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How to Organize for an Enfranchisement

You have established that there are enough tenants to qualify the building. What do you do now?
 

Enter into a participation agreement

 
Providing the participating tenants have agreed to proceed with no exceptions. All participating tenants should enter into a formal participation agreement. The agreement will govern the relationship between all tenants. This is prior to and during the collective enfranchisement procedure for the building. It includes items such as rights of voting, negotiation and agreement of terms. Most importantly, it covers the individual tenants’ financial contribution. This facilitates in future that there are no difficulties between parties.
 
This can be particularly important where there are large blocks involved as disputes can cause difficulty or delays. A prior agreement makes future disputes easier to resolve. It could also be useful to record an agreement on what happens after acquiring the freehold. For example, the new freeholder would grant lease extensions to all participating tenants in the purchase. This is often the main reason why leaseholders choose to purchase the freehold.
 
In small blocks or where the amounts are small, it may be possible to dispense of an agreement by everybody paying their share up front. If you have a structure in place then tenants have to agree means of finance to move on to the next stage.
 

What do you do next? Choosing the nominee purchaser

 
The nominee is the person named in the initial notice, who acquires the freehold and becomes the new landlord. The participating tenants must decide on who the nominee purchaser is at an early stage. He or she must conduct the business at the later stage of the process and on completion will be responsible for the management of the building.
 
A nominee purchaser can be a person or one of the tenants, or a corporate person, a trust and more than likely a company formed by the tenants for the purpose. There are currently no controls for the qualification and selection of a nominee purchaser. In addition, tenants are free to choose whoever or whatever agency they wish.
 
The most common format is a company wholly owned by the tenants. If this is the case the company must be established before it can be submitted on the initial notice. There are various companies that will be able to help you with this. Companies House is also a helpful tool. They can advise on how to establish a company. As well as producing Articles of Association that reflect the purpose of the company and govern voting rights and controls of shares.
 
Leaseholders may find it useful to establish a cost fund or fighting fund to cover the initial steps. These will be the valuation, the information gathering and arranging of the nominee purchaser. These are all applicable in the early stages.
 

Do I need a professional advisor?

 
Is it believed to be critical for the presenting and serving of an initial notice. It is important to appoint either a valuer and/or a solicitor to help with the various stages of enfranchisement.
 
The valuer will provide as follows:-
 
(a) Providing valuation advice to fully appraise the tenants on the possible outcome of negotiations.
 
(b) Advise on the offer amount for the initial notice.
 
(c) Respond to landlords counter-notice.
 
(d) Negotiation and settlement of the price.
 
(e) Advice on the structural repair and condition and implication of future maintenance costs and service charges.
 
(f) Advice on future management.
 

Why do we need a solicitor?

 
a) Preparation of the information for the action
 
b) Setting up the company
 
c) Service of the initial notice
 
d) Response to landlords request for substantiation of a claim
 
e) The conveyance of title
 
f) Amendment of the terms of the leases after enfranchisement
 

Assessing the purchase price

 
An initial valuation of the property by a qualified valuer or surveyor is strongly recommended. This is to provide the enfranchising leaseholders with an idea of the final purchase price prior to commencing the action
 
There is a formula based within the 1993 Act which a surveyor will use to give an estimate of the premium payable. The participating leaseholders will have to jointly pay to buy the freehold.
 
No valuation will be 100% accurate. It can be virtually impossible for a valuer to provide an exact valuation of the eventual settlement figure. However, the valuer should be able to give the best and worst case scenarios. Using local knowledge and anticipating areas of claims and counterclaims when doing so.
 
There is no such thing as a fixed price for a freehold. Leaseholders should be aware from the beginning that prices can range to avoid future surprises.
 
When considering the likely purchase price the leaseholders should consider the freeholders’ costs as well. Leaseholders will share the cost of the freehold as well as the freeholder’s reasonable legal and valuation costs.
 

Summary

 
It is so important to ensure that the participating tenants have the correct legal advisors as well as valuers with local knowledge that can help you.

What is Enfranchisement?

