Forming Your Collective Enfranchisement Company
Whilst the process to form a limited company is relatively simple, do beware – although it’s comparatively straightforward compared to many areas of law, there are still some quite serious traps for the unwary and it’s vital to make sure that forming your Collective Enfranchisement Company is done properly. [This company is also sometimes known as a Freehold Management, or Right to Enfranchise – RTE – Company].
Everything has to be taken into account to ensure transparency, and to try to minimise the possibility of issues arising in the future. Working with experienced freehold purchase solicitors like us can help considerably with this process.
Looking for Expert Enfranchisement Advice? Call our team on FREEPHONE 0800 1404544 for FREE Initial Phone Advice.
Collective Enfranchisement – what is a nominee purchaser?
If you are involved in buying the freehold of your block of flats (a process which is also sometimes called collective or leasehold enfranchisement) remember that part of the process is choosing a nominee purchaser. This is the person who is legally responsible for the freehold purchase, and will eventually be the new freeholder for the block of flats.
Luckily, this nominee doesn’t have to be just one person; it can also be a group of people, a limited company or any other legal entity.
Equal Shares in Your Collective Enfranchisement Management Company
In the vast majority of cases, the best course of action for a group of leaseholders getting together to buy their freehold is to form a limited company with equal shareholding. This means that each leaseholder participating in the purchase has the same share of the final freehold, which is owned by the freehold management company.
This isn’t a legal requirement, but it is definitely the simplest and most transparent way of structuring the collective enfranchisement. To be frank, other options often lead to disaster.
The main alternative to equal shareholding is for their to be just one person in the block to be named as the nominee purchaser. This isn’t ideal for anyone, least of all the person named as nominee purchaser and is open to all sorts of potential problems. We strongly recommend that this situation should be avoided. The option of setting up a limited company being a far better alternative.
If you do decide on equal shareholding, your company will be structured so that all shareholders of the company, who will be the participating leaseholders, will have equal shares in the running of the company. Directors will then be appointed to manage the company, but these directors will have no greater shareholding than anyone else, but will just be managing the company for the shareholders.
The enfranchisement process – don’t forget to get the right Articles of Association
Every limited company has to have articles of association. These are the documents which lay out the rules by which the company operates and which the company officers should follow. The articles of association also govern the rights of shareholders and take on particular importance when there is no written shareholders’ agreement.
There are so many other things to think about when a new block of flats is being built or when a group of leaseholders get together to buy the freehold of their block (a process which is often referred to as collective or freehold enfranchisement), that making sure that the articles of association for the company which manages the freehold is not going to be top priority. But it’s important to get these company documents right at the outset.
Template Articles of Association – probably not good enough
Because articles of association often fall low on the to do list, standard articles known as “model” articles are often used.
The drawback of these template articles is that they are not designed to meet the specific requirements of the freehold company, or instances where there are existing tensions between the various different parties involved. Making sure that the articles are correct from the beginning should help avoid expensive and avoidable problems arising from disputes at a later stage.
Enfranchisement Company – What to include in your Articles of Association
There are lots of different reasons why bespoke articles are better than model articles and much will depend on the situation of each individual company.
Some of the main things which you and the other participants in the freehold purchase really should think about, are:
• Is the freehold company going to provide leaseholders with services, or will it administer roadways, common areas, car parks or will it collect service charges and ground rents from the leaseholders and tenants?
• Will the company insure the property or does it plan to build up cash reserves by asking members to contribute?
• How is the ownership of shares going to be transferred to new leaseholders? Have the “pre-emption” rules been altered so that shares can be easily transferred without needing every other leaseholder to consent?
• What happens when a flat is sold? We always recommend a clause in the articles of association linking ownership of the freehold automatically to the ownership of flats – allowing directors the new freehold company to transfer shares from a leaseholder who selling up, to the new owner of the flat – even if this is not dealt with by the outgoing leaseholder.
