on the leaseholders’ behalf. The financial implications should be explained to all leaseholders at this meeting and it should be made clear that if they do not participate, their leasehold interest would not be affected but they would not gain a share of the freehold.
Before starting the enfranchisement process the participating leaseholders will need to consider the following:
- ensure the building is eligible;
- check that there are enough participating leaseholders;
- obtain an estimate of the purchase price;
- choose a Nominee Purchaser; and
- select and employ professional advisers.
What is the eligibility that needs to be checked for enfranchisement purposes?
It is advisable for leaseholders to check that the building complies with the legal requirements and that there are sufficient qualifying leaseholders. In order for the building to qualify:
- there must be at least two flats in it; and
- at least two-thirds of the flats must be owned by qualifying tenants.
To be a qualifying leaseholder for enfranchisement they must have:
- a lease that was originally granted for a term of more than 21 years (it does not matter how long is left to run on the lease);
- a lease of 21 years or less that includes a clause allowing a perpetual right of renewal;
- a shared ownership lease where the leaseholder’s share is 100%;
- the continuation of a long lease under the Local Government Housing Act 1989 following the expiry of the original term; or
- a lease granted under the 'right to buy' or 'right to acquire on rent to mortgage terms'.
However, even if the leaseholder satisfies any of the above criteria, they would not be a qualifying tenant if any of the following applies:
- the landlord is a charitable housing trust and the flat is provided as part of the charity's functions;
- the leaseholder is the owner of more than two flats in the building. This could be either jointly with other parties or solely in their own name; or
- the leaseholder holds a business or commercial lease on that particular flat.
In order to qualify for enfranchisement the building also has to comply with the 25% non-residential rule. If more than 25% of the internal floor area of the building, excluding any common parts, is neither used nor intended to be used for residential purposes, such as shops or offices, then the building will not qualify for enfranchisement. Parking spaces and garages that are allocated for specific use by occupiers of flats in the building are considered to be residential for this purpose.
There is no right of enfranchisement where:
- the building has been converted into four or fewer flats; and
- it is not a purpose-built block of flats; and
- the same person has owned the freehold prior to the conversion of the building into flats; and
- the person or an adult member of their family has lived there for the past 12 months.
Some properties are completely excluded from the rights of enfranchisement which are:
- National Trust properties;
- buildings that are within a cathedral precinct; and
- Crown properties (although the Crown is not bound by the relevant legislation, the Minister has made a statement to the House of Commons that the Crown will be prepared to comply with its principles so enfranchisement should be possible).
Are there enough participating leaseholders to qualify and to finance the purchase?
There must be enough qualifying leaseholders for enfranchisement to proceed, the minimum number of participating leaseholders must be equal to half of the total number of flats in the building. For example, if there are twenty flats in the building, at least ten of the flats held by qualifying leaseholders must participate in enfranchisement. However, if there are only two flats in the building, both the flats of the qualifying leaseholders must participate.
It is preferable for more than the minimum number of leaseholders to indicate they wish to participate, for several reasons. It would make it less costly for all of those taking part and it would mean more leaseholders would have an input into the process and subsequently the management of the building as this would become the responsibility of the Nominee Purchaser (unless there is already a Right To Manage company in existence).
What is a Nominee Purchaser?
The Nominee Purchaser is usually a company formed by the participating leaseholders with the sole purpose of buying the freehold, although it can also be a different third party such as a social landlord. If the leaseholders do not have sufficient funds to collectively purchase the freehold they could use their legal right to allow a third party of their choice to buy it for them.
The most common is a company entirely owned by the leaseholders, which would be a company ‘limited by guarantee’. If this arrangement is chosen by the participating leaseholders, the company must be established prior to inclusion in the Initial Notice. The Leaseholders Association (LA) can provide detailed advice on how to form the appropriate type of company. An Articles of Association would be required to clarify the purpose of the company and to refer to voting rights and the general running of the company.
What are the leaseholders’ rights to participate?
It is in the collective interest to have as many leaseholders as possible involved in the freehold purchase however there is no legal right to participate and therefore no obligation to invite all leaseholders to take part. Regardless of this, the LA advises leaseholders instigating the enfranchisement process to notify all other leaseholders and flat occupiers of their proposals at an early stage. There would not appear to be any reason to exclude any leaseholders from the enfranchisement process unless they have clearly stated that they have no interest in participating.
How is the purchase price assessed?
The LA would recommend that the participating leaseholders obtain an initial valuation of the property from a qualified valuer or surveyor for an indication of the purchase price before starting the enfranchisement process.
It is extremely difficult for even the most experienced valuer to provide an accurate estimation of the eventual sale price. However, they should be able to provide an estimate of the highest and lowest figure the leaseholders should expect to pay. There is rarely an agreed fixed price for a freehold and the participating leaseholders should make themselves aware from the start, of an estimated range of sale prices.