It is the right, subject to qualification, for owners of flats in a block to buy their freehold. People often apply for enfranchisement to try and reduce their costs and take control of what they spend on the building long term. The relevant Act is the Leasehold Reform Housing and Development Act 1993 (as amended).
 

What has to happen to consider enfranchisement?

 
50% of the leaseholders have to meet the qualification criteria before considering going ahead. Once this is the case the qualifying tenants can participate. Unfortunately, the procedure is quite complex and it is vital to serve the correct notice on the landlord. So it is always advisable to use a specialist solicitor and surveyor when undertaking this process.
 

Checking Eligibility

 
The first action must be to check that the building qualifies and that there are enough qualifying tenants to be able to proceed. You need to check as follows:-
 
a) The flat contains at least two flats.
 
b) Qualifying tenants own at least two-thirds of the flats. Qualifying tenants are leaseholders that have a lease in excess of 21 years when first granted. This will cover most leases which are often between 99 to 125 years when they are first granted.
 
There are other leases which come within a definition of a qualifying tenant although these are a lot less common. These are as follows:-
 
a) A shorter lease which contains a clause providing a right of perpetual renewal.
 
b) A lease terminable on death or marriage or unknown date often called the Prince of Wales clause.
 
c) The continuation of a long lease under local Government Housing Act 1989 following the expiry of the original term.
 
d) A shared ownership lease where the tenants share 100 per cent.
 
e) A lease granted under the right to buy or right to acquire or on rent to mortgage.
 

Are there any exceptions to the above?

 
Yes, these are as follows:-
 
a) The landlord is a charitable housing trust that provides the flat as part of the charity function
 
b) The tenant owns more than two flats within the building. This is either jointly with others or solely in their own name. Please note where this applies these flats will be discounted from the two thirds.
 
c) The tenant has a business or a commercial lease.
 

Does the building have any restrictions when it comes to commercial use?

 
If more than 25% of the internal floor area of the building is for commercial use then the building does not qualify. The commercial restriction excludes common parts of the building. It could be shops or offices etc. Garages and parking spaces specifically used by flats in the building are classed as residential.
 

Does a residential landlord have an exemption?

 
There is no right of collective enfranchisement where:-
 
a) The building is a conversion into four or fewer flats and
 
b) Is not a personal block and
 
c) The same person has owned the freehold since before the conversion of the building into flats and he or an adult member of the family has lived there in the past twelve months.
 

Are there any other exceptions?

 
Yes, buildings such as a cathedral within a precinct or National Trust properties. Or where the freehold includes any track of operational railway including a bridge or tunnel or retaining wall to a railway track. Also, Crown properties which are mainly owned by the Government.
 

Summary

 
It is really important when starting the process of Enfranchisement to employ a solicitor. They are there to deal with all of the legal requirements with qualifying tenants. If this is wrong at any point then it can invalidate a notice and it is therefore very important to do it correctly.

How to Gather Information and Deal with the Initial Notice

There is one important first step for leaseholders who are considering serving a notice on the freeholder. The leaseholders have to gather information on the people in the building and whether they will be qualifying tenants
 
The leaseholders need to do this to ensure that the initial notice is correct and valid. Also to respond to any challenges from the landlord following the service of the initial notice.
 
The initial notice must be correctly served on the freeholder. It must include the correct information on the interest of the participating tenants.
 
There have been some cases where freeholder’s interest may be one or more different ownerships i.e. severed or flying freeholds. This does not in itself form any obstacle to enfranchisement. It just means tenants should be aware that they have to have the deed to the freehold of the property.
 

The Information Required

The leaseholders need to have certain information as follows:-
 
a) The full identity of the freeholder where it is a personal company name and address
 
b) Details of any intervening or head leases and identify the names and address of the relevant lessees.
 
c) Full names and addresses of the leaseholders of the building and details of their leases.
 
d) Details of any flats let through the landlord and let on a periodic tenancy
 

Where to find that Information

The leaseholders will already know some of this information. Obtaining the remaining information is as follows:-
 
1) There are landlord and tenant legislation, enabling leaseholders to obtain details of the name and address of the landlord. The Landlord and Tenant Act 1985 gives this right. The freeholder must provide the information within 21 days of the request. It is an offence to not comply with this. The ground rent demand should also have the same details on.
 
