In her latest article, Niki Adkins, Head of Leasehold Property, outlines the rights of flat owners to purchase the freehold through the right of Collective Enfranchisement.
What is collective enfranchisement?
Together, flat owners can effectively ‘force’ a freeholder to sell their freehold to them. This right may be exercised whether or not the freeholder intends to sell, but the right must be exercised collectively by at least 50% of the flat owners.
This is known as Collective Enfranchisement.
What’s the difference between collective enfranchisement and the right of first refusal?
With enfranchisement, the sale can be forced on the freeholder; whereas with the Right of First Refusal the freeholder must first want to sell.
A freeholder can recover its reasonable professional fees incurred in the enfranchisement transaction from the flat owners.
Read about the Right of First Refusal here.
Do I qualify for Collective Enfranchisement?
Collective enfranchisement only works if at least 50% of the flat owners join together to force the sale.
To qualify the following criteria must be satisfied:
- The building must consist of at least two flats
- Those flats must make up at least 75% of the building
- At least 75% of the flat owners must be ‘qualifying tenants’ (i.e. lease of at least 21 years length)
- No more than 25% of the building can be non-residential.
How does collective enfranchisement work?
Once you have checked that your building qualifies for Collective Enfranchisement, you will need to get specialist valuation advice to find out how much the freehold is worth, and what lower figure you should offer to the freeholder, to allow for negotiation.
It is wise for the participating flat owners to enter an agreement between themselves, known as a Participation Agreement. This is a legal, binding agreement between the flat owners that will govern the relationship between them during the process of the freehold purchase.
What does a participation agreement do?
A Participation Agreement will set out the rights and obligations of the participants as a group, in particular it will:
- Clarify the steps and decisions involved in the purchase
- Set out the duties and obligations of the participants
- Ensure all participants provide funds in the agreed proportions
Once an agreement is entered into, a formal notice is served on the freeholder proposing a purchase price (which is usually a low offer) and allowing them at least 2 months to respond with a counter notice.
Can the landlord refuse enfranchisement?
Generally, this counter notice will accept your right to purchase the freehold and will usually counter-propose a higher price. Your appointed valuer will then enter into negotiations with the freeholder’s appointed valuer to try to reach an agreement on price.
Although a freeholder may reject your offer to purchase the freehold, they may do so only if they have grounds to reject.
Alternatively, a freeholder may ask the court to order that enfranchisement be prevented on the basis that they intend to redevelop the building.
However, to succeed with this argument at least 75% of the leaseholds must be due to end within 5 years of the date of the original notice served by the leaseholders.
What if the freehold purchase can’t be agreed on?
If the terms of the transaction (i.e. price and the wording of the Transfer document) cannot be agreed, either party can speak to a specialist tribunal to solve the issues.
The parties have up to 6 months from the date of the counter notice to make an application.
The freeholder cannot recover its costs associated with any Tribunal proceedings, so there is an incentive on the freeholder to reach agreement amicably.
What happens after the freehold sale is agreed?
Once the parties have agreed terms by negotiation, or the Tribunal has determined the terms, the freehold will be transferred to the leaseholders through the normal process of conveyancing.
Following successful completion of your purchase the freehold will then be registered in the new owner’s name.
What is a freehold limited company?
Our advice is that a limited company is set up and used as the vehicle to purchase the freehold on their behalf. The participating flat owners then become shareholders of that company.
This provides the greatest security for the flat owners and will make future transactions much easier, as the freehold will remain registered in the name of the company instead of having to be transferred every time one of the flats is sold.
With a company set up the freehold can then be managed through the company with individual flat owners being shareholders and Directors of that company.
What rights does a freeholder have?
Once you as flat owners become the owners of the freehold you will be able to exercise control over the building and will be free to manage it as you see fit.
This may include managing the building yourselves or employing the services of a managing agent selected by you to run the day to day tasks required, such as maintenance, repairs, gardening and insurance etc.
Many flat owners welcome the freedom ownership of the freehold brings.
Amongst other advantages, you will be able to decide how to manage the building as well as extend the existing leases of the participating flats without the costs and restrictions associated with lease extensions when dealing with a third-party freeholder.
What are the risks of Collective Enfranchisement?
Owning and buying your freehold is not without its risks.
Although you have a right to force your freeholder to sell to you it is important to firstly assess whether you qualify for the right to collective enfranchisement.
This is where the advice of a specialist lawyer (and possibly a specialist surveyor) is important.
We can assess your position and advise on the right to enfranchise. Only when you are sure you have the right to enfranchise should a notice be served on the freeholder.
Unlike the Right of First Refusal, the freeholder cannot withdraw from the transaction.
How much does Collective Enfranchisement cost?
The main costs will of course be the purchase price of the freehold. You will need to employ a specialist surveyor/valuer to assess the likely value of the freehold before you make any formal offer to purchase.
Although we cannot advise you on the likely price to pay for the freehold, we can put you in touch with relevant experts.
Other costs
You will have the legal costs to consider, your surveyor/valuer’s costs and the cost of setting up a limited company to own the freehold.
In addition, you will automatically become responsible for the freeholder’s reasonable professional fees and other costs.
However, many flat owners recognise the benefits and greater freedom that comes with owning your freehold and decide that the benefits far outweigh the risks.
Specialist solicitors for freehold purchase
If you have any questions following this article, please don't hesitate to get in touch with our bright Leasehold Property team.
The team have experience in all aspects of leasehold property including freehold purchase, both through ROFR and Collective Enfranchisement. We would be happy to assist you with this.
Call us on 01202 499255, or fill out the form at the top of this page, for a free initial chat.
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