Owning a long residential lease can be a valuable asset although, as the lease term decreases over time, so too can the value of your flat. However, together with other owner-occupiers, you may have the right to collectively purchase the freehold of your building.
In this guide, we explain the collective enfranchisement process for buying freehold property.
What is collective enfranchisement?
Collective enfranchisement refers to the process when leaseholders of flats collectively buy the freehold of a residential leasehold building. This means that each leaseholder will be buying a share of the freehold so that, as a group, they will own the whole freehold together.
Part-owning the grounds and the building that your flat forms part of will afford you greater control over the management and maintenance of your building. Other benefits of collective enfranchisement include the power to grant extended leases, without having to go through the normal statutory lease extension process or be bound by its fixed 90-year extension term, as well as removing the requirement to pay ground rent.
Owning a share of the freehold can also increase value and appeal when selling the property.
Who is eligible for collective enfranchisement?
The right for leaseholders of a building to join together and buy the freehold is set out under the Leasehold Reform Housing and Urban Development Act 1993 (as amended).
The 1993 Act gives leaseholders the collective right to force the sale of the freehold of the building, or part of the building, provided there are enough qualifying tenants to be able to proceed, and the building in question qualifies.
To qualify under the Act the building must:
- be a self-contained building or a part of a building
- contain a minimum of two flats
- have no more than 25% of the internal floor area, excluding common areas, in non-
- residential use, for example, as shops or offices
- have at least two-thirds of the flats owned by ‘qualifying tenants’.
A ‘qualifying tenant’ is a leaseholder with a long lease, which is defined as a lease of more than 21 years when originally granted. This will cover most residential leases which are typically granted with a term of either 99 or 125 years. There are, however, also other scenarios in which the leaseholder of a flat will fall within the definition of a qualifying tenant, for example, where the tenant has ‘staircased’ up to 100% equity under a shared ownership lease.
In broad terms, provided the building qualifies and the number of leaseholders who wish to participate represents at least 50% of the number of flats in the building, and those flat-owners are qualifying tenants, the landlord cannot refuse their claim.
There are limited exceptions to the right to buy the freehold, for example, if the building was converted from a single house with less than five flats, the freeholder, provided they carried out the original conversion, must not live in the building if the leaseholders wish to qualify. A leaseholder will also not be a qualifying tenant if they own more than two flats in the building, if they have a business or commercial lease, or the landlord is a charitable housing trust and provision of the flat forms part of the charity’s functions. However, in most cases, collective enfranchisement will be a viable option if enough qualifying tenants agree to proceed.
What is the collective enfranchisement process?
The process for collective enfranchisement can be complex, potentially involving a number of purchasers, with prescribed procedures and strict timescales to follow. Most freeholders are also unlikely to be cooperative in relinquishing their freehold, meaning professional legal advice is recommended.
Typicallt, the collective enfranchisement process involves the following steps:
Checking eligibility of the building and participating leaseholders
Not every leaseholder needs to participate, but there must be a sufficient number. The building must also qualify under the collective enfranchisement rules.
Choosing the nominee purchaser
The leaseholders will need to decide how they will acquire and hold the freehold. They must decide on a nominee purchaser, ie; the person or entity to whom the freehold is conveyed. The best way to purchase a freehold is typically via a company specifically set up for this purpose, of which all participating leaseholders will become members. The company will then act as the nominee purchaser and will be named in the initial notice to the landlord.
Organising for enfranchisement
It’s often advisable to draw up what’s known as a ‘participation agreement’ between leaseholders. This is a binding document that sets out the terms of the purchase, such as the contribution to be made by each leaseholder towards the freehold premium and overall procedural costs.
Assessing the purchase price
A surveyor will usually need to be instructed to provide a professional valuation. The surveyor will use the statutory formula set out under the 1993 Act, together with their own expertise and knowledge of the locality, to calculate the likely premium to put in the formal application to the freeholder.
Serving the initial notice
The solicitor will need to serve the formal application on the freeholder and any intermediate landlords setting out detailed information including the nominee purchaser, the proposed premium and the extent of the property to be included. Service of the notice will trigger the statutory process for acquiring the freehold, which then follows a prescribed route. The notice should also be registered against the freeholder’s title to protect against any subsequent disposal of the freehold.
