What is Leasehold Enfranchisement?
Leasehold Enfranchisement (also known as Collective Enfranchisement or the Right to Enfranchise) is the right for flat leaseholders to join together (under the Leasehold Reform, Housing & Urban Development Act 1993) to force their landlord to sell the freehold to their block of flats to them. Leasehold Enfranchisement applies only to residential property. When you buy the freehold, you become both landlord and tenant and can extend the lease of your flat by granting yourself a new lease of up to 999 years.
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Why would I want Leasehold Enfranchisement?
- Your asset stops deteriorating – exercising your right to enfranchise allows you to grant yourself a very long lease extension, often for 999 years, at a ‘peppercorn rent’ (i.e. your lease effectively becomes rent free)
- Buying a freehold enables tenants to take direct control of maintenance and management of their building – avoiding the need for overpriced service charges and creating the chance to improve the quality of management services by removing the need for external management companies. Service charge disputes are one of the main reasons why tenants often decide to go ahead with leasehold enfranchisement
- Remortgaging may become easier as many lenders prefer the additional security of freehold over leasehold properties.
- Leasehold Enfranchisement provides a more secure family inheritance
- The building’s value is likely to increase as some purchasers avoid buying a leasehold property
Don’t let your lease drop below 80 years
The cost of the freehold purchase where the lease of any flat(s) in the building has less than 80 years remaining rises sharply, and continues to rise dramatically as the lease in question become shorter.
Why? Once the lease term drops below 80 years, the freeholder is entitled to claim what is known as ‘marriage value’, and this generally accounts for the largest part of the premium payable to the freeholder. The marriage value is the profit element of the increase in value of the flat through extending the lease (or purchasing the freehold) and, under statute, the freeholder is entitled to 50% of this profit.
Who can apply for Leasehold Enfranchisement?
The main criteria for Leasehold Enfranchisement under the Leasehold Reform, Housing & Urban Development Act 1993 are:
- The building must have at least two flats – if there are only two flats, both tenants must join in the application
- At least half of the flats must have tenants who want to participate
- The original lease must have been for at least 21 years
- Unlike lease extension, when you exercise your right to enfranchise there is no requirement for a tenant to have owned a flat for at least two years
What will I have to pay for?
- A surveyor’s valuation report valuing the freehold
- If there are three of more particiapting leaseholders we would suggest forming a company to own the freehold on behalf of all of the particiapting leaseholders. You will need to pay any company formation costs.
- Your solicitor’s costs, which will include costs in preparing participation agreements for all leaseholders joining in with the process, preparing and serving the Claim Notice on the freeholder, legally transferring the freehold property to a new company set up for the purpose. If a landlord is uncooperative, there will be additional legal costs incurred in an application to the First Tier Tribunal (Property Chamber)
- The costs of an agreement with the other flat owners taking part in the Leasehold Enfranchisement, setting out their contributions and entitlement to new leases
- Your landlord’s reasonable costs, including his freehold valuation costs, the costs of any legal advice he has taken about the leasehold enfranchisement and his conveyancing costs
- The costs of managing agents managing the building on your behalf
Collective Enfranchisement – Procedures and statutory time limits
• Participation agreement – this isn’t a legal necessity, but we strongly recommend that all participating leaseholders sign up to a participation agreement. It’s a legally binding document and particularly with medium and large blocks, having an enforceable Participation Agreement can make the difference between a successful enfranchisement and failure.
Our specialist can help you draft a bespoke participation agreement for your particular circumstances.
Click here to read more about participation agreements.
• The first mandatory issue in enfranchisement is for the leaseholders to choose a nominee purchaser. This is normally a company consisting of the enfranchising tenants. The alternative is for an individual to stand as a nominee purchaser. This is fine when you’re just buying the freehold of a leasehold house, but usually inappropriate with a block of flats.
When forming such a company, you will need to register it at Companies House.
• After gathering the necessary information and getting help from your enfranchisement solicitor, it’s time to serve the Initial Notice. The ‘valuation date’ will be fixed as the date of service of the Notice.
• If your freeholder wants additional information, they must ask for it within 21 days of receipt of the Initial Notice.
• The nominee purchaser must respond to this request within 21 days.
• In this collective enfranchisement process, the landlord must serve a Counter Notice by the date specified in the Notice. Bear in mind that this date must be at least two months from the date of service of the Initial Notice.
• If your freeholder doesn’t serve the Counter Notice, the nominee purchaser has to apply to Court for a vesting order. Failure in doing this results in the Initial Notice being deemed withdrawn.
• If the counter notice disputes qualification, the nominee purchaser must apply to the Court. This must be within two months of the Counter Notice, for declaration that the Initial Notice is valid.
• If terms cannot be agreed, either party may apply to the First-Tier Property Tribunal. The time for this must be at least two months from, and within six months of, the date of the Counter Notice.
•The Tribunal’s determination becomes final 21 days after it is sent out by them. Any appeals must be made within this period to the Lands Tribunal.
• In enfranchisement, the freeholder must provide a draft contract within 21 days of the Tribunal’s final determination.
