Druces Private Wealth

Collective Enfranchisement

Druces Private Wealth

Collective Enfranchisement

Tenants of blocks of flats have had the right collectively to acquire the freehold of their building since 1993. Various legislative changes since then – culminating in the Commonhold and Leasehold Reform Act 2002 – simplified the criteria and improved their position. This is a complex area of law and you will always need to take specialist advice on your particular situation.

There are a number of reasons to enfranchise. The most important is to enable the residents who participate to grant themselves long leases for nominal price with a reduction or removal of ground rent. Secondly, control of the management is taken over by the tenants’ nominee company (although this does not apply in every case). There is also the psychological benefit in being part of a tenant-owned building which is a good selling point with buyers.

The main qualifying criteria are that:-
• The building must be a self-contained block of flats (a converted building as well as purpose-built will suffice).
• The building must have no more than 25% non-residential use
• Two thirds of the flats must be let to qualifying tenants (a qualifying tenant is one who holds the flat under a long lease, namely one which is for more than 21 years)
• The qualifying tenants of flats comprising 50% of the flats in the building must participate

Note that there is no minimum period of ownership for a qualifying tenant, nor a requirement to have lived in it.

It will almost always be necessary to obtain a professional valuation. You need to know how much you are likely to have to pay even if only for the purposes of negotiating with the freeholder. The notice served on the freeholder must state the proposed price; an unrealistic price could invalidate the notice. It is highly likely that the freeholder will employ a specialist valuer and the tenants will almost certainly need one to negotiate on their behalf.

The cost of enfranchisement is based upon some complex formulae. Important factors include the level of ground rents and frequency of review, the length of the unexpired terms of the leases. Note in particular that where any of the flats of participating tenants have leases of less than 80 years to run it will be necessary pay a ‘marriage value’. This is a main reason to press on with enfranchisement sooner rather than later.

The law requires the residents’ nominee company to pay the reasonable costs of the freeholder (and any intermediate landlord) of assessing the right of the tenants to enfranchise, dealing with the tenants’ notice and statutory procedure and handling the valuation and conveyancing work. Costs will normally comprise solicitor’s and surveyor’s fees. There is still a liability to pay the costs if the tenants withdraw from the process.

The normal way to start the process is for a residents committee to be formed and for one or two of the key people to agree to drive the matter forward. Opinions of other residents should be canvassed. It is then a good idea to invite a solicitor to attend a meeting of the committee to answer questions, to explain what is involved and to advise on the pros and cons. To work well, the process needs to be highly organised and it is recommended to get a binding commitment from participating tenants in the form of a participation agreement.

It will probably take 2 to 3 months to get detailed legal advice, obtain a valuation, report back to the other residents and generally be in a position to move forward with the formal process. The statutory procedure itself is initiated by a notice served on the freeholder (and any intermediate landlord).

From there the timescale ranges from a few months (if the freeholder accepts the claim in principle and the negotiations over the price are concluded reasonably quickly) to a year to 18 months (if the freeholder disputes the claim or it is not possible to agree the price and other terms without reference to the First Tier Tribunal). Assuming the process is successful you must allow a short period for the conveyancing of the freehold to the nominee company.

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