Without this clause, you can end up in terrible difficulties – in theory with numerous people who no longer own flats the block still having a share in the freehold
• What will the arrangements be for selecting or removing directors, and will non-leaseholders be allowed to become members or directors? Will members be able to force directors to act in a certain way or will there be limits imposed on when a member can vote, for example when they owe the company money?
• What provisions are there for dealing with disputes? Should an alternative resolution process be considered before litigation?
The best way of avoiding problems occurring in the future is to make sure that everyone is well aware of what the articles of association say, and that they are tailored to the requirements of the individual property. This is the case whether the management company already exists or is just being set up. If the articles aren’t up to scratch, take action to have them changed.
Want Help with Drafting the Articles of Association for Your Freehold Purchase Company? Call Us Now on FREEPHONE 0800 1404544
The preparation of the annual accounts is usually best done by a qualified chartered accountant, who will prepare a profit and loss account and balance sheet for each financial year, which will then be forwarded to Companies House and HM Revenue and Customs.
If a member of the enfranchisement company has enough experience, you could leave it to them. But beware – this is not the kind of thing you want to get wrong – and if mistakes are made, it can lead to huge problems within the company – who, after all, may be your neighbours as well.
Having an independent chartered accountant carry out this work will give credence and validity to the accounts and lower the risk of coming across any problems in the future
Your Collective Enfranchisement Company – holding an annual general meeting
Limited Companies must also hold an Annual General Meeting, and are also obliged to file certain documents annually with the relevant authorities. This is another reason why getting the right legal help from the outset is wise; your solicitor can help keep you on the right side of the law and make sure you are aware of legislation which has to be complied with.
Collective enfranchisement is an important process, and leaseholders should make sure that everything is being handled properly so that issues do not arise in the future. For example, any freehold management company will need a set of Memorandum and Articles of Association to be drafted.
Your Collective Enfranchisement Company – it’s not a Residents Association
Everyone takes part in the collective enfranchisement process needs to be very clear about the difference between a freehold management company and a residents’ association.
Remember that leaseholder does not necessarily equal resident. Many leaseholders might not live in the block in question, and not all residents will be the same as leaseholders. The freehold management company’s sole purpose is to manage the freehold of the building.
This is an important point as leaseholders can often try to raise issues with the freehold management company which are not its responsibility. These issues can delay the process considerably and could even cause the collective enfranchisement process to come off the rails completely.
For these reasons, having the aims and purpose of the freehold management company and the aims of the collective enfranchisement set or clearly from the outset is so important.
A leasehold enfranchisement can only be successful when the process is clear and transparent from the outset.
Consider outsourcing block management
Particularly when it comes to larger blocks, it’s worth thinking about whether management of the building itself should also be outsourced. Remember this is highly specialised work and a large building be quite difficult to manage yourself. If there are only two or three flats it can be easy enough to manage it yourself, but in a large block this will be almost impossible.
Everyone will probably benefit from a professional management or maintenance company being taken on and it will ensure that the organisers are able to get on with what they are there to do rather than worrying about maintenance issues and spending their time on things which are not necessarily for the collective good of the project.
Beyond Enfranchisement – Issues To Consider
Recently enfranchised blocks are likely to face a number of issues, such as:
• The need to extend the leases of those participating in the collective enfranchisement to 999 years
• Considering whether to sell parts of the property (eg currently unused lofts) to free up capital
• Arranging sale of shares in the Freehold Company to flats that did not originally participate in the freehold purchase – to realise asset value for your freehold company
• Deciding how any proceeds raised from such sales of shares are to be distributed
• Reviewing current contracts that you have with service providers, including, for example, the cleaners of any shared facilities like lobbies, corridors and stairs
• Choosing a new managing agent – which can itself be quite an intimidating task for those not used to it
• Getting to grips with new aspects of property management such as required fire risk assement
• Developing and keeping to effective systems for collection of ground rent from any non-participants in the freehold purchase, and service charges from or flat owners
The amount of legislation affecting residential property management is growing quickly. A good point of reference is ARMA – The Association of Residential Managing Agents. Their web address is https://www.arma.org.uk. Their website has lots of useful information about Residential Managing Agents as well as a list of their members.
