What is Collective Enfranchisement?
As collective enfranchisement solicitors, we understand how difficult it can be to understand legal concepts and procedures around collective enfranchisement.
Thankfully Jade Wilson, Solicitor at Ashley Wilson Solicitors, is here to explain more about what collective enfranchisement is and how to understand the process.
Q: What is collective enfranchisement?
A: Collective enfranchisement is the process by which the owners of flats in a block can join together to make a claim to force their freeholder to sell the freehold of their building to them.
Q: How do tenants form a collective enfranchisement?
A: The first step is to make contact with other flat owners to discuss the benefits of acquiring the freehold, the potential costs and discuss instructing a solicitor and valuer to act on behalf of the tenants.
If you need to obtain contact details for the other flat owners, it is possible to find an address for the owner of the flat from the Land Registry.
Q: How easy is it to set up?
A: This is likely to depend on the size of your building. If there are up to six flats it should be relatively simple to contact the other flat owners, however, if the building contains a large number of flats the administrative task will be larger.
In the event that you are interested in acquiring the freehold of a larger building, you may wish to instruct a company to write to all the leaseholders to establish whether they would be interested in joining in a claim. You may wish to ask your managing agent, solicitor or a specialist company who project manage claims for large buildings.
Q: Why should tenants buy the freehold?
A: There are many reasons for the tenants to buy the freehold of the building, but some of the most common reasons include: –
– The participating tenants will have a greater degree of control over the management (and service charges!) in relation to the building.
– The tenants can extend their leases to 999 years and reduce their ground to nil.
– The clauses in the new 999-year leases can be varied to suit the leaseholders.
– In comparison to a statutory lease extension, the premium and costs are likely to be less as they are divided between a number of tenants.
– In comparison to a statutory lease extension (where the tenant must have owned their flat for two years before they can start a claim), there is also no requisite period of ownership for a tenant to participate in a claim.
Q: What is the qualifying criteria?
A: In order to make a claim for the freehold of your building, the following criteria must be met:
– The building must be a self-contained building (structurally detached from any other building) or part of a building (which must be able to be severed vertically from the other parts of the building).
– If there are any commercial units, the floor space must not exceed 25% of the total floor space (excluding the common parts).
– At least 2/3rds of the flats in the building (or part of a building) must have long leases granted over them that were granted for at least 21 years from the commencement of the term (even if there are less than 21 years remaining at the date the collective enfranchisement claim is commenced).
– At least 50% of the flats in the building must participate in the claim.
Q: Is it expensive / How much do you have to pay?
A: The premium payable to the freeholder to buy the freehold will depend on a number of factors, including:
– The location of the building
– The number of flats in the building
– How many flats are participating in the claim
– How long the term remaining on each lease is
– Whether there are any commercial units or flats retained by the freeholder
– At the outset of the matter, you will need to instruct a specialist collective enfranchisement valuer who will be able to advise you of the estimated premium payable for the freehold.
– The valuer will also advise you of the first offer price to put forward to the freeholder and will negotiate the premium with the freeholder’s valuer on your behalf to ensure that you are paying the lowest premium possible to the freeholder.
Q: Are there other costs involved?
A: As part of the collective enfranchisement process, as well as the premium, the following costs will be payable:
– The tenants’ valuer’s costs
– The tenants’ solicitor’s costs
– The freeholders’ reasonable valuation costs
– The freeholders’ reasonable legal costs
– Any arrears of service charge and ground rent on the date of completion
– The reasonable valuation and legal costs of any intermediate leaseholder(s) (if there are any)
Q: Do tenants have to pay the freeholder’s costs?
A: The tenants’ are liable for paying the freeholder’s reasonable costs for the following work:-
– The freeholder’s initial valuation
– The freeholder’s legal costs for reviewing the initial notice and serving the counter-notice (and associated work)
– The freeholder’s legal costs for drafting and negotiating the terms of the Transfer Deed
– The freeholder’s legal costs for completing the matter
– The tenants’ are not responsible for the freeholder’s costs in relation to the following:-
– The freeholder’s valuation costs for negotiating the premium
– The freeholder’s costs involved in preparing for or attending a Tribunal hearing
– If the freeholder claims costs that are unreasonable, the tenants’ can make an application to the Tribunal for the Tribunal to determine the reasonable costs payable by the tenants.
