Tenants of long lease flats in apartment blocks have the right to get together and buy the freehold from the current owner. This process is known as collective enfranchisement. However, the cost of doing so may just have risen, following a recent Court of Appeal decision in the case of Cravecrest Ltd v Duke of Grosvenor and Vowden Investments Ltd.
The building in this case was laid out as flats, but would be far more valuable if it were to be re-instated as a house. Furthermore there was also potential to build a fourth floor in the attic space. The important issue was whether the Leasehold Reform Act 1993, which grants tenants the right to buy the freehold, allows landlords to recover potential development value. The Court of Appeal decided that the landlords should be allowed to recover this extra value, although the decision is likely to be appealed.
The advantage of flat owners clubbing together to purchase the freehold of their block is that they get full ownership and control of the building. They could grant themselves 999 year leases at no premium, and take over the management of the building. This would significantly increase the value of their flats.
However, there is a down side in taking over the management of a large block since it could be onerous having to be responsible for insurance, repairs and redecorations. You may have to pursue your neighbours for arrears, or deal with complaints about leaks, unauthorised alterations or noise nuisance. It can also be very expensive to buy the freehold, especially if there are some short leases and few participating tenants.
Who qualifies to buy the freehold?
The qualifying tenants are those who hold leases with a term of 21 years or more. They can buy the freehold (and any intermediate leasehold interests) of the building together with any common areas, such as gardens and parking areas, which the tenants have the right to use. There is no requirement for a tenant to have owned the lease for any particular length of time and the tenant does not have to be resident in the property.
At least two thirds of the flats in the building must be held by qualifying tenants and there must be at least two flats in the building.
The notice claiming the right to purchase the freehold must be given by the qualifying tenants of at least half of the flats in the building.
The purchase is made by a nominee purchaser. Typically it will be a special purpose company owned by the tenants who participate in the enfranchisement. Your solicitor can easily arrange to form such a company, so that you can use this as your nominee purchaser.
Those that do not qualify for right to enfranchise
If there are any parts of the building that are let on short leases (leases granted for 21 years or less) or there are non-residential parts let to business tenants, the tenants of such parts cannot participate in the collective enfranchisement.
Specific types of building are excluded from the right to collective enfranchisement, including Crown properties, although the Crown will sometimes allow enfranchisement. Freeholds which are owned by the National Trust, fall within a cathedral precinct or include the track of an operational railway are also excluded.
The tenants of course have to pay the landlord for the freehold. The purchase price is assessed according to the open market value of the landlord’s interest in the building on the day the claim is made, and, if there are fewer than 80 years to run on the lease, what is called a “marriage value”, which is the extra value to the tenant given the length of the remaining lease.
Organising the enfranchisement
If one or two tenants initiate the process, they will have to work out the minimum number of qualifying tenants who need to participate and then try to interest that number of tenants to join them in the process. Once a sufficient number have shown interest, you may want to enter a formal participation agreement to cover the enfranchisement procedure. There could, for example, be an agreement to grant new long leases to all those tenants who participate. The leaseholder may also want to establish a fighting fund to cover the costs of the valuation, information gathering and setting up the company, as well as formalising the funding and arrangement of loans and mortgages which some of the participating tenants may need.
It is important to get all the information about the ownership of the property and the valuation of the freehold in place, as well as setting up the purchasing company, in advance of serving the initial notice on the freeholder. Any information that you cannot easily obtain, may be obtained by serving a “Section 11” notice on the relevant parties, who must respond within 28 days with the requested information. It is at this early stage that you will need to involve a solicitor and a valuer.
The Initial Notice
When the initial notice is served on the landlord, this triggers the statutory procedure, and all its various deadlines. It is important that the notice is accurate and contains all the required information. If it is withdrawn, another notice can’t be served for a further year. The notice can be registered at land registry to provide protection for the company in case the landlord sells the freehold before the purchase of the freehold has completed.
The process of collective enfranchisement can be frustrating, and time consuming, but it can promote a feeling of community between the participating tenants, and can greatly enhance the value of their flats.
- The initial notice must be signed by all the participating tenants. No one can sign on their behalf.
- The Landlord has 21 days from receipt of the initial notice to request information showing that the tenants have the right to acquire the freehold.
- The Landlord must respond to the notice with a counter notice within just over 2 months and puts forward his own valuation of the premium.
- If the parties cannot agree on the premium, either party may apply to the Leasehold Valuation Tribunal, but this application must be made between 2 and 6 months of serving the counter notice.
- If the Landlord fails to serve a counter notice then the tenants will have the right to apply to court for a Vesting Order that they can acquire the freehold on the terms of their initial notice, but they must apply within 6 months of the date by which the Counter Notice should have been served or their application is deemed to be withdrawn.