In 2017, the issue of ground rent being charged on new build properties caught the media’s attention. The cases involved some developers securing contracts with leaseholders that saw the initial ground rent of £200-£400 charged on their new build property doubling every decade. This made the homes virtually unsellable. To rectify the situation, in 2019, laws were enacted to ensure all new build homes must be sold as freehold and abolishing ground rents on new flats. In January 2021, further leasehold reforms were announced; however, there has been no date set for when the changes will become law. Therefore, if you own a flat, it may be in your best interests to consider collective enfranchisement if you and others in your building are unhappy with certain aspects of your leasehold, for example, the service charges.
What is Collective Enfranchisement?
Collective enfranchisement is a right, provided by the Leasehold Reform Housing & Urban Development Act 1993 for the owners of flats in a building and sometimes part of a building, to join together and buy the freehold of that building.
How can tenants come together to purchase the freehold of their building?
The procedure for collective enfranchisement is complex and leaseholders will require an experienced Property Law Solicitor to advise them on the process.
The basic framework for applying for collective enfranchisement is:
- Checking eligibility (of the building, the tenants, etc.)
- Organising for enfranchisement
- Choosing the Nominee Purchaser
- Selecting and instructing professional advisers (solicitors and surveyors)
- Assessing the purchase price
- Serving the Initial Notice
Checking eligibility for collective enfranchisement
Eligibility for collective enfranchisement applies to the building and the tenants.
For the building to qualify for collective enfranchisement, it must:
- Contain at least two flats and at least two-thirds of these flats must be owned by “qualifying tenants” – see below.
- Have no more than 25% of the internal floor area of the building, excluding any common parts, garages, or parking spaces, used for non-residential purposes.
- Have at least half the flats with qualifying tenants want to join together for collective enfranchisement purposes.
To be a qualifying tenant, you must have a long lease that was originally granted for 21 years or more and you must not own three or more flats in the building.
Organising for enfranchisement
After canvassing for the 50% of tenants required to qualify for collective enfranchisement, many applicants set up a committee or a company to deal with the process and drive it forward.
Choosing a Nominee Purchaser
A Nominee Purchaser is a person named in the Initial Notice who will acquire the freehold. Often the Nominee Purchaser is a company or trust, formed by the tenants to acquire the freehold.
If the nominee purchaser is a company, all participators will be shareholders, and some will be officers of that company.
Selecting professional advisors and assessing the purchase price
You will need to instruct a valuer to advise you on the price you should offer in the Initial Notice to purchase the freehold. There is a formula defined in the 1993 Act which a surveyor will use to give an estimate of the premium the participating leaseholders will have to jointly pay to buy the freehold. The cost of a share of the freehold for one flat (excluding legal fees) is broadly similar to the cost of extending a lease by 90 years. Therefore, the shorter the lease, the more expensive purchasing the freehold will be.
However, there are other costs involved in buying a freehold. For example, the tenants are responsible for paying the landlord’s legal fees and other costs associated with the process.
Tenants partaking in the collective enfranchisement may find it worthwhile to create a fund to pay the costs associated with the process.
Serving the Initial Notice
By serving the Initial Notice, tenants formally notify their landlord of their intent to purchase the freehold of their building. Tenants are responsible for the reasonable costs incurred by the landlord concerning the collective enfranchisement from this point on.
The Initial Notice must contain the names and addresses of the qualifying tenants and the amount proposed for the purchase of the freehold.
The Notice can be registered with the Land Registry to prevent the freeholder from selling the property before the enfranchisement process is completed.
After receiving the Initial Notice, the landlord must serve a Counter-Notice by the date specified.
The Counter Notice will:
- agree your right to the freehold and accept your terms (or propose different terms); or
- not approve your right to the freehold and give details why not (which will need to be determined by the County Court); or
- neither admit nor deny entitlement, but state a submission is to be made to the court for an order that the right to enfranchise cannot be made because the freeholder aims to redevelop the whole or a substantial part of the property.
Completion of collective enfranchisement
Once you and your landlord agree on the terms of purchasing the freehold of your building, the deal becomes a conveyancing transaction.
If the matter proceeds to completion the participating tenants, through their nominee purchaser, will become the freeholder of the building, subject to the various flat leases. In effect, the participating tenants will replace the existing freeholder and they can grant themselves extended leases.
In summary
Collective enfranchisement is a considerable investment in time and money; therefore, containing experienced legal advice is essential.
The benefits of collective enfranchisement can be significant; leaseholders gain control over the building their home is located in and the power to make decisions that are in their best interests over the long term.