Freeholders may choose to sell their freehold, or could be forced to sell their freehold through a process called Collective Enfranchisement.
Hannah Faith details the steps involved in selling the freehold, providing advice for freeholders on what they need to adhere in the sale process.
What is Collective Enfranchisement?
The Leasehold Reform, Housing and Urban Development Act 1993, entitles residential leaseholders to purchase the freehold of their building.
This procedure is known as Collective Enfranchisement and under the 1993 Act leaseholders can force the sale of the freehold meaning that the safe and protected investment you made into your freehold property is in jeopardy.
The 1993 Act does not provide the leaseholder as an individual the right to purchase the freehold the leaseholders must come together collectively to purchase the freehold.
The group of leaseholders must equate to 50% of the total number of flats in the building, known as the requisite majority. The property and leaseholders must qualify for Collective Enfranchisement under the 1993 Act.
Does my freehold qualify for collective enfranchisement?
For a residential freehold property to qualify for Collective Enfranchisement, it must contain at least two flats, no more than 25% of the building can be used for non-residential purposes, and at least two-thirds of the flats must be owned by qualifying tenants.
What is a qualifying tenant in collective enfranchisement?
A person is a qualifying tenant if they hold a long lease (ie. over 21 years).
What can I do if I’m served a collective enfranchisement notice?
Following service of an initial notice you have a right of access to inspect the property in order to arrive at a valuation or any other matter arising out of the claim.
Within 21 days of receipt of the notice you can request evidence that the participating tenants qualify for enfranchisement.
They in turn will then have a further 21 days to respond and failure to do so means the claim will be deemed withdrawn.
Are freeholders liable for any additional costs in enfranchisement?
The leaseholders are automatically responsible for your reasonable legal and valuation fees in this matter. This is limited to your valuation and your legal costs of transferring the freehold and checking the leaseholders qualify for the right to buy the freehold.
How is the sale price of the freehold determined?
It is important that valuation advice is obtained to ascertain the correct purchase price payable to you. The valuation is based on the application of methodical calculation to a mixture of known and assumed material.
Certain facts are known, the length of the leases and amount of ground rent payable; to this the valuer has to provide the current market value of the flats, the likely improvement in that value following the collective enfranchisement and estimate a yield rate for calculation.
Can I sell my freehold on the open market?
If you decide that you want to sell your freehold there are several matters you need to take into consideration. Under Part 1 of the Landlord and Tenant Act 1987(LTA 1987) leaseholders must be given the Right of First Refusal to purchase the freehold before you dispose of it on the open market.
When does the Right of First Refusal apply?
Subject to certain exceptions Right of First Refusal applies if the freehold consists of the whole or part of a building; it contains two or more flats held by qualifying tenants (this is the same definition as in collective enfranchisement); the number of flats held by qualifying tenants must exceed 50% of the total number of flats contained in the premises.
How is the Right of First Refusal initiated?
You would initiate the Right of First Refusal by serving a notice under s5 of the LTA 1987 called an “offer notice” which contains the sale price of the freehold. The sale of the freehold can be by way of a contract or auction. There are strict time frames to be followed on both sides.
It is worth noting that should the leaseholders decide not to accept your offer you would not be able to offer the freehold to another party for better terms than offered to the leaseholders for the next 12 months (eg. you cannot sell for a lower price).
Accordingly, it would be prudent to set the price in the offer notice to one that can be achieved on the open market.
What if I don’t offer the Right of First Refusal?
It is a criminal offence for a freeholder, without reasonable excuse, to sell the freehold without serving an offer notice to the leaseholders first. Additionally, the leaseholders under certain circumstances, can demand information relating to the sale and force a sale by the new freeholder to them at the same price that he paid.
What's the difference between collective enfranchisement and the Right of First Refusal?
The right of first refusal applies to buildings where only half the premises comprises residential accommodation whereas premises with more than 25% non-residential accommodation are excluded from the right to collective enfranchisement.
Further when you sell the freehold by way of right of first refusal to either the leaseholders or a third party the buyer will not pay marriage value whereas the participating tenants in a collective enfranchisement claim must do so (if applicable).
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