Collective enfranchisement and lease extensions have attracted much interest since their formal introduction in 1967 and have evolved vastly since their inception. The right of long leaseholders to buy their landlord’s interest outright or acquire an extended lease term has led to a number of legal challenges over the years. Landlords and tenants are anxious to protect their competing interests, and this is therefore an area of the law which is continually evolving.
The legislation confers two distinct rights:
- to purchase the freehold, either individually relating to leasehold houses, or collectively for a block of flats;
- to seek a lease extension.
Although these rights are qualified by the statutory tests for qualification, changes to the legislation have made it simpler for leaseholders to make a claim. The requirement that leaseholders must have occupied the property for a period of two years has largely been swept away and replaced by a new, two-year ownership test. Indeed, in the case of a collective enfranchisement, even the ownership requirement has been removed. Likewise, qualification tests based on the property’s rateable values and rent have gone, with the result that higher value houses, for example, may now enfranchise.
What is Collective Enfranchisement?
This gives the right for leasehold flat owners acting together to purchase the freehold and any head leases of their building. A building will qualify under the act if it:
- contains two or more flats held by qualifying tenants; and
- is an independent building or part of a building which is capable of independent development; and has at least two thirds of the flats held by qualifying tenants (A qualifying tenant must have a long lease, which when originally granted was for a term of more than 21 years, and must not own three or more flats in the building. You cannot be a qualifying tenant if you hold a business lease.).
Notwithstanding the above, a building will not qualify if:
- it comprises four or less units and has a “resident freeholder”
- more than 25% of the internal floor space (excluding common parts) is used for non-residential purposes;
- it is part of an operational railway.
- it is owned by a Housing Association or Charity and the leases are provided as part of their work
Preparation of a Claim
As a qualifying tenant, you can give a notice to your landlord, or the managing agent, requiring them to provide details of the legal interests in the block/building. The response to this notice should provide the tenant with the details in order for him to ascertain whether the building contains a sufficient number of qualifying tenants for it to qualify as above.
Having established that the building qualifies, it is then advisable to find out whether you have a sufficient number of tenants who want to participate. This is important because you will need enough qualifying tenants for the enfranchisement, but is also important from the point of view of being able to finance the acquisition. In order to qualify for enfranchisement, you need to establish that the number of participating tenants comprises not less than one half of all the flats in the building. However, if there are only two flats in the building then both must participate.
When these points have been established, there are five further practical steps which should be taken before embarking on the enfranchisement procedure.
1. You must establish what it is going to cost by obtaining a valuation. In simple terms, the price to be paid by the participating tenants to purchase the freehold of the building is the aggregate of:
- the building’s investment value to the freeholder – the capitalised value of his ground rents and the value of his reversion;
- one half of the marriage value – the increased value attributable to the freehold by virtue of the participating tenants being able to grant themselves extended leases at nil premium and a peppercorn rent;
- compensation for loss in value of other property owned by the freeholder, including development value consequent to the severance of the building from that other property.
For the purposes of calculating price, the tenants should take the advice of a properly qualified Surveyor or Valuer with experience in the field of enfranchisement and knowledge of the market.
In addition, you must consider the participating tenants’ own legal costs, valuation fees, and the claimants will be required to reimburse the freeholder his own legal costs and valuation fees.
2. You will need to decide how to finance the cost of acquisition of the freehold. Some of the participating tenants may need to seek a further advance from a Building Society or Bank. The participants must consider who is to finance the purchase of the non-participants’ flats and on what basis.
3. It will be necessary to establish what vehicle should be used in order to buy the freehold and how the participating tenants will establish and regulate the relationship between themselves. In most cases, this is likely to be through a company structure, although in some circumstances a trust might be more appropriate. It should be noted that the participating tenants do not all have to have equal shares, so that the proportion of the shareholdings will be a matter for negotiation between them.
4. You should consider tax implications to the transaction and seek specialist advice, both in relation to each individuals position and in relation to the vehicle chosen to buy the freehold.
5. A Participation Agreement should also be considered between the participating tenants. The legislation provides no guidance on the way in which the participating tenants should work together. Since the purchase may well involve substantial sums of money and is likely to take time to complete, it is strongly advised that, before embarking on a claim, the participating tenants should enter into a formal Participation Agreement in order to regulate the relationship between them during the course of the claim.
How is a Claim made?
You must be aware that most of the time limits imposed on the procedural stages of the claim are strict and a failure to do something within the required time frame can have dire consequences. You must be well organised and backed by expert professional advice.
The next procedural step is the service by the participating tenants on the landlord of the Initial Notice. This is the notice which claims the right to collective enfranchisement, and costs start to run against the tenants from the time they serve this notice. Amongst other things this notice must specify:
- the extent of the property being claimed, and evidence on a plan;
- full particulars of all the qualifying tenants in the building. Importantly, this is not just the participating tenants;
- the price being offered for the freehold;
- the name and address of the nominee purchaser – this could be a person or company who will conduct the negotiations and buy the freehold on behalf of the participating tenants.
- the date by which the freeholder must give his counter-notice, which must not be less than two months from the date of the service of the initial notice.
The freeholder may respond with a procedural notice requiring the participating tenants to deduce title, and the freeholder’s Valuer is also likely to inspect the building during this time. Within the period specified in the initial notice, the freeholder must serve his counter-notice. First and foremost, this must state whether or not the claim is admitted. If it is not, then the participating tenants must decide if they wish to dispute the rejection through the courts (There are certain circumstances where the freeholder can resist a claim on the ground of redevelopment).
If the claim is admitted, then the counter-notice must state, amongst other things:
- which of the proposals contained in the Initial Notice are acceptable;
- which of the proposals contained in the Initial Notice are not acceptable and what the freeholder’s counter-proposals are;
- whether the freeholder wants a leaseback on any units in the building not held by a qualifying tenant (for example, a flat subject to a short-term tenancy or a commercial unit).
If any terms of acquisition (including the price) remain in dispute after two months following the date of the counter-notice, then either party can apply to the First-Tier Tribunal (FTT)for the matter in dispute to be determined. This application must be made within six months following the date of the counter notice or the claim is lost. Most claims are settled by negotiation. If a FTT is required to make a determination, then there is a right to appeal that decision to the Lands Tribunal if permission is given to do so.
Once the terms of acquisition have been agreed or determined by the FTT, the matter reverts to a conveyancing transaction with the parties entering into a sale contract with a completion date. If the matter proceeds to completion, the participating tenants, through their nominee purchaser, will become the freeholder of the building, subject to the various flat leases. In effect, the participating tenants will replace the existing freeholder. This will put them in a position to grant themselves extended leases.
There may be taxation consequences on granting an extended lease, particularly for second home owners. There will also be responsibilities for the participating tenants as they are now the freeholders. The participating tenants will become responsible for the management of the building and the administration of the service charge account in accordance with the covenants in the original leases.
If the nominee purchaser is a company, all participators will be shareholders and some will be officers of that company. These are all matters on which clear professional advice will be needed. After the enfranchisement is complete, it is important to note that an individual tenant has no right to become a participating tenant – even if he is a qualifying tenant. It is a matter for the tenants to resolve between themselves. You can always ask to be allowed to join in, but you will have no remedy if refused.
Part 2 will cover ‘The Individual Right to Extend’ and ‘Enfranchisement of Leasehold Houses’
Our Collective Enfranchisement and Lease Extension Solicitors are experienced and knowledgeable in the property market and can assist with all aspects of lease extensions and enfranchisement whether you are acting individually or collectively in connection with the enfranchisement of a flat or house.
Call 01323 407555 or see more at Lease Extensions and Enfranchisement