Dealing with the subsequent procedures
The freeholder has two months to serve a counter-notice stating whether they admit or deny the leaseholders’ right to buy the freehold, and if they accept this right, whether they agree to the terms proposed. If the freeholder disputes the right to buy, an application to the County Court would need to be made for a declaration as to the leaseholder’s entitlement.
If the freeholder accepts the right to buy, but disputes the terms proposed, such as the premium, the parties will have a negotiation period of two months. If agreement cannot be reached within this timeframe, there is then a four month window during which an application can be made by either party to the First Tier Tribunal (Property Chamber) for a ruling.
Once the initial notice has been served, the collective enfranchisement procedure is classed as running and the nominee purchaser is likely to be subject to demands for information, where strict deadlines must be observed or risk being treated as having withdrawn from the process. The notice must also be complete and contain no inaccuracies, otherwise risk being rejected as invalid. It’s also worth noting that participating leaseholders will be liable for the landlord’s reasonable professional fees from the moment they serve the notice, whether or not they go on to complete the purchase, for example, if the qualifying tenants fail to provide evidence of title, the initial notice would be deemed withdrawn, with costs still payable to the landlord.
What is a participation agreement?
Collective enfranchisement is a co-operative venture working to strict statutory time limits in which every person taking part depends on everyone else to perform. In particular, everyone involved in the purchase has to agree to provide a certain amount of money, where any failure to do so, or to do so on time, may cause the process to fail. It’s therefore recommended that all participating tenants enter into a formal participation agreement amongst themselves which will deal with various issues, including an individual tenant’s financial contributions.
A participation agreement is essentially about formalising participation in the joint purchase of the freehold, and provides a contractual basis to ensure that everyone complies and makes their contributions on time. The participation agreement can also be used to control various other aspects of the collective enfranchisement process, including rights of voting, the negotiation and agreement of terms, how the costs of managing and maintaining the building will be shared post-purchase, as well as the important right to obtain new long leases. In this way, the participation agreement can help to pre-empt any potential conflict between leaseholders, both during the collective enfranchisement process and after the acquisition.
How is the collective enfranchisement price decided?
The price payable for the freehold will depend on a number of factors, including the market value of the individual flats and the length of their leases. By law, the freeholder is entitled to be compensated for the value of the freehold, made up of a number of factors, including:
- loss to the freeholder of ground rent income from the flats
- loss to the freeholder of the reversion, i.e; the entitlement to the building at the end of the existing leases
- 50% of the marriage value where an unexpired lease is less than 80 years. The marriage value is the increase in value arising from the leasehold and freehold interests being combined. This means that the price payable for the freehold will often be significantly higher if the leases have less than 80 years remaining.
There is no exact science in determining the purchase price, and a professional valuation isn’t strictly required. However, an experienced surveyor will be best placed to provide a fair estimated range. If a dispute arises with a landlord over the cost of the freehold, the leaseholders can apply to a Tribunal to decide the issue. A ruling will be made by the Tribunal after hearing any evidence from both parties, including any professional valuation evidence.
Once terms have been agreed, or the Tribunal has made a ruling, the parties are then required to enter into a contract within specified time limits. A party can apply to the County Court to force the other party to enter into the contract if these time limits are not met.
Landlord rights & responsibilities
The freeholder has a limited statutory right to resist a claim for collective enfranchisement in order to redevelop their property. However, this right requires that at least two-thirds of long leases be due to end within five years. The landlord also has to prove that they need possession for demolition, construction and redevelopment.
Otherwise, where the building and leaseholders qualify for collective enfranchisement, the freeholder will not usually have any basis upon which they can refuse to sell the freehold and will be required to participate in the collective enfranchisement process, or have an order made in any event. The responsibilities of the landlord in this context include providing information about who owns the freehold and the names of other leaseholders where requested, and service of a counter-notice setting out their response to the claim.
Most disputes, however, arise not over the right to buy, but rather over the purchase price. It’s therefore important that independent valuation evidence is sought to support the proposed premium, so that the landlord is more likely to accept any claim without challenge. It’s also crucial that expert legal advice is secured so that the prescribed procedures are followed.
Collective enfranchisement FAQs
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Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.
