With the property market in London and other major cities, such as Manchester, continuing to grow, it is important to ensure that if you own leasehold property you are fully aware of your rights to protect your investment.
Ownership of a long residential lease can be a valuable asset, however as the lease term decreases over time so, unfortunately, can the value of that asset. The Leasehold Reform and Urban Development Act 1993 (as amended) gives tenants as a group the right, upon qualification, to force the sale of the freehold of the building or part of the building. This process is known as collective enfranchisement.
We understand the importance for landlords of having a strategy which works across an entire property portfolio to preserve their freehold investments and where obtain the best possible premium.
There are a number of benefits of collective enfranchisement including:
- The leaseholders can grant themselves extended leases of 999 years.
- The leaseholders gain control of the management of the building.
- The leaseholders can vary their lease so they will no longer have to pay ground rent.
- The leaseholders can put right any defects in their leases.
Qualification for collective enfranchisement?
Building qualification - The leaseholder should first check that the building qualifies:
- It must be a self-contained building or part of a building.
- There should be at least 2 flats in the building.
- At least two-thirds of the flats must be let to ‘qualifying tenants’.
- The qualifying tenants who want to join in the enfranchisement (the participating tenants), must own at least half of the flats in the building, and they must own at least two flats in total.
- There must not be more than 25% of the internal floor area in non-residential use
- The building must not be an excepted property (i.e. a building within a cathedral precinct or a National Trust property)
Leaseholder qualification - A leaseholder is a ‘qualifying tenant’ if:
- they hold a long lease, i.e a lease with an unexpired term of at least 21 years (when granted); or
- a shorter lease which contains a clause providing a right of perpetual renewal; or
- a lease terminable on death or marriage or an unknown date (including the so-called 'Prince of Wales' clauses);or
- the continuation of a long lease under the Local Government Housing Act 1989 following the expiry of the original term; or
- a shared ownership lease where the tenant's share is 100%; or
- A lease granted under the 'right to buy' or 'right to acquire on rent to mortgage terms'.
- The leaseholder’s landlord must not be a charitable housing trust where the flat is provided as part of the charity’s function
- The leaseholder must not have a business lease
- The leaseholder must not own more than 2 flats in the building (whether jointly or in their own name
Preparing for enfranchisement
Instructing professional advisers
It is recommended that the leaseholders instruct experienced solicitors to assist with gathering all the necessary information, establishing that the building and leaseholders qualify for collective enfranchisement and to assist with all the preparatory steps required before serving the Initial Notice and to assist with all subsequent steps including the conveyance of the title and granting new leases after enfranchisement.
An initial valuation of the property by a qualified surveyor is also recommended to provide the qualifying tenants with an idea of the premium payable for the freehold. The tenants will then be able to decide whether they wish to proceed and whether they will require any external funding. The price payable for the freehold depends on a number of factors, including the market value of the individual flats and the length of the leases. The price payable for the freehold will be higher if the leases have less than 80 years remaining.
The qualifying tenants may want to set up a fund at an early stage to cover the initial preparatory steps including obtaining the valuation report, gathering information, setting up a company, drafting a participation agreement and preparing the initial notice of claim.
Where the building and the leaseholders qualify for collective enfranchisement, it is recommended that all participating tenants enter into a formal participation agreement amongst themselves which will deal with issues such as; rights of voting, the negotiation and agreement of terms, the individual tenant's financial contributions and the right for the leaseholders to obtain new long leases from the freeholder after the purchase.
The participating tenants must choose a Nominee Purchaser or Purchasers. This is the person or persons or company who will be named in the Initial Notice to purchase the freehold and become the new landlord.
The Nominee Purchaser can be a person, one or more of the tenants, a company or a trust. There are currently no controls or qualifications in the legislation governing selection of Nominee Purchasers.
The most common choice is a company wholly owned by the tenants and, if this is the vehicle chosen by the participating tenants, the company must be incorporated prior to being put forward in the Initial Notice.
The enfranchisement procedure
- The participating tenants must sign an “Initial Notice” setting out certain essential information about the building and the Leaseholders, with the details of the Nominee Purchaser and the price that they wish to pay.
- The notice is served on the Freeholder and any intermediate landlords.
- The notice sets out a “Response Date” by which the Freeholder must respond to the notice. That date must be at least two months after services of the notice. If the qualifying tenants decide to withdraw the initial notice, they may not serve another notice for 12 months.
- The Initial Notice triggers the statutory procedures for acquiring the freehold and the participating tenants are jointly and individually liable for the landlord's reasonable costs as from the date he receives the Notice. It is therefore important that the Notice is complete and contains no inaccuracies or misdescriptions, because, although these may in some cases be corrected by application to the county court, it is an area of expense to be avoided. An incomplete Notice can be rejected as invalid.
- The qualifying tenants have the right to register the Initial Notice with the Land Registry. This provides protection for the tenants against the landlord's sale of the freehold since any purchaser of the freehold, subsequent to the registration of the Initial Notice, will take the freehold subject to the claim for enfranchisement.
- After the service of the Initial Notice the landlord is entitled to require evidence of the participating tenants' title to their flats. The landlord has a period of 21 days from the giving of the Initial Notice in which to request the information.
- Where this information is required it must be provided by the Nominee Purchaser within 21 days. If the qualifying tenants fail to provide evidence of title, the Initial Notice would be deemed withdrawn, with costs payable to the landlord.
- The Freeholder must serve a Counter-Notice stating whether he accepts the participating tenants’ right to enfranchise and, if so, what terms he agrees and what he does not agree.
- If the Freeholder does not respond to the Initial Notice, or responds after the Response Date, the qualifying tenants are entitled to acquire the Freehold on the terms and premium set out in the Initial Notice. The Nominee Purchaser must apply to court within six months for a Vesting Order, otherwise the Initial Notice is deemed withdrawn.
- If the Freeholder serves a Counter notice not admitting the enfranchisement claim (for example by alleging that less than two-thirds of the flats are let to qualifying tenants) then the nominee purchaser would need to make an application to court, within 2 months of the counter notice, for a declaration that the initial notice is valid.
- If the Freeholder serves a Counter notice admitting the enfranchisement claim but disputing the terms there then follows a period of at least two months when the parties, will try to negotiate an agreement.
- If the terms have not been agreed within 2 months, the Nominee Purchaser can apply to the First Tier Tribunal (Property Chamber) for a decision on the terms which have not been agreed. The Latest date for application is 6 months from date of freeholders counter-notice.
- The First-tier Tribunal will issue directions to prepare the case for hearing and if the matter proceeds to a final hearing, the tribunal will determine the terms in dispute.
- The First-tier Tribunal determination becomes final 21 days after it is sent out by the Tribunal. Appeals must be made within this period to the Lands Tribunal with leave of the Tribunal.
- The freeholder must provide a draft contract within 21 days of the Tribunal's determination becoming final (taking into account rights of appeal).
- The parties are expected to enter into the contract within a period of two months after the Tribunal's decision becomes final.
- If this 2 month period elapses without exchanging contracts, then the participating tenants must apply to court within a further two months for a Vesting Order.
Should you have any questions please call to speak to a member of our team.