Q: Do tenants need to form a company?
A: It is not a requirement of the legislation that the tenants form a company to hold the freehold interest but if there a building consisting of 3 or more flats, we would recommend that a company is formed to hold the freehold interest for administrative purposes.
Q: How do tenants start the process?
A: In order to start the process, the tenants will need to: –
– Instruct a valuer to advise on the estimated premium payable on completion and the offer a price to put forward to the freeholder; and
Instruct a solicitor to: –
– Investigate the Land Registry documents to ensure that the tenants’ claim is valid
– Prepare a Participation Agreement (an agreement between the tenants set out their obligations in respect of the claim)
– Set up the company (if required);
– Draft the offer notice and serve the offer notice on the freeholder
Q: How long will it take?
A: We estimate very broadly that a collective enfranchisement claim will take from 6 – 12 months from the date that the initial offer notice is served on the freeholder until completion. However, we work towards your timescales and if the tenants would like to delay completing or speed matters up that we will endeavour to do so.
Q: What happens once all terms are agreed?
A: Once the terms have been agreed (or determined by the Tribunal) then the tenants’ have a very maximum of four months from that date in which to sign the Transfer Deed and pay the premium and associated costs to the freeholder to complete the purchase of the freehold.
Q: Finally, is it worth it?
A: It is definitely worth making a claim for your freehold. If you have a lease that was granted for 125 years or less then it is likely that in your lifetime you will have to extend your lease. The less time that remains on the term of the lease, the more expensive it is to extend your lease. If you acquire the freehold you can extend your lease to 999 years (rather than the 90 years you are entitled to under a statutory lease extension).
Even if your lease is a long lease, it is still definitely worth making a claim for the freehold as you have a greater degree of control over the management of your building and having a share in the freehold is likely to increase the market value of your flat.
Q: What’s the difference between leasehold and a freehold?
A: If you own the freehold interest in land and/or buildings, you are the absolute owner of that land and/or building and this interest will never expire.
If you own the leasehold interest in land and/or buildings, it is held for a finite amount of time (normally granted initially for 99 or 125 years) and following the expiry of the lease (the document that grants the leasehold interest) the ownership of the land and/or building reverts back to the freeholder.
Q: Should the Government be speeding up the change in rules for leaseholders?
A: The Government should definitely be speeding up changes in the law to avoid abusive leasehold practices, for example, ground rents that double every ten years. However, it is important that the Government do not rush through legislation that may have unintended consequences or will not be adopted, for example, with commonhold.
Q: What is commonhold?
A: Commonhold is a system of property ownership that introduced in England and Wales in 2002.
Effectively, it allows flat owners to own the freehold of their own flat in a building with shared ownership of and responsibility for land and parts of the building used in common with the other flat owners. This would include, for example, the maintenance of common hallways, gardens or other amenity land, the structure of the building including the roof and foundations, and the buildings insurance.
The system has not been widely adopted and it is often commonly joked that there are more books written on commonholds than there are actual commonholds in England and Wales!
Should you wait for the government to reform leasehold law or act now?
Unfortunately, there is no certainty as to how and when the law will be reformed. It is possible that any leasehold law reform will only affect new leases and will not apply to existing leases, or that the reform may only affect certain aspects of existing leases, for example, limiting the amount of ground rent that may be charged but have no effect on the length of the term. Another proposal that the law commission are considering is prohibiting the sale of leasehold houses, of course, this will have no effect on flats.
Alternatively, even if the government reformed leasehold law, it does not necessarily mean that the reforms would be widely adopted, as we have seen with the introduction of commonhold.
In addition, as leases become shorter the higher the premium will become, so we would recommend proceeding with your claim to acquire the freehold as soon as possible.
Buying the freehold can be a difficult process. We recommend you get professional help from a solicitor at Ashley Wilson with experience in this area.
For more information on the collective enfranchisement process, please download our infographic Collective Enfranchisement Procedure – The Ashley Wilson Solicitors Guide.