2) Land Registry. The applying party has the entitlement to inspect the register and obtain copies of the entries relating to the freehold. The entry will provide the name and address of the registered owner. It will also provide details of any other interest of the freehold such as other freeholders, head lessees and mortgages. There is a small fee for copies of these registers. The land registry holds the registers. You can also obtain details of any leaseholders through this information as well.
 
3) Information Notice. Under Section 11 of the 1993 Act, you could serve the landlord with an interest in the property, requiring details of that interest.
 
The leaseholders can, therefore, request from the landlord certain details. These are details of any other freeholders, any intermediate leases, including the name and address of the lessees and the terms of the lease. The information notices can require sight of certain relevant documentation such as service charge. The recipient of these such notices has to respond within 28days.
Is there a right to take part?
 
There is no right to take part or right of invitation to join the freehold purchase. However, participating tenants may find it useful to ensure that all tenants are aware of their proposals. At present, though, there is no legal obligation to do so.
 

The initial notice

 
The initial notice triggers the statutory procedure for purchasing the freehold. The nominee purchaser is then liable for the freeholder’s reasonable costs from the date that the freeholder receives the notice. It is therefore absolutely critical that the notice is complete and contains no inaccuracies. These may need a correction via an application to the county court. This can be costly and could lead to a rejection of the notice.
 
There is protection for enfranchising tenants. They have the right to register the initial notice with the Land Registry. This provides protection for the company against the landlords’ sale of the freehold. Since any purchase of the freehold would subsequently be to the registration of the initial notice. The procedure will, therefore, be able to continue as though a new owner had originally received the notice.
 
The service of the initial notice also features the valuation date as the same date as the initial notice. The valuation date is the date upon which the variables affecting the price of the freehold are set. For example, the number of years left on the leases, the present value of the flat and their assured future value. Therefore however long the negotiation or the determination of the price. The valuation factors apply to the day of the service of the initial notice.
 
It is advisable to instruct a solicitor for the preparation of the service of an initial notice as they can be extremely problematical.
 

What if I have an absentee landlord?

 
If after all reasonable efforts the leaseholders cannot find the freeholder this should not prove to be an obstacle. There are other ways to find this information. However, these are all extremely complex and leaseholders should employ a solicitor to look into this. There are various options, the details of which would take too long in this article to outline.
 

Preparing for the subsequent procedures that need to take place

 
The landlord has the right to ask for evidence of the participating people and titles to their flat on receipt of the initial notice. It is a simple task of producing the official land registry entries providing they are all registered. The landlord has a period of 21 days after giving the initial notice in which to request the information. It must also be provided within 21 days of the request. In the event that a leaseholder is not registered the notice would be withdrawn with the costs payable to the freeholder. This is why it is so important to employ a solicitor who knows what they are doing as a specialist in this area.
 
Where the initial notice is withdrawn a new notice cannot be served again for another 12 months beginning on the date of the withdrawal. The landlord has the right to inspect the property. This includes the participating tenants’ flats subject to ten days’ notice to the occupier.
 

Can the landlord serve a counter-notice?

 
A landlord must serve his counter-notice by the date specified in the initial notice. This must be to either agree to the leaseholders’ purchase of the freehold and accept the terms or not agree to the right and give reasons why they do not. The freeholder can deny the right of enfranchisement due to having redevelopment plans or lease back proposals.
 

Redevelopment

 
The freeholder is not obliged to sell the freehold in the case of redevelopment. This is if plans to demolish and redevelop the whole or a substantial part of the building can be proven to the court. This can only apply where two-thirds of the leases in the building are due to terminate within a period of five years from the date of the service of the initial notice.
 

Leaseback

 
Where the freeholder owns a flat, or flats in the building, they have the option of taking a selection on the flat of a 999-year lease.
 
Where there is a lease back the value of the flat is deducted from the calculation. If an agreement cannot be reached for whatever reason then either party can apply to the Tribunal for an independent determination. You must ask your professional advisors on all relevant documentation that needs to deal with such an application.
 
