Frequently Asked Questions - Collective Enfranchisement
In 1993 the tenants of blocks of flats were given the right to collectively acquire the freehold of their building. Various legislative changes were made culminating in the Commonhold and Leasehold Reform Act 2002 which has simplified the qualifying criteria and introduced various other measures which, on the whole, improve the position of leaseholders. Below are some answers to frequently asked questions.
Please note that this is a complex area of law and there are various exclusions and special provisions which apply in certain circumstances. This is only for general guidance and you should only act or refrain from acting after taking specialist advice on your particular situation.
Q: Why should we enfranchise?
A: There are a number of reasons. A main one is to enable the residents who participate to grant themselves long leases for nominal price with a reduction or removal of ground rent. Secondly, and although it does not apply in every case, is that the control of the management will be taken over by the tenants' nominee company. Thirdly there is the perceived psychological benefit in being part of a tenant owned building and is a good selling point with buyers.
Q: What are the qualifying criteria?
A: The main criteria are that:-
The building must be a self contained block of flats (which includes a converted building as well as a purpose built one)
The building must have no more than 25% non residential use
Two thirds of the flats must be let to qualifying tenants
A qualifying tenant is one who holds the flat under a long lease, namely one which, is for a term of more than 21 years
The qualifying tenants of flats comprising 50% of the flats in the building must participate
Please note that it is not necessary for a qualifying tenant to have owned a flat for a minimum period or to have lived in it
Q: Do we need a formal valuation?
A: Not strictly speaking but it would be highly unwise not to have one save in the very simplest of cases. The formulae are complex. You need to know how much you are likely to have to pay even if only for the purposes of negotiating with the freeholder. The notice served on the freeholder must state the proposed price. If it is unrealistic it could invalidate the notice. It is highly likely that the freeholder will employ a specialist valuer and the tenants will almost certainly need one to negotiate on their behalf. There are only a limited number of surveyors who specialise in this type of valuation.
Q: How much do we have to pay?
A: As said above the formulae are complex. They are based on various factors including the amount and the level of ground rents and frequency of review, the length of the unexpired terms of the leases and in particular it is important to note that where any of the flats of participating tenants have leases of less than 80 years unexpired it will be necessary pay a 'marriage value'. This is a main reason to press on with enfranchisement sooner rather than later. There are also circumstances where the tenants may need to pay for 'unsold' parts of the building although in many cases the freeholder is entitled to a lease back of those parts.
Q: Do we have to pay the freeholder's costs?
A: Yes. The legislation requires that the residents' nominee company pay the reasonable costs of the freeholder (and any intermediate landlord) of assessing the right of the tenants to enfranchise, dealing with the tenants notice and statutory procedure and handling the valuation and conveyancing work. Costs will normally comprise solicitors and surveyors fees. There is still a liability to pay the costs if the tenants withdraw from the process.
Q: Do we need to form a company?
A: There is no legal requirement at present but the simple practical answer is yes. Normally this would be a company limited by shares. It is often necessary to have a bespoke constitution depending on the complexity of the arrangements between participators which should, amongst other provisions, require a flat owner to transfer their share to the new owner when their flat is sold.
Q: How do we get ourselves organised?
A: The normal process is for a residents committee to be formed if this has not been done already and for one or two of the key people to drive the matter forward. Opinions of other residents should be canvassed. It is then a good idea to invite a solicitor to attend a meeting of the committee to answer questions, to explain what is involved and to advise on the pros and cons. To work well the process should be run like a military campaign!
Q: Do we need a binding commitment from participating tenants?
A: This is recommended. We have standard forms of participating agreement which are intended to bind the participators to themselves and to the process. This will have to be changed to meet the specific circumstances e.g. to specify how the interests in any non participating flats are dealt with how and when contributions to the price and costs paid and apportioned and giving participators the right to a new long lease of their flat.
Q: What are the other costs?
A: The main costs will be the professional fees, namely solicitors and surveyors/valuer as well as the landlord's costs, company formation costs. There may also be payments in respect of the conveyancing for example, Land Registry fees and incidental searches. Stamp Duty Land Tax only starts after a threshold of £125,000 per participator is exceeded, which is rare. You should bear in mind that there are a number of variables for example whether or not is it necessary for the claim to be referred to the Firts Tier Tribunal and whether the claim is dealt with fairly speedily by way of negotiation with the freeholder. Clearly there are economies of scale which can benefit large groups of participators. In our experience the overall cost per tenant usually works out to be reasonable when compared with the benefit obtained. Nevertheless before proceeding it is recommended that a costs benefit analysis be made once the initial investigative work has been undertaken.
Q: How long will it take?
A: You will probably need about 2 to 3 months to obtain detailed legal advice, obtain a valuation, report back to the other residents and generally organise yourselves to be in a position to go forward with the formal process. As to the statutory procedure itself this is initiated by a notice served on the freeholder (and any intermediate landlord). From there the timescale could be one of a few months if the freeholder accepts the claim in principle and the negotiations over the price are concluded reasonably quickly, to a year to 18 months if the freeholder disputes the claim or it is not possible to agree the price and other terms without reference to the First Tier Tribunal. Assuming the acquisition is successfully negotiated or awarded by the Tribunal you must allow a short period for the conveyancing of the freehold to the nominee company.