How to Organize for an Enfranchisement

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You have established that there are enough tenants to qualify the building. What do you do now? Read this article to find out how to organize for an enfranchisement.

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?

  1. a) Preparation of the information for the action
  2. b) Setting up the company
  3. c) Service of the initial notice
  4. d) Response to landlords request for substantiation of a claim
  5. e) The conveyance of title
  6. 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.

How to finance the cost of the acquisition

It may necessary for a number of participating tenants to seek mortgage funding. You need to consider how to finance the purchase and also on behalf of the non-participants. What happens if they decide to participate at a later date? Is there a figure that you would require of them?

What vehicle are you going to use for participating tenants?

You now need to consider how you are going to  purchase the freehold and in what vehicle. Are you going to purchase the freehold in a company? If not how are you going to regulate between yourselves. It is normally purchased in a company although it is totally a matter for you. It should be noted that participating tenants do not all have to have equal shares so the proportion of the share holdings is totally a matter of negotiation. Therefore, it is for each individual purchaser to decide on how you are going to do this. But you should also take legal advice.

The 2002 Act provides for collective clarity mains through the mechanism of a right to enfranchisement company. However these provisions have never been bought into force and it is unlikely they will be.

What are the tax implications of the transaction?

You should always employ or look to speak to an accountant regarding the individual positions and the vehicle chosen by on how to purchase the freehold.

Collective enfranchisement legalisation provides no guidance or controls on a way that participating tenants should work together in order to acquire the freehold. The purchase may involve a substantial amount of money and it is likely to take some time to complete. During this time participants will rely heavily on each other to perform the tasks within the strict limits.

It is advised before making a claim that you lay out by way of a “participation agreement” what everyone is due and liable for as well as dealing with the regulation of your relationship between people. This will allow you to deal with the purchase price and cost that are shared between you.

How is the claim made?

It is important to be aware that most time limits imposed on procedural stages of the claim are strict and failure to do so within a certain time frame can have dyer consequences. We would always advise to have an expert dealing with this matter for you.

A procedural step for instance is the service of participation tenants on the landlord which the Act calls the initial notice. This notice claims the right for collective enfranchisement. Costs start to run against the tenant and time they serve this initial notice so it is important you are fully aware of what is required.

Such as follows;

  1. The extent of the property to be acquired – supported by a plan.
  2. Full particulars are qualified tenants in the building – not just the participating tenants.
  3. The price being offered to the freeholder – the offer does not need to be supported by a valuation. But it should represent a genuine figure.
  4. The name and address of the nominee purchaser – the person or company nominated by the participating tenants to conduct the negotiations of buying through on their behalf.
  5. The date of which the freeholder must give the accountant notice – being a date not less than 2 months from the service of the initial notice.

The freeholder is likely to respond within procedural notice requiring the existing tenants to introduce the title. The freeholders valuer is also likely to inspect the building for purpose of carrying out a valuation.

The freeholder must serve his counter notice within a specific time period.

If the claim is admitted and the counter notice must state certain things such as;

  1. Which of the proposed contained initial notice are accepted.
  2. Which of the proposed contained the initial notice are not accepted and what the freeholders counter proposals are and especially on price.
  3. When the freeholder wants the lease back in the units in the building and not held by a qualifying tenant.

Disputes

If any of the tenants in the acquisition remain in dispute after two months following the date of the counter notice, then either party can apply to the first tier tribunal for it to be determined.

This application must be made within 6 months following the date of the counter notice or the claim on the deed to be with drawn.

You will find however that most claims are settled by negotiation and it is rare to have a determination.

Completion

Under the terms of the acquisitions once this has been agreed or determined by the first tier tribunal then the matter reverts back to purchase transactions. The parties will enter into a sale contract under the terms agreed or determined and then proceed until completion.

When the matter proceeds to completion then the participating tenants through their nominee purchaser, will become the freeholder of the building subject to various flat leases. Once the matter proceeds to completion the participating tenants through their nominee purchaser are in effect then the freeholders. This will then put them in a position to extend and grant their leases.

Are you looking for a quote for your insurance? Did you know we may be able to save you a substantial amount of money that will actually pay for your enfranchisement. We can do this often without reducing cover. Why not contact us on 01273 827090.

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.

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