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22 Jan 2021

Guide to Collective Enfranchisement

Tenants of long leases of flats (granted for a term of over 21 years) have the right to acquire the freehold of the building, and any intermediate leasehold interests (on a collective basis).

This right is called collective enfranchisement and the statutory provisions are contained in The Leasehold Reform Housing and Urban Development Act 1993.

This guide sets out the basic procedure of a collective enfranchisement claim. If there is anything that you do not understand, or would simply like to discuss further please contact the person in our office with conduct of your matter or the contact at the name at the end of this guide.

Eligibility

Before serving formal notice to start a claim for collective enfranchisement steps must be taken to establish that the building is eligible for collective enfranchisement and that the leaseholders are eligible to make the claim. The eligibility rules are complex. The basic rules are summarised below:

  • The building must be the whole of a self-contained building, or a structurally separate part divided vertically from the other parts.
  • The building must be made up of at least two flats.
  • At least two-thirds of the flats in the building must be let to qualifying leaseholders IE tenants of leases granted for more than 21 years (the present unexpired term is not relevant).
  • No more than 25% of the building (excluding common parts) must be used for non-residential use.
  • The leaseholders making the claim must equal at least 50% of the total number of flats in the building. If there are only two flats in the building, both flats of qualifying leaseholders must participate.
  • Certain buildings such as those with a resident landlord, or buildings where the National Trust or the Crown owns the freehold, are excluded from the right to collective enfranchisement.
  • There are no longer any residence or low rent tests.

Organising the participating leaseholders

The participating leaseholders will usually form an informal working group to ascertain which tenants wish to participate in the claim and to discuss the best way to proceed with the claim.

Participating leaseholders are advised to enter into a formal participation agreement to set out the steps that will be taken prior to and during the collective enfranchisement claim. Such an agreement will cover matters such as voting rights, negotiation and agreement of terms and the financial contribution to be made by individual leaseholders. Where appropriate the participation agreement may also include an agreement that, on completion of the purchase of the freehold, the new freeholder will grant new long leases or vary the leases held by the leaseholders participating in the claim.

Qualifying leaseholders do not have a statutory right to participate in the collective claim. A particular leaseholder or leaseholder(s) can be excluded from the claim by the participating leaseholders if the 50% threshold is satisfied. There are provisions to change this and require all qualifying tenants to be notified of a proposal to enfranchise and be invited to participate but these provisions are not yet in force.

Financing the claim

Leaseholders will need to be clear of the funds required to finance the acquisition. These will include the purchase price and also professional fees including the landlord’s professional fees. Professional fees will be payable even if the notice is withdrawn.

The purchase price for the freehold is a matter for expert advice and will be made up of the following elements:

  • The open market value of the landlord’s interest in the building and the interest of any intermediate landlords.
  • The marriage value i.e. the value to the leaseholders of acquiring the freehold and their existing leasehold interests and therefore the ability to vary or extend their leases. This is only applicable if the length of the unexpired lease is less than 80 years.
  • Compensation for severance if the leaseholders’ claim will lower the value of other property belonging to the landlord.

The nominee purchaser

One of the first steps to consider is the identity of the nominee purchaser. The nominee purchaser is the person named in the Initial Notice and will acquire the freehold and become the new landlord. In most cases, the nominee purchaser will be a newly formed company wholly owned by the participating leaseholders with appropriate voting rights and control of shares.

Professional Advisers

The leaseholders will require professional assistance from a suitably qualified valuer and solicitor. The valuer will advise on the offer to be made in the leaseholders’ Initial Notice and the response to the landlord’s Counter Notice and will also be able to advise on the condition of the building and implications for future maintenance and management.

The solicitor will investigate the eligibility of the claim, set up the nominee company, serve the Initial Notice, respond to any requests to substantiate the claim, and will prepare the transfer of the title of the freehold to the nominee purchaser and any subsequent extension or variation to the leases.

Procedure

  • The leaseholders may set up an informal working group and take initial advice on eligibility and value.
  • Where necessary the leaseholders may serve an Information Notice on the landlord requesting details of the landlord’s interest, the interest of any intermediate landlord, and requesting copies of documents such as service charge accounts. The landlord must respond within 28 days.
  • The leaseholders must make arrangements for a nominee purchaser and any participation agreement.
  • Participating leaseholders serve an Initial Notice on the landlord and the valuation date for the claim will be the date of service of the Initial Notice.
  • The landlord may request additional information of the leaseholders’ interests in the building within 21 days of receipt of the Initial Notice. The nominee purchaser must respond to any such request within 21 days or the Initial Notice is deemed to have been withdrawn, with costs payable to the landlord and a new notice cannot be served again for another 12 months. The landlord also has the right to inspect the property, including the participating leaseholders’ flats on 10 days notice.
  • The landlord must serve a Counter-Notice by the date specified in the Initial Notice. This date must be at least two months from the date of service of the Initial Notice. If the landlord fails to serve the Counter-Notice, the nominee purchaser must apply to court within six months for a Vesting Order, otherwise the Initial Notice is deemed withdrawn.
  • If the claim is denied the nominee purchaser must apply to the court, within two months of Counter-Notice, for declaration that the Initial Notice is valid.
  • If the claim is agreed but terms cannot be agreed, either party may apply to the Leasehold Valuation Tribunal (LVT). This must be done at least two months from, but within six months of, the date of service of the Counter-Notice.
  • The LVT determination is a formal procedure requiring expert evidence to be presented by all parties. The LVT will determine the terms of the claim and this determination will become final after a 21-day appeal period.
  • The landlord must provide a draft contract for the transfer of the freehold to the nominee company within 21 days of the LVT’s determination. The parties are expected to enter into the contract within two months of the LVT’s decision failing which the participating leaseholders must apply to court within a further two months for a Vesting Order.

Additional Costs

Stamp Duty and Land Registry fees will be payable by the nominee company in addition to the purchase price and professional fees.

Possible benefits and burdens of making a collective Enfranchisement claim

Participating leaseholders will have the benefit of the ability to grant themselves (via the nominee purchasing company) lease extensions or variations that may significantly increase the value of their interests in the property. In addition, participating leaseholders will have a greater degree of control over the day-to-day management of the building and the expenditure on service charge items via their interest in the nominee purchasing company.

These possible benefits must be weighed up against the need for participating leaseholders to be prepared to take an active role in both the collective claim (including the possibility of disputes between tenants) and the ongoing management of the building. The burden of the later can be offset by the employment of suitably qualified managing agents as officers of the nominee purchasing company.