If you are considering collective enfranchisement – exercising your right as a one of a group of leaseholders within a residential block, to buy the freehold of that property – there are many things to consider, one of which is the importance for you , and the group as a whole, of entering into a participation agreement.
What is a participation agreement?
Wherever there is a group of people involved in a common project, it is a good idea to have a clear written agreement within that group covering the things that they need to do, who is going to lead it and how they are going to reach the mutually desired end.
A participation agreement does this for leaseholders who wish to commit to the enfranchisement process. It binds everyone within the group to the course of action which they have agreed to follow, and obliges them to meet their responsibilities and duties to the group, such as to introduce the amount of money required by each individual and at the right time. It is a contract between them as individuals which provides a solid platform from which they can then commit to completion of the process of buying the freehold of your block.
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Do we really need a participation agreement?
If anyone within the group fails to meet a group responsibility, this can cause real problems for the rest of the group. The finance of the venture is particularly important, and if someone fails to stump up their share of the money required to complete the joint purchase of the freehold to their block, the rest of the group will either have to make up the shortfall or be forced to default on the entire purchase.
Once the Initial Notice has been served on the freeholder, there are implications if it is withdrawn. The group will be liable for the landlord’s legal fees from the date on which the Initial Notice was served through to the date of withdrawal. They will also be unable to begin the process again by serving a fresh Initial Notice for a twelve month period. Either is clearly undesirable, and a participation agreement helps to avoid the failure of the enfranchisement process.
When should we sign our participation agreement?
The agreement must be in place before the Initial Notice is served on the freeholder. Subject to that, it can be put in place at any time, but it’s sensible if everyone signed up to it at the earliest possible opportunity in the enfranchisement process – since the contract should deal with issues such as how the funding is to be raised, the instruction of a specialist solicitor and valuer, matters which need to be agreed right at the outset.
Participation agreements involving large numbers of leaseholders
The more leaseholders involved in the joint purchase of the freehold, the harder it often becomes to tie everyone in to the agreement – and especially in large blocks, many leaseholders may be unable or reluctant to commit to the collective enfranchisement until they have a clear idea of how much money is involved. This can make for a slow start.
One way of making progress would be for those leaseholders ready to commit to the process to enter into an agreement between themselves, to appoint a solicitor and a valuer and for the costs of doing so to be shared between themselves. This will enable an initial assessment of the costs involved in the enfranchisement to be carried out and this information can then be made available to other leaseholders in the block. This way, gradually more leaseholders will commit as the costs are known and they can then be invited to join the existing agreement, thereby sharing the liability for the legal and valuation costs already committed as well as committing to future expenditure.
Can we draft our own participation agreement?
The enfranchisement legislation does not give any guidance at all as to how a group of leaseholders wishing to go down the freehold purchase route should organise themselves.
So the short answer is – yes – you can draft your own document.
However, as a participation agreement is a contract, and has important implications for all involved, we strongly recommend that a solicitor experienced in all areas of enfranchisement is asked to draft your agreement.
What should a participation agreement contain?
The agreement should cover a range of matters, including;
- the date on which the agreement is to come into force
- the appointment of a specialist solicitor and valuer
- the obligations of the newly created enfranchisement company
- matters relating to the Initial Notice, representations and warranties, covenants
- a default indemnity.
The raising of funding to cover the purchase and the associated costs is also of paramount importance – the agreement must state clearly how these costs are going to be shared between the group and when they are to be paid by each member, to ensure that all payments can be made as they are due and completion of the purchase can take place when agreed.
The participation agreement should also discourage any member of the group from withdrawing once they have committed – this can have a range of negative effects, since the group will be liable for the landlord’s costs from the issue of the Initial Notice to the date of withdrawal, and the legislation also provides that following withdrawal an Initial Notice cannot then be served until a 12 month period has expired.
Ultimately, the agreement’s purpose is to give certainty to all involved, and to enable them to proceed with confidence.
These are technical issues and to avoid misunderstandings or disputes within the leaseholder group at a later stage, it is best to have the agreement professionally drawn up.
Don’t give up
Getting people to commit and sign up can be a slow and painful process but is absolutely essential to the collective enfranchisement effort. If you live in a large block of flats or some residents either live abroad or are going on holiday during the process, it may take some months for the signatures to all be collected as the documents must be signed by one participant at a time. Unfortunately, this is the only way in which it can be done, ensuring transparency and that all of your legal obligations are met. Trying to cut corners can only end in disaster.
Appointing a spokesman
In any group, it is always best if one person is appointed as a spokesman – this avoids unnecessary duplication, crossed wires and the confusion that can result, not to mention the unnecessary extra costs. It is recommended that the leaseholder group appoint one person to be in overall control of the process, and leave it for them to liaise with their solicitor and other professional advisors, reporting to the rest of the group as required.
The sign-up form – is it the same as a participation agreement?
In short, no.
When the residents in a block of flats are first invited to take part in a potential enfranchisement effort, it’s a really good idea to ask them to sign up to register their intent to pursue the freehold purchase.
This sign-up form is not legally binding, and simply registers the resident’s interest in joining the enfranchisement effort. It is particularly useful for organisers to assess the potential interest in the freehold purchase, allowing them to see how many residents are interested and whether or not they are likely to reach the 50% threshold needed to kick off the process.
Using the signup form is always a good idea, especially with medium or large sized blocks where the real purchase needs support of a significant number of leaseholders.
How complex does the signup form need to be?
The sign-up form need only consist of a simple sentence which identifies the resident and commits him or her to take part in the process of collective. It’s a simple as that.
What about those leaseholders who don’t participate in the enfranchisement?
You might also want to think about the leaseholders in your building who didn’t qualify or chose not to take part in the enfranchisement. You are not legally obliged to involve them, but it can be a good idea to make them aware of what is going on and involve them in any decision-making that your company undertakes so there are no ill-feelings between tenants following the acquisition of the freehold.
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