Collective Enfranchisement provides leaseholders of flats within a building the right to come together to purchase the freehold of the building as per the Leasehold Reform Housing & Urban Development Act 1993.
Where at least 50% of the building’s qualifying leaseholders come together (and if the building itself qualifies), then the existing freeholder can’t actually refuse.
Sounds simple enough, but the process is actually quite complex and will most likely require the assistance of a specialist solicitor and surveyor. The leaseholders may also need to come together under one company (the nominee purchaser) of which they will all be members and through which they will serve the initial notice to the landlord.
With many steps to tick through, it’s common for multiple actions to be entered into simultaneously. Many statutory deadlines are involved and, once the Initial Notice has been served, the clock is ticking. Any missed deadlines or skipped steps may result in the purchase not going ahead and the nominee purchaser will be responsible for all fees incurred by the Freeholder during the process.
With that in mind, preparation is key! Read on for some more information re the initial steps of the process and what needs to be done before you get the ball truly rolling.
Making Sure the Building and All Participating Leaseholders Qualify
For the building to qualify:
- The building must consist of at least two flats
- At least two thirds of the flats must be owned by qualifying tenants
The building will not qualify if:
- More than 25% of the internal floor area of the building (excluding any common areas), is neither used nor intended to be used for residential purposes (garages and parking spaces specifically used by flats in the building will be classed as residential)
- The building is a conversion into four or fewer flats and is not a purpose-built block
- The building has had the same freeholder since before the conversion into flats
- The building has been occupied by the freeholder or an adult member of his family for the past 12 months
Other buildings are excluded from qualifying if they:
- Fall within a cathedral precinct
- Are National Trust properties
- Include any track of an operational railway (including a bridge, tunnel or retaining wall to a railway track)
- Are Crown properties
For the tenants to qualify, they must be leaseholder who’s:
- Lease was at least 21 years long when it was first granted or, less commonly;
- The owner of a shorter lease that contains a perpetual renewal clause
- The owner of a lease that contains a ‘Prince of Wales’ clause meaning it is terminable on death, marriage or an unknown date
- The owner of a lease granted under the Local Government Housing Act 1989 following the expiry of the original term
- The owner of a 100% share of a shared ownership lease
- A lease granted under the ‘right to buy’ or ‘right to acquire on rent to mortgage terms’.
If any of the following scenarios apply, even if the above criteria are satisfied, the leaseholder will not qualify:
- The freeholder is a Charitable Housing Trust and the flat is provided as part of it’s functions
- The leaseholder owns more than two flats in the building (either jointly or solely)
- The leaseholder has a business or commercial lease.
Once you have established that the building and tenants qualify, you must make sure that at least 50% of the building’s leaseholders are participating e.g. if there are ten flats, at least 5 of the flats owned by qualifying leaseholders must be participating. If there are only two flats in the building, both leaseholders must qualify and participate. So, the building qualifies, your group of leaseholders qualifies…what next?
Funding
Collective Enfranchisement is an expensive affair and decisions about how to fund the process from start to finish need to be made early on. Many leaseholders set up a ‘fighting fund’ to cover the initial expenses such as setting up their company, valuations, having the participation agreement drawn up etc. They then decide on how to fund the rest of the process before serving the initial notice. Funding can come in the form of loans or mortgages so early planning is needed to ensure that the efforts and initial costs aren’t wasted.
Get it Together
The participating leaseholders will need to organise a committee who will work through all the necessary stages and liaise with the participating leaseholders. Sometimes this involves a very large group of people and decision-making can become arduous so it’s important that all parties enter into a formal agreement re their joint actions during the enfranchisement including rights of voting, negotiation, agreement of terms and the individual tenants’ financial contributions.
You may well have already involved your chosen (qualified and experienced) solicitor to confirm eligibility but if not, now’s the time to hand over to them. Your solicitor can prepare a Participation Agreement that covers the above to avoid any disputes and therefore reduce the risk of any delays in the process.
Choosing Your Nominee Purchaser
As touched on above, the nominee purchaser is the person or group that will serve the initial notice to the existing freeholder and become the new freeholder once proceedings are concluded. This could be an individual, a trust, or (commonly) a company formed by the participating leaseholders for this particular purpose. This decision needs to be made early on as, besides being named on the initial notice, the nominee purchaser will also be key to the latter stages of the process and will ultimately be responsible for the management of the building. If you decide to form a company, your solicitor, managing agent or an accountant can advise re the process. So, once the initial decisions above have been made and your funding is in place, you’re ready to choose your valuer and move on through the process under their and your solicitor’s guidance.