If the freeholder fails to serve a counter-notice by the date specified in the initial notice, the participator may apply to the county court for a vesting order. This is an order allowing them to acquire the freehold on the terms of the initial notice. If the Court is satisfied with the right of transfer it will grant the order. The leaseholders must make the application to the Court within six months of receiving the counter-notice.
 

Strict procedures and time limits

 
There are very strict procedures and time limits as follows:-
 
1) Leaseholder to serve Section 11 information notice
 
2) Freeholder must respond within 28 days, leaseholders must make arrangements for a nominee purchaser and if forming a company register at Companies House. Participating tenants serve a section 13 initial notice. The valuation date is the date of the Section 13 notice.
 
3) Freeholder may request evidence of title of participating leaseholders but must do within 21 days.
 
4) The nominee purchaser must respond as requested within 21 days.
 
5) Freeholder must serve counter-notice by the specific date in the notice. This date must be at least two months from the date of the service of the initial notice. Where the freeholder failed to serve such a notice the nominee purchaser can apply to the court within six months for a vesting order
 
6) If the counter-notice disputes the qualification the purchaser must apply to the court within two months to argue their case.
 
7) If terms are not agreed after service of the counter-notice either party may apply to a Tribunal. This must be at least two months from and within six months, of the date of the service of the counter-notice. The Tribunal then lays out the details thereafter.
 

Summary

 
This type of law is so complicated. It is absolutely critical to employ some form of professional to advise and assist throughout the transaction. At least have a local valuer and/or solicitor that specialises in the right to manage and collective enfranchisement.
 

Valuation of a freehold subject to long leases

The valuation of a freehold of a block of flats with long leases is based on the investment value. 

 

In order to value an investment for enfranchisement purposes and to achieve such an income for so many years there has to be a calculation. It is best illustrated in an example as follows:-

 

1. Calculate the term

 

The calculation for the term in ground rent would be £50 x 10 flats = £500.00 per annum for the block

Multiply the ground rent figure by the year’s purchase. This is calculated by the valuer or more usually taken from the valuation table. To obtain the years purchase multiplier the valuer must make an assumption on a yield rate. In this example the valuation table showed the yield as 8% for the years figure. The years purchase of lease 68 years at 8% = 12.433 so £500.00 x 12.433 = £6,216.00.

 

2. Calculate the reversion

 

The current value of the flats say £105,000.00 x 10 flats = £1.5M (leaseholders present interest)

It is the nature of leasehold properties for the value to decrease as the lease shortens. So a long lease is generally worth much more on the open market than a short term lease. In general enfranchisement will increase the value of the individual flat. The amount of this improvement will be heavily dependent upon the length of the unexpired term before extension. There are no hard and fast rules as to how much the value will increase by. It is always an estimate based on local comparisons within the market.

 

The lease will affect the value of each individual flat but the freehold valuation must consider its current state. In effect the valuer has to assess the unimproved value of the flat not the improved value.

 

When calculating the reversion the valuer must do so based on the sale value for when the current term expires. For this purpose it must be assumed that the most favourable leases will be granted for a maximum of 999 years.

 

The example below states the acquisition of the freehold will produce an increase in the value of each flat of 10%. Meaning a future value of each flat of £165,000.00.

Improved value: £165,000.00 x 10 = £1.65M

 

Again, take the multiplier from the tables to provide an investment value. What is the promise of the future £1.6M worth in today’s market? Then multiply, the present value of £1.00 to the same yield rate of 8% as of previously.

Present value £1.00 deferred 68 years at 8% is 0.00534. So £1.6M x 0.00534 = £8,811.00.

 

What is the investment value of the freehold?

 

The investment of the freehold i.e. the freehold interest is therefore represented by the sum value of the term and the reversion £6,216.00 plus £8,811.00 = £15,027.00.

That is the sum that the interest is likely to achieve in an open market sale.

 

Marriage Value

 

This represents the increased value of the flats following completion of the enfranchisement. The market value increases as the enfranchised leaseholders have the ability to grant themselves longer leases. The potential profit only arises from owning part of the freehold. All parties share the freehold equally as dictated by the legislation.

