Most flats which are sold in England and Wales are leasehold, as property law determines. Through combined leaseholder participation in a collective enfranchisement, some leasehold flats are sold with a share of the freehold.
If you buy a leasehold flat you effectively have a tenancy, albeit one that lasts well into the future. The legal owner of the flat is the person or company who owns the freehold to the property, as the term ‘freehold’ refers to the land and the building that sits on it.
What is collective enfranchisement by definition?
Collective enfranchisement is the process by which the leaseholders in a building join together and buy the freehold. This right to do so comes under the Leasehold Reform Housing & Urban Development Act 1993.
The word ‘collective’ is important, as it means that the group will gain the freehold of the whole building in which their flats are located.
What are the benefits of owning the freehold to your flat?
If yourself or a group of residents have purchased the freehold usually lease extensions would be agreed between participants at no extra cost, also waiving the ground rent.
Owning the freehold of your flat means that you will actually own the ground and structure of the flat outright in legal terms with other owners who participated and therefore have more control over your own home.
If you want to do any home improvements such as building or extension work to your flat the group of residents that purchased the freehold may look more favourably on this than an external freeholder.
You will also most likely no longer be liable to pay large bills to the freeholder such as ground rent – essentially the right to use the land.
In addition to charges such as ground rent, if you are a leaseholder you will also have to pay a service charge for any services that your freeholder provides, such as maintenance, landscaping and cleaning of communal areas. The freeholder has the right to choose who they employ to complete these services, so if you buy the freehold, you and your fellow owners will have the choice of which property management company to appoint.
New housing developments have been selling houses as leasehold for the same price as they would be freehold, collecting ground rent and service charges. They also sell the house with a lease that will need an imminent extension – eventually gaining even more money by selling the freehold when requested a few years later.
To summarise, the key benefits to buying the freehold are that:
- The qualifying group of residents may be able to grant themselves a new lease to extend the term as they wish
- Your flat will be much easier to sell
- You will gain control of the management of your building
How does a building qualify for collective enfranchisement?
The premises will qualify for collective enfranchisement if:
- Two-thirds of the flats are owned by qualifying tenants (leaseholders whose leases have more than 21 years remaining)
- It contains two or more flats held by qualifying tenants
- It is part of a building or a self-contained building
- The freeholder or a close relative of the freeholder does not live in a property in the development
If 50% of the flats participate then the landlord can’t object. Purchasing a freehold can be a length and complex process so it is advisable to instruct a specialist surveyor and solicitor.
To qualify for collective enfranchisement it does not matter whether the flat is owned by an individual or a company or whether you live there or not.
Are there any exceptions?
Tenants do not have the right to acquire the freehold of a building in the following circumstances:
- If a leaseholder owns three flats or more in the building they do not qualify
- If the building is partly commercial, the leaseholders can’t proceed with collective enfranchisement if the commercial area accounts for more than 25% of the building
- A building with a resident landlord which is converted into four flats or less may not qualify for collective enfranchisement
Other exceptions include if the building is is a National Trust property or within a cathedral precinct. Some Crown properties are also exempt from collective enfranchisement.
What is the basic enfranchisement procedure?
The first step to collective enfranchisement is for the leaseholders to set up a company, of which they are all members. The Nominee Purchaser is chosen, who will be named in the Initial Notice.
The Initial Notice sets out certain information about the leaseholders and the building, the name of those seeking freehold and the price they want to pay. The notice also sets out a ‘responsive date’ by which the freeholder must respond by, which must be at least two months after receipt. This notice is then served to the freeholder.
A Counter-Notice is then served as a reply from the freeholder saying whether they accept the request and if they do, on what terms.
If the freeholder is late to respond to the Initial Notice, or they don’t respond at all, the leaseholders are given the legal right to buy the freehold on the terms specified in the notice.
If there are issues between the leaseholder and freeholder that can’t be resolved, the leaseholders can apply to the Leasehold Valuation Tribunal within 6 months of receiving the Counter-Notice.
The framework of the collective enfranchisement process entails:
- Checking if you can qualify to buy the freehold
- Organise a ‘company’ of qualifying leaseholders
- Choosing a Nominee Purchaser
- Choosing and appointing solicitors and surveyors
- Seeking expert advice and a valuation to determine the purchase price
- Serving the Initial Notice to the freeholder
How much will it cost to buy the freehold on my flat?
A number of factors can impact the price that you pay for the freehold of your flat, including:
- The value of each flat in the building
- The number of years left on each lease
The price to purchase the freehold will be higher if the leases have less than 80 years left on them.
The Leasehold Reform Housing & Urban Development Act 1993 contains a formula that can be used by a specialist surveyor to give you an estimate of the premium to the leaseholders taking part.
The qualifying leaseholders then have to work out how they will acquire and hold the freehold. It is recommended that this is managed by one person who is nominated to represent the group, or alternatively by a small committee that can work with the key professionals and then report back to the rest of the group. The process can quickly become extremely complex if every qualifying leaseholder in a block of flats is at cross-purposes, so electing one representative or a nominated committee prevents this and simplifies the process.
The price for the freehold specified on the Initial Notice must be realistic so it is essential that your valuation advice is provided by an expert in the is area. You can then all consider the price collectively and decide whether the quote that you receive is affordable.
Once you instruct your solicitor, costs begin to accrue, so it is vital that everyone agrees to the price. It is wise to make sure that you can also afford the shortfall if someone in the collective decides that they no longer want to purchase their freehold.
Whilst unusual, if you are in a large block of flats where a large number of flat owners choose not to buy the freehold, you may not have to make up their shortfall. Sometimes you can look into getting an investor to pay their share.
A thorough evaluation of what it is you’re actually buying within a freehold is essential. You should determine whether there is a basement, vault or underground car park included as part of the building as these can complicate the purchase.
It is imperative ensure that all those applying for the freehold can afford it at the earliest possible stage.
Whether you end up completing the purchase of the freehold or not, the participating tenants are liable for the freeholder’s and professional fees as soon as they serve Initial Notice.
For further information about residential property management in London or elsewhere, contact us today for further information.