• The parties involved in collective enfranchisement are expected to enter into the contract within two months after the Tribunal’s final decision. This is called the ‘appropriate period’.
• In case the appropriate period elapses without exchanging contracts, then the enfranchising leaseholer must apply to court within a further two months for a vesting order.
Leasehold enfranchisement: Negotiations with your landlord and what to expect
Buying your freehold involves a number of strict regulations and deadlines which are designed to keep projects on track.
However, much of the delay can occur in the early stages of the project – eg when you’re trying to entice residents to join the collective enfranchisement effort
Another stage which can slow the process down is any negotiation between the parties which takes place after service of the Enfranchisement Notice and the receipt of the Counter Offer from your freeholder.
Negotiations commonly take place between the freeholder and those leaseholders involved in the freehold purchase, during which they try to reach agreement about the premium to be paid for the freehold on the block. Sufficient time is given in law for these negotiations to continue, with most collective enfranchisement efforts being concluded during this period with a successful negotiation between the two parties.
Thankfully, only a small minority of cases end up going to the First Tier Tribunal (Property Chamber) – previously the Leasehold Valuation Tribunal or LVT – for the purchase price to be independently determined.
Leaseholders have two months from the date of the Counter Notice being served before they can apply to the Tribunal. This is designed to force leaseholders to negotiate with the landlord before rushing prematurely to the Tribunal and there’s a four month window in which they can do so (expiring six months after the date of the Counter Notice being served).
This gives, effectively, almost six months in which the leaseholders and the landlord can negotiate the price to be paid and greatly increases the chances of common ground being found and a price agreed on before the case is referred to Tribunal.
Collective enfranchisement – how do we deal with splitting the premium when individual leases are different lengths.
This isn’t an unusual situation. It is most likely to occur where one or more leaseholder has already extended their lease. And because those lease extensions may not have all taken place at the same time, and perhaps some leaseholders didn’t use the statutory route (where you get an automatic 90 years) preferring an informal extension of a bespoke period, you may find that there are a number of different leaseholders all with different outstanding lease terms.
The answer is, however, relatively simple. The specialist enfranchisement surveyor who you bring into carry out a formal valuation, should simply be asked to provide a breakdown of this premium – with potentially different shares of the premium for each leaseholder, taking the remaining length of their lease into account.
If this is likely to be an issue, that it’s important that it’s made crystal clear to all participating leaseholders from the outset
The importance of offering a reasonable premium to your freeholder
Negotiations can be tricky and it can often feel overwhelming when large figures are thrown your way by the landlord but you should not be put off. Your freeholder will be aware this that the Tribunal will ultimately decide on a fair price if they don’t offer one, so don’t feel intimidated by large counter offers.
By offering a fair price to buy your freehold, you’ll always be vindicated by the Tribunal if your application has to go that far. It’s worth pointing out that the surveyor you should appoint to value the premium, is usually the person who carries out negotiation your behalf – when looking at the right price, they will bear in mind issues such as such as marriage value, yield rates and potential development value.
The Risks of Getting Your Enfranchisement Application Wrong
If your collective enfranchisement effort is declared invalid or fails in any other way, it can be more than a year before you’re able to start it again – in which time support from residents might have waned or the value of the property may well have risen.
That’s why it’s so important that you get the right team on board – an experience enfranchisement solicitor and a specialist surveyor.
Successful enfranchisement – the need to work together
You will need to consider the role to be played by your fellow leaseholders. As well as assessing their eligibility to take part in the enfranchisement and making sure that enough of you qualify, you also need to make sure that you are going to be able to work well together – as the process will require cooperation and for everyone to do their part at the appropriate time. You also need to ensure that the other leaseholders involved are willing to take on all of the responsibilities associated with being a property freeholder.
This can be a big responsibility and includes setting up a company to manage the building and its freehold and taking care of all the landlord’s duties such as repairs and maintenance. This is why it is so important that people are not only eligible to take part in the lease enfranchisement but also understand what it means and are willing to take on the responsibilities.
You might also want to consider how you will work together once you have finished acquiring the freehold.
Setting up your freehold company
Another issue to consider when you are thinking of lease enfranchisement is the fact that you will most likely have to set up a company to manage the freehold once you have acquired it. This comes with the usual responsibilities inherent with running a company; you will need a board of directors to oversee the operations of the company and it is vital that you keep accounts and records of everything the company does so it stays accountable.
Remember – you are effectively taking on together the duties of the landlord once you have purchased the freehold.
Click here to read more about formation of the Collective Enfranchisement Company
Contact Our Leasehold Enfranchisement Solicitors
Trying to buy the freehold of your block without an experienced collective enfranchisement solicitor and valuer is a risky business – particularly when you consider what is at stake in terms of the value of the transaction and the possibility of being able to own the freehold on your block..
Wherever you live, our Solicitors can help. For a FREE initial telephone consultation from one of our specialist team;
- Call us today on FREEPHONE 0800 1404544 or
- email us using our contact form for FREE initial advice and a FREE quote.