 

Legislation stipulates to ignore the marriage value of any flat held by a prospective member. Taking the figures from the previous example above the approved value of the property at £1,650,000.00.

 

From this subtract the leaseholds current value £1.5M and the freeholders interest of £15,027.00 and in any case the marriage value is £134,973.00.

 

Take a 50/50 split between the freeholder and the enfranchising leaseholders. The leaseholders would have to pay half the price i.e. £67,486.00 in addition to the freeholder’s interest.

 

You will see in this example that the marriage value can considerably exceed the value of the freeholder’s interest. The calculation depends upon the estimated increase in the value of the flats. So logically, the lower increase the lower the marriage value will be. This is where the input of a local valuer and local knowledge is of paramount importance.

 

Completing the valuation of a freehold

 

Using the examples above the potential valuation, assuming no extra costs arise from the additional freeholders interest or injurious affection would be the sum of the freeholders interest £15,027.00 plus the marriage value £67,486.00

Possible purchase price £82,513.00 or approximately £8,250.00 per flat.

 

Summary

 

The example freehold valuation assumes that all leaseholders are both qualifying and participating. The examples provided are solely to demonstrate general work and practice valuation. They are not for the application of individual circumstances. It is extremely important that you get a local professional valuer to help you in advising on the cost of purchasing the freehold.

Is it worth buying the freehold as a leaseholder?

Unfair service charges for leaseholders are rife. In England and Wales, there are powerful laws that give leaseholders rights. Leaseholders can force the freeholder to sell and buy the freehold in order to take over the management of the block of flats and have more control over their costs.

 

Is it worth buying my freehold?

 

It is now a lot easier for leaseholders to be able to buy their freehold and essentially be in control of their own costs.

 

It is a legal process known as collective enfranchisement. This gives leaseholders the right to get together and purchase the freehold for a fair market price. The government brought in the law in 1993. It was then updated by the Commonhold and Leasehold Reform Act of 2002.

 

Are lease extensions cheaper?

 

It can cost a substantial amount of money for a lease extension. Often, mortgage companies and insurers will look at the length of lease especially if they are 80 years or less. Leaseholders will always pay a ground rent during the term unless they purchase the freehold. By buying the freehold they can usually extend the lease for a longer term, possibly up to 999 years for free. The only outlay would be legal costs.

 

It is important to realise how flats with a share of the freehold differ from a freehold house. Flat owners with a share of the freehold own their freehold jointly with other leaseholders in the building.

 

Freedom from the freeholder

 

There are often stories where freeholders charge hundreds of thousands for either work or lease extensions. Leaseholders can go to a Leasehold Valuation Tribunal to challenge unfair charges but it does cost a substantial amount of money. Once bought, the new freeholders are free to make their own choices to reduce costs. This will include contractors and insurance policies. Leaseholders have so much more control when they own a share of the freehold.

 

Can owning a share of the freehold add value to a flat?

 

Yes, the gain could be substantial if there is a short lease. A short lease could also put buyers off as it is very difficult to get a mortgage on a property that has a lease less than 80 years. It is advised to ask a solicitor to look into the costs involved in doing so before committing to it. Also, see our Right to Manage article.

 

How much does buying the freehold cost?

 

The bulk of the cost will be the cost of negotiations and surveyors together with the actual value of the freehold itself. A property valuation will need to be done by a surveyor. There may then be a Tribunal if the landlord does not wish to sell. There could also be legal fees, valuation fees, stamp duty and freeholder fees. However, it could add a substantial amount to the value of the property.

 

Summary

 

The benefits of buying the freehold can outweigh the initial costs involved. We would suggest seeking the advice of a solicitor before making any commitment. Once the exchange has completed, either buying the freehold or taking the right to manage. The flat block will need to be insured again. In that case, we can provide a quote and place on risk quickly and easily. Request a call back if you would like a quote.

 

Mark Harrington

Managing Director

iInsure365

For competitive commercial insurance call us now

01273 827090


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