In addition, when considering appointing a managing agent, you might want to check if they are members on the RICS (The Royal Institute of Chartered Surveyors) website at https://www.rics.org/uk
Enfranchisement – make sure you know what you’re taking on
Whilst enfranchisement is generally a really good idea – adding value to your property, providing you with more security and enabling you to take better control of your block, there is at least one major downside – and that’s the rights and responsibilities you take on. These can be significant, and whilst it often isn’t so much of a problem in a small block, it can be a major issue when you come to larger blocks.
So what are the kind of things that either you, or a freehold managing agent need to handle?
- maintenance and repairs to your block – which includes communal areas and the
- roof and guttering, alongside both general and external general maintenance.
- managing utilities – which can include heating, plumbing, and electricity.
- responsibility for collecting ground rent and service charges
- arranging block insurance
- communicating and keeping other leaseholders in the loop
- organising work and payment for contractors
- making sure your block complies with health and safety rules
- responsibility for any pest control
Beware the risk of burnout
One of the biggest problems resident management companies can come across is that of burnout. With larger blocks,a small number of organisers taking on a huge project such as collective enfranchisement, tempers can fray and people can end up dropping out altogether.
This could put the whole project in jeopardy so it’s vital that jobs and responsibilities are outsourced effectively, keeping a solid structure to the organisation which allows it to operate smoothly and fluidly.
And the work doesn’t stop when you complete the purchase of your freehold. The Enfranchisement Company is then responsible for the block.
There are a number of service providers to whom you can outsource certain services — for example acting as a company secretary and dealing with all of the legal obligations of the company. This can incur a small additional expense but this is nothing compared to the potential fines or penalties you may face for missing filing deadlines or not adhering properly to company law.
Your Collective Enfranchisement Company – Getting It Wrong
Companies House obligations and legal requirements which a limited company must meet in order to operate and keep on the right side of company law.
Your Companies House obligations are very important, and if you do not hire somebody to take on the company secretary’s duties, you must ensure that you file all required documents regularly in order to avoid being struck off.
Regular AGMs must also be held, as well as insurance being put in place for the building
Resident management companies are the type of company which is most commonly struck off each year due to this sort of poor management, which is exactly why it is worth considering outsourcing the company secretary’s duties to a provider with experience this field.
If the company is struck off, the freehold of the building and everything else owned by the resident management company becomes the property of the Crown. The company could be restored, but this is not always guaranteed and can be very expensive.
Buying Your Freehold – the Need for Specialist Legal Advice
The simplest way of making sure that your freehold management company is both properly set up and structured, is to get assistance right from the outset from a specialist solicitor who has undertaken plenty of collective enfranchisement work before.
An experienced enfranchisement solicitor will be able to keep the process moving forward fairly and transparently, and having someone to provide a sense of direction and deal with the legalities of the process should give the participating leaseholders peace of mind. They will have the security of knowing things are being managed professionally, keeping stress levels low and making the freehold purchase run more smoothly and happily for all involved.
How We Can Help
Wherever your block is situated in England Wales, our specialist team can help by;
- providing a free estimate of your enfranchisement costs
- identifying and instructing on your behalf a specialist surveyor for a valuation of the freehold purchase
- during the enfranchisement notice and dealing with all the paperwork
- registering the freehold purchase
- setting up your collective enfranchisement company
Looking to Set up a Collective Enfranchisement Company? Contact Our Specialist Solicitors Today
Exercising your Right to Enfranchise involves a really difficult of law – so it’s critical that you get the right expert advice.
For a FREE initial phone consultation from an specialist in Enfranchisement;
- Call us today on FREEPHONE 0800 1404544 or
- email us using our contact form for FREE initial advice and a FREE quote.