Valuation advice is essential at an early stage as the legislation says that the price leaseholders offer for the freehold must be realistic. A valuer would also be needed by the leaseholders to carry out negotiations, and to provide expert evidence to a First-tier Tribunal (FTT) if agreement cannot be reached on the price.
When there are less years left to run on the lease the cost of buying the freehold increases and when there is a period of less than 80 years to run the freeholder is entitled to add half of the ‘marriage value’ to the calculation of the price. Marriage value is the additional value of the leasehold and freehold interests being combined due to the enfranchisement process.
In addition to the sale price, the participating leaseholders should consider their liability for the freeholder's costs. The total cost to each leaseholder would be an equal proportion of the eventual sale price of the freehold, their own cost of employing valuers and solicitors and the freeholder's reasonable costs in dealing with the enfranchisement process.
What is the basic enfranchisement procedure?
The procedure for claiming enfranchisement is complex and the LA would not advise a group of leaseholders to carry this out without professional assistance. A brief summary of the procedure is set out below:
- The leaseholders who wish to participate must obtain and sign an ‘Initial Notice’ that provides specific information about the building and the leaseholders, with the name of the persons or company in whose name the freehold will be acquired, and the price that they wish to pay.
- The Initial Notice is served on the freeholder. The notice should include a ‘response date” by which the freeholder must respond to the notice. This response date must be at least two months after the service of the Initial Notice.
- The freeholder serves a Counter-Notice stating whether the participating tenants’ right to enfranchise has been accepted and, if so, what terms are agreed and what remains open to negotiation.
- If the freeholder does not respond to the Initial Notice, or responds to it late, the leaseholders are entitled to buy the Freehold on the terms set out in the Initial Notice and there is a procedure for enforcing this.
- Following this there is a period of at least two months when the parties, typically using the valuers they have appointed, try to negotiate and reach an agreement.
- If there are issues that remain unresolved, the leaseholders must, within six months of the date of the Counter-Notice, apply to an FTT for a decision on any terms that have not been agreed.
Any members of the LA who would like further details of the procedure should contact us for specific advice.
What should the leaseholders do to ensure the process runs smoothly?
The LA recommends that the leaseholders instigating the enfranchisement process organise a working group, which should draft a written agreement on how they intend to proceed with enfranchisement. If it appears there are enough leaseholders willing to proceed, and the estimated purchase price of the freehold is not prohibitive, it is advisable for all leaseholders wishing to participate to enter into a formal agreement.
This agreement should set out the actions they intend to take and specify rules for matters such as voting rights, the negotiation and agreement of terms and the financial contributions the participating leaseholders need to make. This is particularly significant in respect of large blocks of flats where failure to reach timely decisions could result in the enfranchisement process collapsing. It may also be useful to include in any agreement what would happen after enfranchisement has been completed.
It would be helpful for participating leaseholders to discuss setting up a fund to cover costs, which would include forming a company limited by guarantee, obtaining documents and having a valuation carried out. This needs to take place before the service of the Initial Notice.
What happens if the landlord cannot be found?
If the landlord is missing, there is a separate procedure, involving a combination of the Courts and the FTT, which should enable the leaseholders to enfranchise even in these circumstances. Again these are detailed processes that the LA can provide further details to its members on request.
Would leaseholders need to employ professional assistance?
At some stage prior to the service of the Initial Notice and to help on an ongoing basis, the participating leaseholders will be strongly advised to employ a solicitor and a valuer. In addition to the advice they can provide, there will be a number an actions throughout the collective enfranchisement process they can help with.
Leaseholders should note that surveyors and particularly solicitors specialise in certain subjects, therefore it is important to select those who can demonstrate they have extensive knowledge of the enfranchisement legislation, practices and procedures.
At some stage prior to the service of the Initial Notice and to help on an ongoing basis, the participating leaseholders will be strongly advised to employ a solicitor and a valuer. In addition to the advice they can provide, there will be a number an actions throughout the collective enfranchisement process they can help with which include: Please see the LA information sheet 101 Glossary for a precise explanation of the terms used in this information sheet. This is a complex process and the LA can provide detailed advice to any flat-owners who are contemplating enfranchisement or at any time after the process has begun. However, the LA will be unable to carry out any of the functions of a solicitor, surveyor or valuer that are mentioned above.
Disclaimer: This is a very general explanation of the subject. Where issues are not governed by statute the information is our opinion or best practice. You are advised to seek professional advice before acting on the guidance contained herein. Whereas The Leaseholder Association endeavours to ensure that published information is correct, it does not warrant its completeness or accuracy. The Leaseholder Association assumes no responsibility or liability for any injury, loss or damage incurred as a result of any use or reliance upon the information and material contained herein.
Info Sheet: 113/2/15 ©Copyright