Collective Enfranchisement

What is collective enfranchisement?

Collective enfranchisement is the owners of flats in a building joining together to acquire the freehold of the building. 

Right of first refusal – Landlord and Tenant Act 1987

If the landlord wishes to sell the freehold of a qualifying building, the landlord must first offer the freehold to the leaseholders to collectively purchase it (the right of first refusal).  The right of first refusal procedure is governed by the Landlord and Tenant Act 1987 (the 1987 Act). 

The offer is made by way of a formal offer notice (section 5 notice) giving the leaseholders at least 2 months to accept the offer.  To accept the offer the qualifying leaseholders of more than 50% of the flats in building must participate.  If the requisite majority of the leaseholders accept the landlord’s offer the landlord may not sell the freehold to someone else. 

If the landlord chooses to proceed, the conveyancing process is then dealt with and the purchase of the freehold is completed.

It normally takes approximately 5 to 9 months to complete the purchase of the freehold under the right of first refusal procedure.

It is a criminal offence for a landlord not to follow the right of first refusal procedure. 

Also if the procedure is not followed and the freeholder is sold, the leaseholders are entitled to acquire the freehold from the buyer of the freehold. 

Claim for the freehold – Leasehold Reform, Housing and Urban Development Act 1993

Whether or not the landlord wishes to sell the freehold to anyone, if the qualification criteria are met the leaseholders collectively can force the landlord to sell them the freehold.  The procedure for claiming the freehold this way is governed by the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act).

The procedure formally starts with the leaseholders giving an initial notice (section 13 notice) to the landlord setting out the leaseholders’ proposals, primarily the purchase price for the freehold. 

The landlord must serve a counter-notice in response, setting out the landlord’s counter-proposals. 

If all the terms cannot be agreed between the parties soon enough then an application to determine these can be made to the First-tier Tribunal.

Once the purchase price and other relevant terms are eventually agreed, or determined by the First-tier Tribunal, the purchase of the freehold is completed and then registered at the Land Registry.

It normally takes approximately 6 to 12 months to complete the purchase of the freehold via a statutory claim under the 1993 Act.

The benefits of collective enfranchisement

An important reason leaseholders may wish to purchase the freehold is to be in control of the building which they live in.  If they are managing the building, leaseholders may obtain a reduction in the expenditure for maintaining the building which would reduce the service charges.

If they own the freehold leaseholders can agree with each other to grant themselves extended leases of their flats and/or vary their lease provisions.  Even if the leaseholders own the freehold, the leases of their flats will continue and the length and provisions of the leases are still essential.

Collective enfranchisement may also be a way of preventing unwanted development of the building.

Eligibility for collective enfranchisement

Right of first refusal

To qualify for the right of first refusal under the 1987 Act, generally:

• The premises consist of the whole or part of a building.
• The premises must contain at least two flats held by qualifying leaseholders (qualifying tenants).
• The number of flats held by qualifying leaseholders tenants must be more than 50% of the total number of flats contained in the premises.
• The non-residential floor area of the premises must not exceed 50% of the total floor area of the premises.
• The qualifying leaseholders of more than 50% of the flats in the building must participate.

Leaseholders who own more than two flats in the building are not qualifying leaseholders.

Certain landlords are exempt from the right of first refusal procedure.

Claim for the freehold 

To qualify to claim the freehold under the 1993 Act, generally:

• The building must be self-contained.
• The building must contain at least two flats.
• No more than 25% of the building may be non-residential.
• At least two-thirds of the flats must be owned by qualifying leaseholders.
• The qualifying leaseholders of at least half of the flats in the building must participate in the claim for freehold.

Leaseholders who own more than two flats in the building are not qualifying leaseholders.

Certain landlords are exempt from the right of first refusal procedure.

Nominated purchaser/nominee purchaser

The participating leaseholders may purchase the freehold in their individual names or in the name of a company owned by them.

Sometimes holding the freehold in the individual names of the participating lessees is suitable. 

In many cases, holding the freehold in the names of a company is more appropriate.

If the freehold is being purchased in the name of a company then a company with suitable articles of association will have to be set up.

Participation agreement

Whether the 1987 Act right of first refusal procedure or the 1993 Act claim for the freehold applies, leaseholders who wish to purchase the freehold should have a participation agreement. made between each other.

By the participation agreement the participating leaseholders y usually agreement with each other 

• that they will proceed with the purchase of the freehold on certain terms;
• how much each of them will contribute to the purchase price;
• how much each of them will contribute to the legal costs and any surveyors’ costs regarding the purchase of the freehold;
• that after the freehold is purchased the leases of the participating flats will be extended; and
• the provisions of the extended leases to be granted.

Lease extensions 

When the freehold has been purchased by the leaseholders the leases of their flats will still exist and the length and provisions of the leases will still be important. 

Therefore, the leases of the participating flats should be extended following the purchase of the freehold and, if appropriate, relevant modifications to the leases should be made.

Usually the extended lease is for a term of 999 years with no ground rent or sometimes a low ground rent.

Purchase price 

The purchase price for a freehold this based on a number of factors, including the value of the flats in the building, the remaining lease term on each flat, the ground rent and the potential for developing the premises.

If less than 80 years remain on the lease of a flat in the building then the calculation of the premium may include marriage value, which can increase the purchase price substantially.

A valuation of the purchase price from a surveyor who specialises in collective enfranchisement valuations is recommended so that you have guidance on the purchase price to be paid.

Timing of completion or serving an initial notice

When the unexpired term of a lease of a flat in the building is 80 years or less, the purchase price for the freehold can increase significantly since marriage value might then be included in the calculation of the premium. 

If the unexpired term has not yet reached 80 years it is therefore important that before 80 years is reached an initial notice for a claim for the freehold under the 1993 Act is served, or that the purchase of the freehold completed in relation to a right of first refusal or voluntary purchase of the freehold.

Landlord’s costs

In right of first refusal purchases following the 1987 Act procedure, whether the leaseholders must pay the landlord’s costs if the landlord makes this a term of the offer for the sale of the freehold.

In statutory claims for the freehold under the 1993 Act, leaseholders must pay some of the landlord’s reasonable legal costs and pay the landlord’s surveyor’s reasonable valuation costs.

Law Reform

There is proposed law reform concerning leasehold matters, including collective enfranchisement.  Please see our comments on this by clicking here.

Contact our collective enfranchisement solicitors

For expert advice on collective enfranchisement in London, the South East and throughout England, contact Grant Saw Solicitors today. For more information, please email us or contact us on 020 8858 6971.